CONFERENCE ON ECONOMIC SOVEREIGNTY IN A GLOBALISING WORLD
http://www.millennium-round.org/
BANGKOK, 24-26 MARCH 1999
A SHORT HISTORY OF NEO-LIBERALISM: TWENTY YEARS OF ELITE ECONOMICS AND
EMERGING OPPORTUNITIES FOR STRUCTURAL CHANGE
SUSAN GEORGE
http://www.millennium-round.org/Susan%20George.html
http://www3.sympatico.ca/truegrowth/neo_lib.htm
The Conference organisers have asked me for a brief history of
neo-liberalism which they title "Twenty Years of Elite Economics". I'm
sorry to tell you that in order to make any sense, I have to start even
further back, some 50 years ago, just after the end of World War II.
In 1945 or 1950, if you had seriously proposed any of the ideas and
policies in today's standard neo-liberal toolkit, you would have been
laughed off the stage at or sent off to the insane asylum. At least in the
Western countries, at that time, everyone was a Keynesian, a social
democrat or a social-Christian democrat or some shade of Marxist. The idea
that the market should be allowed to make major social and political
decisions; the idea that the State should voluntarily reduce its role in
the economy, or that corporations should be given total freedom, that
trade unions should be curbed and citizens given much less rather than
more social protection--such ideas were utterly foreign to the spirit of
the time. Even if someone actually agreed with these ideas, he or she
would have hesitated to take such a position in public and would have had
a hard time finding an audience.
However incredible it may sound today, particularly to the younger members
of the audience, the IMF and the World Bank were seen as progressive
institutions. They were sometimes called Keynes's twins because they were
the brain-children of Keynes and Harry Dexter White, one of Franklin
Roosevelt's closest advisors. When these institutions were created at
Bretton Woods in 1944, their mandate was to help prevent future conflicts
by lending for reconstruction and development and by smoothing out
temporary balance of payments problems. They had no control over
individual government's economic decisions nor did their mandate include a
licence to intervene in national policy.
In the Western nations, the Welfare State and the New Deal had got
underway in the 1930s but their spread had been interrupted by the war.
The first order of business in the post-war world was to put them back in
place. The other major item on the agenda was to get world trade
moving--this was accomplished through the Marshall Plan which established
Europe once again as the major trading partner for the US, the most
powerful economy in the world. And it was at this time that the strong
winds of decolonisation also began to blow, whether freedom was obtained
by grant as in India or through armed struggle as in Kenya, Vietnam and
other nations.
On the whole, the world had signed on for an extremely progressive agenda.
The great scholar Karl Polanyi published his masterwork, The Great
Transformation in 1944, a fierce critique of 19th century industrial,
market-based society. Over 50 years ago Polanyi made this amazingly
prophetic and modern statement: "To allow the market mechanism to be sole
director of the fate of human beings and their natural environment...would
result in the demolition of society" [p.73]. However, Polanyi was
convinced that such a demolition could no longer happen in the post-war
world because, as he said [p.251], "Within the nations we are witnessing a
development under which the economic system ceases to lay down the law to
society and the primacy of society over that system is secured".
Alas, Polanyi's optimism was misplaced--the whole point of neo-liberalism
is that the market mechanism should be allowed to direct the fate of human
beings. The economy should dictate its rules to society, not the other way
around. And just as Polanyi foresaw, this doctrine is leading us directly
towards the "demolition of society".
So what happened? Why have we reached this point half a century after the
end of the Second World War? Or, as the organisers ask, "Why are we having
this conference right now?" The short answer is "Because of the series of
recent financial crises, especially in Asia". But this begs the
question--the question they are really asking is "How did neo-liberalism
ever emerge from its ultra-minoritarian ghetto to become the dominant
doctrine in the world today?" Why can the IMF and the Bank intervene at
will and force countries to participate in the world economy on basically
unfavourable terms. Why is the Welfare State under threat in all the
countries where it was established? Why is the environment on the edge of
collapse and why are there so many poor people in both the rich and the
poor countries at a time when there has never existed such great wealth?
Those are the questions that need to be answered from an historical
perspective.
