Neoliberalism and the development of economics since Keynes.

The Guardian published, on April 15, an excerpt from Georges Monbiot’s new book titled:  ‘How Did We Get Into this Mess’. The excerpt is worth reading in its entirety; the book may be as well!  I was struck in particular, by the following excerpt:

“there is something admirable about the neoliberal project, at least in its early stages. It was a distinctive, innovative philosophy promoted by a coherent network of thinkers and activists with a clear plan of action. It was patient and persistent. The Road to Serfdom became the path to power.

The left has produced no new framework of economic thought for 80 years. This is why the zombie walks.
Neoliberalism’s triumph also reflects the failure of the left. When laissez-faire economics led to catastrophe in 1929, Keynes devised a comprehensive economic theory to replace it. When Keynesian demand management hit the buffers in the 70s, there was an alternative ready. But when neoliberalism fell apart in 2008 there was … nothing. This is why the zombie walks. The left and centre have produced no new general framework of economic thought for 80 years.

Every invocation of Lord Keynes is an admission of failure. To propose Keynesian solutions to the crises of the 21st century is to ignore three obvious problems. It is hard to mobilise people around old ideas; the flaws exposed in the 70s have not gone away; and, most importantly, they have nothing to say about our gravest predicament: the environmental crisis. Keynesianism works by stimulating consumer demand to promote economic growth. Consumer demand and economic growth are the motors of environmental destruction.

What the history of both Keynesianism and neoliberalism show is that it’s not enough to oppose a broken system. A coherent alternative has to be proposed. For Labour, the Democrats and the wider left, the central task should be to develop an economic Apollo programme, a conscious attempt to design a new system, tailored to the demands of the 21st century.”( George Monbiot’s How Did We Get into This Mess? is published this month by Verso.)

Monbiot raises some interesting points with respect to developments in economic policy since the 1970’s and there is merit in his argument.  I think, however, that the situation is much more nuanced.

It is true, that, as Monbiot says, “Keynesian demand management hit the buffers in the 1970’s”.  The political left had no policy to replace it.

But what does “hit the buffers” mean?  Throughout the postwar period until the 1970’s the North American economy was characterized by low unemployment and low and stable inflation.  This situation was aided from time to time by moderate doses of – Keynesian – fiscal stimulus.  But, in the 1970’s this all came apart as wage bargaining between powerful unions and corporations, aided and abetted by the oil price surge, led to rising inflation.  Fiscal and monetary policies could have been used to deal with the wage/price spiral but that would have meant dampening inflation at the cost of high unemployment.  Rather than use these conventional macroeconomic policy instruments, governments in a number of countries, including Canada, the US and UK, tried to implement policies of direct wage and price controls. But, as J.K. Galbraith has said, “since neither unions nor business firms in the English-speaking countries were inclined to accept government interference with wages and prices, the traditional defenders of the integrity of the microeconomic market had decisively powerful allies”. (A History of Economics; The Past as the Present; page 269).  Wage/price controls were an attempt by governments, reluctant to squelch inflation by generating more unemployment, to devise an  instrument to dampen inflation without increasing unemployment.  When that failed the alternatives were either to reduce inflation using the levers of conventional macroeconomic policy or to live with high – and potentially rising – inflation.  Draconian monetary policy was the chosen instrument;  a  policy – consistent with ‘neoliberal’ views – that effectively reduced inflation but at the cost of generating substantial unemployment. It is the case that, to this day the ‘left’ has not produced a satisfactory alternative policy to apply in such circumstances. On that I can agree with Monbiot.

However, in my view the ‘neoliberal’ political revolution – exemplified by the Reagan and Thatcher regimes in the US and UK respectively, occurred, not so much as a consequence of the development of a new “distinctive, innovative philosophy”.  Rather, I think, that the -‘non-neo’- liberalism that had characterized the post World War II period was a victim of its own success.   The socio/economic/political environment of the late 1970’s/early 1980’s was conducive to a sea change in policies.  Not only was there high and rising inflation in the industrial economies but there was social unrest  in both Europe and North America.  Moreover, as noted, attempts by governments to devise new policies to dampen inflation without generating higher unemployment were resisted by all sides of the political spectrum.

As a consequence the socioeconomic environment of the 1970’s opened the door to right wing – neoliberal – governments in many countries.  ‘Government’ became the problem and reduced regulation, free trade and globalization the order of the day.

