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REVIEW ARTICLE OF THE RISE AND FALL OF NEOLIBERAL CAPITALISM
by David M. Kotz

In 1998, Daniel Yergin and Joseph Stanislaw published The Commanding Heights --- a tour de horizon of the transformation of the relationship between governments and the economy between 1979 and the end of the 1990s. The book covered the end of communism in the former Soviet bloc, the transformation of the Chinese economy under Deng Xiaoping, and the Reagan and Thatcher revolutions in the US and the UK. In describing changes in the US, Western Europe and Japan the book described the rise and fall of the post Great Depression version of the mixed economy. The changes wrought in these countries beginning in 1979 occurred because events in the 1970s undermined the intellectual supports for both the centrally planned system of Soviet style communism and the government intervention in the social democratic European countries as well as in the United States under the post-New Deal mixed economy. These events gave credence to the ideas of opponents of both systems, for example, the economist Freidrich Hayek. The emerging dominant ideology that they describe is one of free market laissez faire economics --- an ideology that they believe triumphed as a result of the failures of the more interventionist systems.

Though they never use the term, they are describing the rise of what David Kotz refers to as neoliberalism. Though his book covers some of the same ground, he has the benefit of writing in 2015 whereas Yergin and Stanislaw published their book in 1998. More importantly, however, whereas Yergin and Stanislaw suggest that the downfall of the postwar system in Europe and the US is the result of the triumph of ideas, Kotz argues persuasively that it is actually the result of the exercise of power by those who benefit from the capitalist economic organization of society. The analysis and evidence he brings to bear in support of the role of power exercised by business and political leaders is a most valuable aspect of this book --- one among many important contributions to our knowledge that makes it worthwhile for readers, particularly those who are rarely exposed to these types of arguments.

Neoliberalism, according to Kotz and the literature that has developed around that term is not just a series of ideas but a series of institutional relationships that constitute what US and British writers have referred to as a specific social structure of accumulation (SSA) – a particular version of capitalism for a particular time and place. Economic Historian Douglass C. North won a Nobel Prize in economics for his work on the role of institutions in economic growth. He argues that whether a particular economy grows or not depends in large part on the appropriateness of the institutional structure. Though his analysis of institutions is a far cry from that undertaken by those using the SSA analysis, his basic point is crucial to their approach – namely that a system of markets, including a labor market based on contract rather than the coercion of slavery or serfdom, as well as a capital market for investment funds and a market for the buying, selling and/or renting of land will only work with the appropriate institutional structure.

So far, there is nothing in the Yergin-Stanislaw or North analyses that are different from the quite simple description of “different types of economic systems” taught in the first few weeks of any Principles of Economics course. Capitalism is usually defined as an economic system based on 1) Freedom of enterprise and choice, 2) A reliance on markets, 3) A limited role for government, 4) Private property rights, 5) Free (as opposed to coerced) labor. Sometimes this is counter-posed to the “mixed” economy where there is a much more significant role for government. As the textbook moves into more details in later chapters, the arguments as to where the appropriate role for government might be take up more and more of the discussion.

Implied in numbers 1 and 2 above is the presumption that competition among sellers of goods, services or “factors of production” will produce an approximation of the most efficient and dynamic way to organize society. What distinguishes the SSA approach from the taxonomy in most Principles texts is that Kotz and others emphasize that capitalism is a system of power --- that important implications of numbers 1 and 5 above are ignored. Those who already own sufficient wealth producing property to live off of it are much more likely to be able to successfully pursue “freedom of enterprise and choice” than those who are “free” to offer their labor for sale to the highest bidder. Another important implication lost in most Principles of Economics explanations is that though a wage-laborer is free to offer his or her services to any particular individual with sufficient wealth producing property to employ him or her, because access to capital for investment purposes is difficult to come by for those who don’t already have it, he or she must offer that labor to some institution. The free laborer is free to work for someone else or starve – especially when there is a “limited role for government.”

The SSA analysis argues that to make capitalism successful, the imbalance of power between owners and workers needs to be managed so that economic growth can continue. Though nowhere in the characteristics of capitalism in a typical Principles text is there a statement that capitalism depends on growth for its very survival, that in fact is the key to both the emergence of capitalism in the past and its successful spread to the entire world over the last three centuries. When structural problems arise that interfere with the successful functioning of a particular type of capitalism, it either must transform itself or run the risk of disappearing.