As I've argued in detail in the US quarterly journal Dissent, one
explanation for this triumph of neo-liberalism and the economic,
political, social and ecological disasters that go with it is that
neo-liberals have bought and paid for their own vicious and regressive
"Great Transformation". They have understood, as progressives have not,
that ideas have consequences. Starting from a tiny embryo at the
University of Chicago with the philosopher-economist Friedrich von Hayek
and his students like Milton Friedman at its nucleus, the neo-liberals and
their funders have created a huge international network of foundations,
institutes, research centers, publications, scholars, writers and public
relations hacks to develop, package and push their ideas and doctrine
relentlessly.
They have built this highly efficient ideological cadre because they
understand what the Italian Marxist thinker Antonio Gramsci was talking
about when he developed the concept of cultural hegemony. If you can
occupy peoples' heads, their hearts and their hands will follow. I do not
have time to give you details here, but believe me, the ideological and
promotional work of the right has been absolutely brilliant. They have
spent hundreds of millions of dollars, but the result has been worth every
penny to them because they have made neo-liberalism seem as if it were the
natural and normal condition of humankind. No matter how many disasters of
all kinds the neo-liberal system has visibly created, no matter what
financial crises it may engender, no matter how many losers and outcasts
it may create, it is still made to seem inevitable, like an act of God,
the only possible economic and social order available to us.
Let me stress how important it is to understand that this vast neo-liberal
experiment we are all being forced to live under has been created by
people with a purpose. Once you grasp this, once you understand that
neo-liberalism is not a force like gravity but a totally artificial
construct, you can also understand that what some people have created,
other people can change. But they cannot change it without recognising the
importance of ideas. I'm all for grassroots projects, but I also warn that
these will collapse if the overall ideological climate is hostile to their
goals.
So, from a small, unpopular sect with virtually no influence,
neo-liberalism has become the major world religion with its dogmatic
doctrine, its priesthood, its law-giving institutions and perhaps most
important of all, its hell for heathen and sinners who dare to contest the
revealed truth. Oskar Lafontaine, the ex-German Finance Minister who the
Financial Times called an "unreconstructed Keynesian" has just been
consigned to that hell because he dared to propose higher taxes on
corporations and tax cuts for ordinary and less well-off families.
Having set the ideological stage and the context, now let me fast-forward
so that we are back in the twenty year time frame. That means 1979, the
year Margaret Thatcher came to power and undertook the neo-liberal
revolution in Britain. The Iron Lady was herself a disciple of Friedrich
von Hayek, she was a social Darwinist and had no qualms about expressing
her convictions. She was well known for justifying her programme with the
single word TINA, short for There Is No Alternative. The central value of
Thatcher's doctrine and of neo-liberalism itself is the notion of
competition--competition between nations, regions, firms and of course
between individuals. Competition is central because it separates the sheep
from the goats, the men from the boys, the fit from the unfit. It is
supposed to allocate all resources, whether physical, natural, human or
financial with the greatest possible efficiency.
In sharp contrast, the great Chinese philosopher Lao Tzu ended his Tao-te
Ching with these words: "Above all, do not compete". The only actors in
the neo-liberal world who seem to have taken his advice are the largest
actors of all, the Transnational Corporations. The principle of
competition scarcely applies to them; they prefer to practise what we
could call Alliance Capitalism. It is no accident that, depending on the
year, two-thirds to three-quarters of all the money labeled "Foreign
Direct Investment" is not devoted to new, job-creating investment but to
Mergers and Acquisitions which almost invariably result in job losses.
Because competition is always a virtue, its results cannot be bad. For the
neo-liberal, the market is so wise and so good that like God, the
Invisible Hand can bring good out of apparent evil. Thus Thatcher once
said in a speech, "It is our job to glory in inequality and see that
talents and abilities are given vent and expression for the benefit of us
all." In other words, don't worry about those who might be left behind in
the competitive struggle. People are unequal by nature, but this is good
because the contributions of the well-born, the best-educated, the
toughest, will eventually benefit everyone. Nothing in particular is owed
to the weak, the poorly educated, what happens to them is their own fault,
never the fault of society. If the competitive system is "given vent" as
Margaret says, society will be the better for it. Unfortunately, the
history of the past twenty years teaches us that exactly the opposite is
the case.