The resulting change in the ‘power structure’ in most industrialized countries, notably the US, has greatly increased the political clout of the wealthy and of corporate interests who are inherently ‘neoliberal’. This was brilliantly laid out by Hacker and Pierson in their Winner Take All Politics.  You can read my commentary here: Winner Take All Politics.  It wasn’t so much that the conservatives had a ‘neoliberal’ programme that trumped that of the centre left; rather it was that conservative interests  gained the political clout to implement a programme that they had advocated for generations!

Since the 1970’s the extent of labour unionization has substantially declined in North America, especially in the US.  As a consequence large corporations have much more power to restrain wage growth than they then did and competition from foreign goods and services has appreciably increased. Both of these factors led to a marked shift in the distribution of income towards the high income deciles of the population.

Monbiot argues that, when the “flaws exposed in the 1970’s”  led to the collapse of what he calls ‘Keynesianism’ (I would use the term ‘liberalism’ rather than Keynesianism because it was broader than Keynes macroeconomic policy prescriptions)  there was an “alternative ready”. That “alternative” was, of course what Monbiot and others call ‘neoliberalism’. In Monbiot’s words: “Neoliberalism sees competition as the defining characteristic of human relations. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. It maintains that “the market” delivers benefits that could never be achieved by planning.”

But, as noted below, the alternative is not ‘planning’.  Moreover, though competition may be a characteristic – if not necessarily a ‘defining’ one – of human relations, it does not follow that competition will necessarily lead to a society that is in some sense optimal. Competition may – and probably does – lead entrepreneurs to seek advantages for themselves at the expense of others.  Thus, many markets do not deliver benefits to society as a whole; rather they deliver benefits to a select few and may impose costs on many.

Monbiot states that “when neoliberalism fell apart in 2008 there was … nothing. …. The left and centre have produced no new general framework of economic thought for 80 years.”

It is an exaggeration to say that there was ‘nothing’ when “neoliberalism fell apart in 2008”.  Indeed, Keynesian analysis and its related policy prescription were directly relevant to the situation in which the world economy found itself in the years following the economic downturn of 2008.    Keynesianism provides an analysis of the operation of industrial economies and policy guidance where economic activity is weak and unemployment high that is as relevant now as it was eighty years ago.    In such circumstances monetary policy can be ineffective, as it is now – interest rates being effectively at the lower bound of zero.  In these circumstances fiscal policy (central government spending or tax reductions financed by borrowing) remains the only method of generating higher economic activity.  This was indeed the main policy recommendation flowing from Keynes’ ‘General Theory of Employment Interest and Money‘.  And it was a principal policy recommendation of a majority of economists in the US in the years following the crash of 2008. So, it is not true that “Every invocation of Lord Keynes is an admission of failure”!

Monbiot states that “Keynesian solutions ….. have nothing to say about our gravest predicament: the environmental crisis”.  That is true – it was not Keynes’ concern in the 1930’s.  But economics has a lot to say about it.  It has been a tenet of economic analysis for years, at least since the 1930’s, that there is a role for government intervention when individual actions – such as environmental degradation – impose costs on society, i.e. when ‘market failures’ exist.

Finally, Monbiot states: “For Labour, the Democrats and the wider left, the central task should be to develop an economic Apollo programme, a conscious attempt to design a new system, tailored to the demands of the 21st century.”

I maintain that most, if not all, of the elements of a new system already exist.  The ‘centre left’ holds that:   a) there is no inherent tendency for the economy to operate continuously at maximum levels of output and employment, b) monopoly power is widespread in industrial economies so that many markets do not generate optimum levels of welfare,  c) market failures occur, as in environmental degradation, and d) as a consequence the resulting distribution of income and well being may not be socially desirable. Government intervention is required to ameliorate each of these defects in the operation of market economies and remedies exist to deal with them.

Thus, I argue that there exist elements of a system “tailored to the demands of the 21st century”. Indeed such a ‘system’ looks remarkably like the platform on which the Canadian Liberal party won the election of November, 2015!

So I think it’s overly simplistic at best to say, as does Monbiot, that “when neoliberalism fell apart in 2008 there was … nothing.  The left and centre have produced no new general framework  of economic thought for 80 years”.

Having said all of that it is the case that developments in economics since Keynes have ignored many of the observations that are contained in his opus The General Theory of Employment, Interest and Money.  Although macroeconomics accepted Keynes’ analysis that economies could operate for extended periods of time at levels of output less than those that would generate full employment of available resources – labour and industrial capacity –  mainstream economics paid little attention to other aspects of Keynes analysis:  his emphasis on uncertainty and the volatility of expectations for example.  And, in the 1970’s, in parallel with the rise of ‘neoliberalism’, theories were developed, led by economists at the University of Chicago, that denied the effectiveness of Keynesian remedies for high unemployment.  But that’s a story for another post!



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