In this book, Kotz focuses on the United States. He identifies four periods of distinct SSA’s since the Civil War. From the 1870s to approximately 1900, we have an era that could mostly be characterized by laissez faire capitalism – with minimal government involvement in the economy and great freedom for businesses. What government involvement there was related to conquering the Indian tribes, defeating organized labor (the Pullman Strike of 1994), and providing at least lip service to the idea that competition was preferable to monopoly with the passage of the Sherman Anti-Trust Act. The most important step taken towards freedom for businesses was the Supreme Court decision in Santa Clara County v. Southern Pacific Railroad Company [118 U.S. 394 (1886)]. In that ruling, the Chief Justice explicitly stated that “the Court does not wish to hear arguments on the question whether the provision of the 14th Amendment to the Constitution which forbids a State to deny to any person its jurisdiction the equal protection of the laws, applies to corporations. We are all of the opinion that it does.”

Kotz’s next SSA is one that begins during the so-called Progressive era between 1900 and the end of World War I. Between World War I and the Great Depression, the economy reverted to a form of the 19th century laissez faire economy but in this period it was dominated not by small firms operating in competitive industries but by giant corporations where most industries were organized along oligopolistic lines. In this situation, the dynamic of co-respective competition replaces the periodic gale of creative destruction so praised by Joseph Schumpeter in his 1913 analysis of the business cycle under competitive market conditions. That system dominated by oligopolies foundered when the economy failed to bounce back from the depression that followed the stock market crash of 1929. Instead of a strong recovery such as the ones that had occurred periodically in the 19th century and after the 1921 depression, the US (and rest of the world) experienced a very sluggish recovery that left US unemployment at 18% ten years after the 1929 crash.

The third SSA identified by Kotz was created by the New Deal and World War II experiences which left the US with a strong labor movement, a significant mistrust of bankers and industrialists, and a strong faith in the ability of government to “fix things.” It also left the US with a strong competitor, the Soviet Union and capitalism with a strong alternative, centrally-planned communism. Faced with fears of a return to the depression economics of the pre-war period, American political and business leaders accepted a version of social democracy (Kotz calls it “regulated capitalism”) with a strong role for government and labor unions and a shared prosperity which lasted from the end of World War II through the 1970s. This period is covered thoroughly in the Yergin and Stanislaus book and TV series and has been the subject of many books, most of them ignoring the radical perspective of Kotz and the developers of the SSA analysis.

Kotz very carefully describes the various institutional elements of this version of capitalism, (with a convenient summary on P. 51) and then shows the successes in the immediate postwar period followed by emerging problems (contradictions) within the system. It appears that the very successes of the system, the ability of the labor movement to translate rising productivity into higher real wages and the ability of government policies to keep recessions short and unemployment low, created pressure on profitability. By the end of the 1960s, the average rate of profit in the non-financial corporate business sector began to decline and it fell all the way through the 1982 recession. In this context, Kotz argues that business leaders shifted from the active support or grudging acceptance of the institutions of regulated capitalism that had characterized the previous decades. They opted for something new. The something new is neo-liberalism.

Kotz argues that neo-liberalism is not just a response to what has been referred to as globalization – nor is it merely a rise in the relative importance of the financial sector. Instead, he summarizes the elements of neo-liberalism (in a table on page 42) as including not only a removal of certain barriers to the free flow of capital and goods between nations, deregulation of basic industry and the financial sector, combined with cutbacks in the (already relative stingy) welfare state in the US. He also calls the reader’s attention to some elements that have been less remarked in journalistic coverage of the changes wrought by Reagan (completed by Clinton) in the US and Thatcher in Britain. For example, Kotz notes that corporate CEOs came to be hired from outside the corporation and large corporations began to treat sectors within the larger enterprise as separate profit centers subject to market principles rather than part of an overall structure subject to command and control planning. This can explain part of the dramatic divergence of CEO pay from the median pay within corporations and the extraordinary divergence of the incomes of the top 1%, .1% and .01% from the rest of the “very rich” that have been well documented by Emanual Saez and Thomas Piketty.