In pre-Thatcher Britain, about one person in ten was classed as living
below the poverty line, not a brilliant result but honourable as nations
go and a lot better than in the pre-War period. Now one person in four,
and one child in three is officially poor. This is the meaning of survival
of the fittest: people who cannot heat their houses in winter, who must
put a coin in the meter before they can have electricity or water, who do
not own a warm waterproof coat, etc. I am taking these examples from the
1996 report of the British Child Poverty Action Group. I will illustrate
the result of the Thatcher-Major "tax reforms" with a single example:
During the 1980s, 1 percent of taxpayers received 29 percent of all the
tax reduction benefits, such that a single person earning half the average
salary found his or her taxes had gone up by 7 percent, whereas a single
person earning 10 times the average salary got a reduction of 21%.
Another implication of competition as the central value of neo-liberalism
is that the public sector must be brutally downsized because it does not
and cannot obey the basic law of competing for profits or for market
share. Privatisation is one of the major economic transformations of the
past twenty years. The trend began in Britain and has spread throughout
the world.
Let me start by asking why capitalist countries, particularly in Europe,
had public services to begin with, and why many still do. In reality,
nearly all public services constitute what economists call "natural
monopolies". A natural monopoly exists when the minimum size to guarantee
maximum economic efficiency is equal to the actual size of the market. In
other words, a company has to be a certain size to realise economies of
scale and thus provide the best possible service at the lowest possible
cost to the consumer. Public services also require very large investment
outlays at the beginning--like railroad tracks or power grids--which does
not encourage competition either. That's why public monopolies were the
obvious optimum solution. But neo-liberals define anything public as ipso
facto "inefficient".
So what happens when a natural monopoly is privatised? Quite normally and
naturally, the new capitalist owners tend to impose monopoly prices on the
public, while richly remunerating themselves. Classical economists call
this outcome "structural market failure" because prices are higher than
they ought to be and service to the consumer is not necessarily good. In
order to prevent structural market failures, up to the mid-1980s, the
capitalist countries of Europe almost universally entrusted the post
office, telecomms, electricity, gas, railways, metros, air transport and
usually other services like water, rubbish collection, etc. to state-owned
monopolies. The USA is the big exception, perhaps because it is too huge
geographically to favour natural monopolies.
In any event, Margaret Thatcher set out to change all that. As an added
bonus, she could also use privatisation to break the power of the trade
unions. By destroying the public sector where unions were strongest, she
was able to weaken them drastically. Thus between 1979 and 1994, the
number of jobs in the public sector in Britain was reduced from over 7
million to 5 million, a drop of 29 percent. Virtually all the jobs
eliminated were unionised jobs. Since private sector employment was
stagnant during those fifteen years, the overall reduction in the number
of British jobs came to 1.7 million, a drop of 7% compared to 1979. To
neo-liberals, fewer workers is always better than more because workers
impinge on shareholder value.
As for other effects of privatisation, they were predictable and
predicted. The managers of the newly privatised enterprises, often exactly
the same people as before, doubled or tripled their own salaries. The
government used taxpayer money to wipe out debts and recapitalise firms
before putting them on the market--for example, the water authority got 5
billion pounds of debt relief plus 1.6 billion pounds called the "green
dowry" to make the bride more attractive to prospective buyers. A lot of
Public Relations fuss was made about how small stockholders would have a
stake in these companies--and in fact 9 million Brits did buy shares--but
half of them invested less than a thousand pounds and most of them sold
their shares rather quickly, as soon as they could cash in on the instant
profits.
>From the results, one can easily see that the whole point of
privatisation is neither economic efficiency or improved services to the
consumer but simply to transfer wealth from the public purse--which could
redistribute it to even out social inequalities--to private hands. In
Britain and elsewhere, the overwhelming majority of privatised company
shares are now in the hands of financial institutions and very large
investors. The employees of British Telecom bought only 1 percent of the
shares, those of British Aerospace 1.3 percent, etc. Prior to Ms
Thatcher's onslaught, a lot of the public sector in Britain was
profitable. Consequently, in 1984, public companies contributed over 7
billion pounds to the treasury. All that money is now going to private
shareholders. Service in the privatised industries is now often
disastrous--the Financial Times reported an invasion of rats in the
Yorkshire Water system and anyone who has survived taking Thames trains in
Britain deserves a medal.
