#75 The New Economic Normality 1971-2020: The Market and Neo-Liberalism
"Billionaire fortunes increased by 12% (in 2018) ... or $2.5 billion a day ... while 3.8 billion people who make up the poorest half of humanity saw their wealth decline by 11%... The number of billionaires has nearly doubled since 2008, the beginning of the latest financial global crises, yet wealthy individuals and corporations are paying lower rates of taxes than they have in decades due to the new President Trump taxes"
- Oxfam summary of our world before the annual Davos meeting in 2018.
The keyword in this section is ‘normality’. The world returned after 1971/72 to ‘normality’, meaning that the period from 1945 to 1971 had been abnormal. Post-1971 is often seen by commentators and journalists in terms of the leaders of the time, Ronald Raegan and Margaret Thatcher, as if they alone were responsible for the movement back to the 19th century when the ‘market’ became the criteria for the movements in the economy. From 1971, work and labour, finance and industry, i.e., capital and business, were to be left to the marketplace.
Freeing the Marketplace after 1815
Earlier blogs spent some time explaining how after 1815, 'freeing the market' was revolutionary compared to all government controls that had gone before. Karl Polanyi's classic work The Great Transformation remains a critical text. Polanyi provided readers with a sense of just how radical the political turnaround was after 1815. A political system that allowed the market to determine the allocation of key resources for all living human beings was deeply radical. ‘Freeing the market’ meant that the government ceased to be responsible for most aspects of human life, and the economy was left to its own devices. Labour unions were difficult to create and maintain; finance capital was free to move to whatever part of the world it wished, so too was industrial capital.
Governments in the 19th century took free trade as the symbol which allowed markets to find their own level. There were many consequences; not least in the 19th century was Irish starvation in the 1840s. The poor in French and British cities were left to find work or not. Misery and hunger stalked the cities of the richest nation on earth. For over 100 years, the poor in the cities in France and Britain were hungry for much of the time.
Post-1971: 50 Years of Neo-Liberal Policies
That was the 19th century. It has often been assumed by commentators that due to the immense sacrifices then ordinary men and women made in both wars, and the social welfare services set up between 1945 and 1971, this latter period was the new normal for governments of the western world. In these blogs, I disagree with this perception. Instead, I argue that 'normal' was the long period between 1815 and 1914 when market forces were allowed to be dominant and determined the distribution of wealth across the cities.
There followed an interim period of 50 years between 1914 and 1971. First were the two wars and the attempt to recover a period of widespread suffering for the majority of the people of Europe. From 1945 to 1971, the primacy of political and economic policy was to combat the attractions of socialism. During these years many social and humanitarian policies were inaugurated. After 1971, leaders in the USA decided they no longer needed such policies, and they could return to 'market' criteria.
The free market and neo-liberal policy were justified first under the works of Adam Smith and David Ricardo in the 19th century, and then in the 20th century from Frederick Hayek and Milton Friedman. Every economics student has to read these works in their first year of study.
Public policy on the free market in the late 20th century has masqueraded under a variety of terminologies, of which Neo-liberalism is by far the most common. After 1971, Neo-liberalism became the key ideological and practical frame of reference across the American, western, and non-western world economies.
The essence of free-market ideology since the first half of the 19th century until now has been that competing firms were efficient and represented the best way to run society. Governments would overspend; organised labour is selfish; barriers to the movement of capital services and labour should be reduced to the minimum. This is neo-liberalism in a nutshell. The reality is, of course, very different, as firms tend to move to monopoly or oligopoly, and so inequality increases. This is not the place to expand the argument into economic theory. Neo-liberal economics has been widely practised across the world for the last 50 years.
At the base of neo-liberal free market thinking are the following key components, in no order of importance.
a. Public utilities, i.e. water, energy, health, any large enterprise run by governments, were best privatised and run for profit.
b. The market for capital or trade should be free of government regulation. Owners of capital or companies should be able to decide by themselves how best to invest capital.
c. Labour unions should be either closed or circumscribed so that individual companies could negotiate pay and conditions according to the free market.
d. Trade should be free of import and export duties wherever possible.
Neo-liberal ideas became the stuff of the World Bank and the IMF. When countries came asking for loans to borrow US dollars for overseas trade, the conditions were always determined by the framework of neo-liberalism: never towards the development and growth of a particular economy. Many small countries that started their existence in the 1960s by attempting to look after their citizens were soon made to realise by the IMF or World Bank that provides a safe experience for international capital was regarded as of greater importance. The free movement of foreign capital in and out of any given country was a key part of IMF strategy.
Many of the new leaders of the old colonial territories quickly realised that they could enrich themselves relatively simply under these rules. The movement of cash into tax havens quickly became a part of the global landscape.
