Friday, April 10, 2015

The Myths of Neoliberal Economists

In his book, The Memory Chalet, Tony Judt reminisced over the history of Marxism and discussed its ability to “capture” the minds of many intellectuals who would become so enthralled with its view of historical progression that they would use the promised end to justify terrible means to attain that end.  He referred to Marxism as a secular religion.  Similar to deity-based religions, secular religions can provide a feeling of belonging to something bigger than oneself; it makes available a framework in which all things can be explained; decisions which otherwise might be difficult to make are predetermined.  The dark side of religious belief, secular or otherwise, is that it can produce goals so desirable that adherents resort to unworthy methods to reach those goals.  In one case the legions march off with God on their side, in the other, History is on their side.

Judt makes the provocative comparison between Marxism and free-market capitalism and concludes that Marxism has been superseded by another secular religion—one of which we are barely aware.

“Our contemporary faith in “the market” rigorously tracks its radical nineteenth-century doppelgänger—the unquestioning belief in necessity, progress and History.  Just as the hapless British Labour chancellor in 1929-1931, Philip Snowden, threw up his hands in the face of the Depression and declared that there was no point opposing the ineluctable laws of capitalism, so Europe’s leaders today scuttle into budgetary austerity to appease ‘the markets’.”

“But ‘the market’ like ‘dialectical materialism’—is just an abstraction: at once ultra rational (its argument trumps all) and the acme of unreason (it is not open to question).  It has its true believers—mediocre thinkers by contrast with the founding fathers, but influential withal; its fellow travelers—who might privately doubt the claims of the dogma but see no alternative to preaching it; and its victims, many of whom in the US especially….proudly proclaim the virtues of a doctrine whose benefits they will never see.”

“Above all, the thrall in which an ideology holds a people is best measured by their collective inability to imagine alternatives.  We know perfectly well that untrammeled faith in unregulated markets kills: the rigid application of what was until recently the ‘Washington consensus’ in vulnerable developing countries—with its emphasis on tight fiscal policy, privatization, low tariffs, and deregulation—has destroyed millions of livelihoods.  Meanwhile, the stringent ‘commercial terms’ on which vital pharmaceuticals are made available has drastically reduced life expectancy in many places.  But in Margaret Thatcher’s deathless phrase, ‘there is no alternative’.”

Marxism was based not on data or past history, but on a theory of how society must evolve.  Similarly, free-market capitalism also is not based on data or past history, but on a theory of how economies (and societies) must evolve.

The policies associated with the term free-market capitalism used above can also be referred to as neoliberal economic policies.  One must be careful to not confuse liberal economic policies with liberal political policies.  Liberal economics refers to free-market ideas and is inevitably promulgated by politically conservative people.  Liberal economic concepts were first formulated in response to the industrial revolution.  They included “invisible hands” and other intellectual constructs promoting the wisdom of unfettered markets.  Liberal policies were thought to have been dominant in the long period that terminated with the onset of two world wars and the Great Depression.  The period after World War II led to an era of intense government intervention as societies tried to recover from that tumultuous period.  This was a period of exceptionally high economic growth.   By around 1980, politically conservative economists campaigned to reinstate the policies presumed to have been in place in the prewar liberal years, thus they are referred to as neoliberals.  The neoliberals, in that process of becoming ascendant, managed to bring the period of high growth to an end.
 

Ha-Joon Chang, an economist at Cambridge University, provides a comparison between the claims of free-market capitalists and the actual history of economic development in his book Bad Samaritans: The Myth of FreeTrade and the Secret History of Capitalism.  Chang provides us with a concise version of the neoliberals’ view of economic history.

“According to this history, globalization has progressed over the last three centuries in the following way: Britain adopted free-market and free-trade policies in the 18th century, well ahead of other countries.  By the middle of the 19th century, the superiority of these policies became so obvious, thanks to Britain’s spectacular economic success, that other countries started liberalizing their trade and deregulating their domestic economies.  This liberal world order, perfected around 1870 under British hegemony, was based on laissez-faire industrial policies at home; low barriers to international flow of goods, capital and labour; and macroeconomic stability, both nationally and internationally, guaranteed by the principles of sound money (low inflation) and balanced budgets.  A period of unprecedented prosperity followed.”

Chang is gentle enough to refer to this mangling of reality as merely “misleading.”

“This history of globalization is widely accepted.  It is supposed to be the route map for policy makers in steering their countries towards prosperity.  Unfortunately, it paints a fundamentally misleading picture, distorting our understanding of where we have come from, where we are now and where we may be heading for.”

Chang identifies a particularly egregious example of how Britain practiced “free trade” in the period when it was supposedly setting the example for a period of “unprecedented prosperity.”

“This was a particularly shameful episode, even by the standards of 19th-century imperialism.  The growing British taste for tea had created a huge trade deficit with China.  In a desperate attempt to plug the gap, Britain began exporting opium produced in India to China.  The mere detail that selling opium was illegal in China could not possibly be allowed to obstruct the noble cause of balancing the books.”

When China confiscated a shipment of opium, the British declared war, defeated China, and forced it to accept a humiliating treaty (the Treaty of Nanking) that ceded Hong Kong to the British and denied it the right to set its own tariffs.  In this way free trade was introduced to China.