Exactly the same mechanisms have been at work throughout the world. In
Britain, the Adam Smith Institute was the intellectual partner for
creating the privatisation ideology. USAID and the World Bank have also
used Adam Smith experts and have pushed the privatisation doctrine in the
South. By 1991 the Bank had already made 114 loans to speed the process,
and every year its Global Development Finance report lists hundreds of
privatisations carried out in the Bank's borrowing countries.
I submit that we should stop talking about privatisation and use words
that tell the truth: we are talking about alienation and surrender of the
product of decades of work by thousands of people to a tiny minority of
large investors. This is one of the greatest hold-ups of ours or any
generation.
Another structural feature of neo-liberalism consists in remunerating
capital to the detriment of labour and thus moving wealth from the bottom
of society to the top. If you are, roughly, in the top 20 percent of the
income scale, you are likely to gain something from neo-liberalism and the
higher you are up the ladder, the more you gain. Conversely, the bottom 80
percent all lose and the lower they are to begin with, the more they lose
proportionally.
Lest you thought I had forgotten Ronald Reagan, let me illustrate this
point with the observations of Kevin Phillips, a Republican analyst and
former aid to President Nixon, who published a book in 1990 called The
Politics of Rich and Poor. He charted the way Reagan's neo-liberal
doctrine and policies had changed American income distribution between
1977 and 1988. These policies were largely elaborated by the conservative
Heritage Foundation, the principle think-tank of the Reagan administration
and still an important force in American politics. Over the decade of the
1980s, the top 10 percent of American families increased their average
family income by 16 percent, the top 5 percent increased theirs by 23
percent, but the extremely lucky top 1 percent of American families could
thank Reagan for a 50 percent increase. Their revenues went from an
affluent $270.000 to a heady $405.000. As for poorer Americans, the bottom
80 percent all lost something; true to the rule, the lower they were on
the scale, the more they lost. The bottom 10 percent of Americans reached
the nadir: according to Phillip's figures, they lost 15% of their already
meagre incomes: from an already rock-bottom average of $4.113 annually,
they dropped to an inhuman $3.504. In 1977, the top 1 percent of American
families had average incomes 65 times as great as those of the bottom 10
percent. A decade later, the top 1 percent was 115 times as well off as
the bottom decile.
America is one of the most unequal societies on earth, but virtually all
countries have seen inequalities increase over the past twenty years
because of neo-liberal policies. UNCTAD published some damning evidence to
this effect in its 1997 Trade and Development Report based on some 2600
separate studies of income inequalities, impoverishment and the hollowing
out of the middle classes. The UNCTAD team documents these trends in
dozens of widely differing societies, including China, Russia and the
other former Socialist countries.
There is nothing mysterious about this trend towards greater inequality.
Policies are specifically designed to give the already rich more
disposable income, particularly through tax cuts and by pushing down
wages. The theory and ideological justification for such measures is that
higher incomes for the rich and higher profits will lead to more
investment, better allocation of resources and therefore more jobs and
welfare for everyone. In reality, as was perfectly predictable, moving
money up the economic ladder has led to stock market bubbles, untold paper
wealth for the few, and the kind of financial crises we shall be hearing a
lot about in the course of this conference. If income is redistributed
towards the bottom 80 percent of society, it will be used for consumption
and consequently benefit employment. If wealth is redistributed towards
the top, where people already have most of the things they need, it will
go not into the local or national economy but to international
stockmarkets.
As you are all aware, the same policies have been carried out throughout
the South and East under the guise of structural adjustment, which is
merely another name for neo-liberalism. I've used Thatcher and Reagan to
illustrate the policies at the national level. At the international level,
neo-liberals have concentrated all their efforts on three fundamental
points:
--free trade in goods and services
--free circulation of capital
--freedom of investment
Over the past twenty years, the IMF has been strengthened enormously.
Thanks to the debt crisis and the mechanism of conditionality, it has
moved from balance of payments support to being quasi-universal dictator
of so-called "sound" economic policies, meaning of course neo-liberal
ones. The World Trade Organisation was finally put in place in January
1995 after long and laborious negotiations, often rammed through
parliaments which had little idea what they were ratifying. Thankfully,
the most recent effort to make binding and universal neo-liberal rules,
the Multilateral Agreement on Investment, has failed, at least
temporarily. It would have given all rights to corporations, all
obligations to governments and no rights at all to citizens.