The dominant nations, Britain in the 19th and the USA in the 20th century, have proffered these ideas as the basis of their success. In the 20th century, there was a lull between 1914 and 1971 before global markets became free again. After 1971, neo-liberal ideas became the standard; every nation was expected to accept. Neo-liberalism was never debated at elections; the policy was decided first by the Americans and then quickly by their European allies, as facts on the ground.
And when a national economy ran short of trading dollars, the IMF was able to impose neo-liberal conditionality as the terms for a loan. Ideologically, neo-liberal ideas came to be seen as the basis of 'a free society'. By 2020, neo-liberalism was the policy of all western nation-states, including the European Union, Japan, and most countries of the south, struggling to grow and develop their societies.
As readers can imagine, tomes have been written about neo-liberalism, both for and against, but with little effect on the broad policy as a whole. Once decided by the USA, neo-liberalism was rolled out across the world. The consequences are easy enough to see:
1. Capital has been freed to move wherever it liked to find cheap labour. Many American companies have moved to China and other Asian economies; enabled by the free movement of capital. China has housed western companies on a substantial scale.
2. China was just coming out of its Mao period. At the start of the 1970s, China began to open her economy to the rest of the world. Many large US corporations moved to China to take advantage of the low wages. China has benefited hugely and has now a very large volume of US dollars.
3. Monopoly and oligopoly have reappeared globally across every major sector of the national and international economy. Many writers in the 19th century, and then again in the 1950s and 60s, have written critically about monopoly. For a time, monopoly was broken up. First, in the USA after the great crash 1929/31, and later during the 1945-71 interim period. But since 1971, governments have not attempted to break up monopoly and oligopoly, which by 2020 characterised the global economy. This process is easily visible in the new technologies, hardware and software, Facebook, Apple, and so on. In practice, oligopoly can be found in almost every sector in both manufacturing and services across the world economy. A few instances are food retail, sports retail, banking, aeroplane manufacture, and so on.
4. States have legitimately been able to reduce finance for social needs including health. The short period from 1945 to 1971 produced many 'socialist' forms of legislation; institutions were created to support populations as a whole, which have been very popular. No government has ever dared to remove these supports as they might have wished; instead, slowly starving them of funds has become the new normal. Slow privatisation can be seen everywhere, from prisons to health services, to housing and more.
5. Economic crises have recurred every 10 or 20 years. Each crisis has begun differently; banks went bust and national economies ceased to grow. Many such crises have remained national, but a few have spread globally: 1873-1894, 1929-1931, the so-called Wall Street Crash, and more recently the 2008 crash. In the 20th century a system of macroeconomics has been created to study these turbulences, but with no seeming effect on their regularity. Are these crises becoming more severe, as some economists argue? Certainly, governments have treated the ailing banks in need of 'outdoor relief' and provided billions of dollars to prevent them from going bust.
6. The last consequence of neo-liberal global policies is perhaps the least expected: the growth of tax havens, which I discussed in last weeks blog. As more and larger private companies have grown and traded across the world; simultaneously individuals have made fortunes; so, both have tended to avoid national taxes. Tax havens in small islands have become the common consequence.
Neo-liberalism as a global capitalist policy, driven by the dominant power of the time, has been a policy of governments for roughly two hundred years. There has been an interim period of 65 years, between 1914 to 1971, when the capitalist powers were at war, recovering from war, or providing conditions for people so that they were not attracted to socialism.
It cannot be argued sensibly that the economy should be left to the market as an efficient or just system to allocate scarce resources. Wartime is a period of national emergency when resources need to be allocated efficiently, best determined by government. A simple example is food distribution. By 1914, food production had been left to market forces for 100 years. During the 1914/18 war, the population of Britain was close to starvation by 1916/17, as the import of food had stopped. Government rapidly set up Agricultural Boards to set prices for farmers, and to determine what should be grown and what should not.
Efficiency, justice, or human need has little to do with the market as the criteria for the allocation of resources. Neo-liberal policies simply allow banks and corporations to make profits that can be allocated to owners of private property. The actual system is more complicated than this. The military powers, public information, and the legal system have to be aligned with propertied and governmental classes. The ideological system around the nation and the pride of the nation must also be aligned. But given that these balancing acts can be obtained, neo-liberal policies have worked well in increasing the wealth of the already wealthy across the western worlds of nations, with only occasional upsets due to economic recessions, and the occasional threat of a socialist contender for power.
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The peoples of Western Europe had risen from one world of relative poverty and had learnt how to take the wealth from the Americas and transfer it to their own countries. This was slavery and latterly until 1920, indentureship. A whole set up of banks, shipping companies, and insurance companies had arisen to make these transfers possible. From the 1750s the European invaders turned their attention to Asia and systematically began the colonisation process anew. At the same time, as they attempted to colonise and extract the wealth of Asia, the colonising countries began the process we now recognise as industrialisation alongside the rapid growth of cities. The surplus resources extracted through colonisation were used to finance the growth of new industries.