“The truth is that the free movement of goods, people, and money that developed under British hegemony between 1870 and 1930—the first episode of globalization—was made possible, in large part, by military might, rather than by market forces.  Apart from Britain itself, the practitioners of free trade during this period were mostly weaker countries that had been forced into, rather than had voluntarily adopted, it as a result of colonial rule or ‘unequal treaties’ (like the Nanking Treaty), which among other things, deprived them of the right to set tariffs and imposed externally determined low, flat-rate tariffs (3-5%) on them.”

The goal of British foreign policy was to create a system whereby Britain could obtain raw materials at low price from its colonies or other poor countries, convert those goods into manufactured commodities, and resell them to the same countries at a premium.  Not surprisingly Britain, and other countries that could attain similar power, entered a period of “unprecedented prosperity.”  The rest of the world didn’t do nearly as well.

Forcing a developing country into a free trade environment prematurely, as neoliberalism demands, is harmful to the long term prosperity of that country.  Developing countries, by definition, are in a position to sell only low-technology goods or raw materials.  Developed countries have advanced technologies and skills that allow them to produce more highly-valued goods.  If a country like South Korea followed neoliberal advice they would still be selling fish in hopes of earning enough to buy autos and electronics from the United States or Europe.  Chang points out that the trick to becoming a wealthy country is for a poor country to sell what it can on the open market and forego consumption of goods available on that market.  The easiest way to do this is to impose high tariffs on imports of manufactured goods.  This provides the dual purpose of limiting the flow of funds out of the country and it collects a tax that can be used to subsidize the development of more competitive technologies.  This is the path Britain and the United States followed.  They became interested in “free” trade only when they thought they were powerful enough to control some parts of the market.

“This simple but powerful principle—sacrificing the present to improve the future—is why the Americans refused to practice free trade in the 19th century.  It is why Finland did not want foreign investment until recently.  It is why the Korean government set up steel mills in the late 1960s, despite the objections of the World Bank.  It is why the Swiss did not issue patents and the Americans did not protect foreigners’ copyrights until the late 19th century.”

“It took Toyota more than 30 years of protection and subsidies to become competitive in the international car market, even at the lower end of it.  It was a good 60 years before it became one of the world’s top car makers.  It took nearly 100 years from the days of Henry VII for Britain to catch up with the Low Countries in woolen manufacturing.  It took the US 130 years to develop its economy enough to feel confident about doing away with tariffs [tariffs in the US remained at 40-50% until World War I and were the highest of any country in the world].  Without such long time horizons, Japan might still be exporting mainly silk, Britain wool and the US cotton.”

The neoliberal path to prosperity derived from this false history includes the following:

“….a country needs to privatize state-owned enterprises, maintain low inflation, reduce the size of government bureaucracy, balance the budget (if not running a surplus), liberalize trade, deregulate foreign investment, deregulate capital markets, make the currency convertible, reduce corruption and privatize pensions.”

The problem is that while no wealthy country, including Britain and the United States, utilized these policies in becoming wealthy, undeveloped and developing countries are being advised—and often forced—to follow them.

“In relation to the developing countries, the neoliberal agenda has been pushed by an alliance of rich country governments led by the US and mediated by the ‘Unholy Trinity’ of international economic organizations that they largely control—the International Monetary Fund (IMF), the World Bank and the World Trade Organisation (WTO).  The rich governments use their aid budgets and access to their home markets as carrots to induce the developing countries to adopt neo-liberal policies.  The IMF and World Bank play their part by attaching to their loans the condition that the recipient countries adopt neoliberal policies.  The WTO contributes by making trading rules that favour free trade in areas where the rich countries are stronger but not where they are weak (e.g., agriculture or textiles).”

Neoliberal economic policies were developed in wealthy countries.  Not surprisingly, they work to maintain existing wealth at the expense of robust economic development in potential competitors.

“Free trade demands that poor countries compete immediately with more advanced foreign producers, leading to the demise of firms before they can acquire new capabilities.  A liberal foreign investment policy, which allows superior foreign firms into a developing country, will, in the long run, restrict the range of capabilities accumulated in local firms, whether independent or owned by foreign companies.  Free capital markets, with their pro-cyclical herd behavior, make long-term projects vulnerable.  A high interest rate policy raises the ‘price of future’, so to speak, making long-term investment unviable.  No wonder neo-liberalism makes economic development difficult—it makes the acquisition of new productive capabilities difficult.”

Returning to the theme of neoliberlism as a secular religion, any religion—secular or otherwise—is created in order to provide an orderly framework to a disorderly world.  The creators must also derive comfort from this framework, in the sense that it justifies actions that they feel necessary to their wellbeing.  The rich-world economists who derived liberal policies and their neoliberal acolytes who continue the rote promotion of them have replaced an unpleasant history of forceful domination and unabashed rent gathering with one that attributes all that occurred—and all that will occur—to economic forces as inevitable as the laws of physics.  In other words, belief has replaced scholarly research.

And we will all suffer the consequences.  Chang provides numerous examples where acceptance of neoliberal policies by countries has limited their economic growth.  The data collected by Thomas Piketty, discussed here, is consistent with the notion that the liberal policies presumably in place prior to World War I produced a long era of low growth and ever growing inequality of wealth.  The 30 years or so after the two world wars, which might be described as a Keynesian or social democratic era, was a time of exceptional growth and decreasing inequality.  The returning dominance of neoliberal policies has again led to a period of decreasing economic growth and increasing economic inequality.  Of course there are always other things going on that might ruin a good story, but if the neoliberals can create comforting tales, then so can I.


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