Turning to the capital-labor relationship, Kotz points to the well-known marginalization of collective bargaining, which involved a significant reduction in the percentage of the private sector work force in unions. He also notes the “casualization” of jobs – the rise of part time work which permits businesses to avoid paying benefits. In the public sector, in addition to the abandonment of aggregate demand management by the federal government – leaving “managing” of the macro-economy to the Fed – there was the privatization of more and more government functions, even, under Bush II, the contracting out of many of the aspects of the US occupation of Iraq after 2003. Kotz analyzes neoliberalism as a coherent structure with many layers not captured by Yergin and Stanislaw’s term “free market laissez faire capitalism.” He then amasses a great deal of evidence to demonstrate that on strictly economic terms (growth, private investment, average rates of unemployment, even productivity growth) neoliberalism was unable to replicate the macroeconomic reality of the previous SSA. For the economy as a whole and definitely for the majority of people, the new system failed to deliver the goods. However, that did not matter. The whole point of neoliberalism was to revive the profit rate and reverse the relative erosion of the position of the highest income people. Since 1979, the trend has been to increase inequality as the benefits of what economic growth there was ended up accruing to the richest 10% of the population with a disproportionate benefit accruing to the top 1% and even smaller groups. Thus, the people who were dissatisfied with how the economy was treating them under the previous SSA have been rewarded with a larger share of the economic pie since 1980. Though the system required bubble induced surges in investment and consumption (first during the dot.com boom, second during the housing bubble), it kept chugging along supporting increased consumption over the long run through increased borrowing. With memories of the depression fading, lenders, borrowers, regulators and politicians blithely ignored the warnings of a few economic Cassandras who identified the piling on of debt and the bubble based economy as a crisis just waiting to happen. In analyzing how neo-liberalism worked, Kotz makes an important contribution to our understanding of the roots of the economic crisis of 2008 and the failure of the economy to rebound. The economy failed to rebound from the Great Depression after the crash of 1929. This led to a series of reforms that together constituted the rise of a new SSA – which lasted with great initial success through the 1970s. Kotz argues that ultimately, the failure of the economy to rid itself of the stagnation that has made the recovery from the 2008-2009 recession (the NBER dating committee believes it began in June of 2009) a joke to the vast majority of Americans may also be a harbinger of the end of neo-liberalism. And make no mistake about it. The sluggish recovery is a fact. In June of 2009, the official unemployment rate was at 9.5%. It took over two years for that rate to fall below 9% another year for it to fall below 8% and it didn’t fall below 7% till December of 2013 over four years into the “recovery.” But that isn’t the worst of the news. The employment to population ratio has not regained its 2007 level as of March 2015 and the ratio in June 2009 (59.4) was higher than the one from March 2015 (59.3). Remember, this is after more than five years of “recovery.”

Kotz carefully develops the argument that the crisis that emerged in 2008 and the subsequent sluggish recovery is not only the result of bad policies (as has been argued, for example by Paul Krugman in End This Depression Now) but the result of a structural crisis in neoliberalism. He further argues that this is not merely a financial crisis and develops persuasive evidence for this conclusion. If he is right, then when the current crisis is finally resolved, the American economy might very well be operating under a new SSA. The book closes with speculation as to the possible future structure. He believes the American economy is faced with three possibilities – One is that, despite the crisis in the neoliberal SSA, it might survive because the powerful forces that benefit from it have not been severely damaged. Unlike the period of the Great Depression when many banks failed and the economy experienced unemployment rates of 25% and the alternatives of fascism and communism in Europe frightened business and political leaders in the US to accept New Deal reforms, the policy responses to the crisis from the supposedly liberal Obama Administration have been to sustain all the elements of neoliberalism. In fact, in the austerity approaches of the Republican Congress and the anti-labor and anti-democratic new rules developed in many states (with the support of the Supreme Court) one could argue that the political and business leadership of the United States are “doubling down” on the neoliberal SSA no matter how much pain it causes ordinary Americans.

Two versions of a new form of regulated capitalism are also considered. One which Kotz calls “business regulated capitalism” is summarized with a table on P. 203. Though some of the elements of the post-World War II SSA would be re-instituted, such as financial regulation, the marginalization of organized labor would continue and there would be expansions of public-private partnerships along with a re-invigoration of the role of government in the promotion of innovation and expanded spending on military and civilian infrastructure. “The dominant ideas that could hold together such a social structure of accumulation are those of nationalism and individual responsibility. Such ideas justify a stronger role for the state.”(203). It is not surprising that maintenance of military superiority is a strong component of this SSA (something shared with the post-World War II SSA as well). The other alternative Kotz labels “social democratic capitalism” which has very small differences from the SSA that prevailed after World War II (compare pages 51 and 207). For a variety of reasons, Kotz thinks such a change is most unlikely.

Finally, Kotz suggests that given the fact that according to polling data, more and more young people in the United States have a favorable opinion of “socialism” (not defined in the polling), it is conceivable that some democratic form of socialism could emerge as an alternative to a capitalist SSA. He develops the possible elements of such a radical transformation in the US economy and summarizes it in a table on page 213.

In this chapter, Kotz is not attempting to make firm predictions. That is why he does not assert that the crisis of 2008 and since will necessarily mean the end of the neoliberal SSA though he argues that such an end would benefit the majority of the people. Instead, he seeks to engage the reader in an effort to understand the choices we as a society face. Human beings make their own history. The SSA after World War II was created as a result of struggles and circumstances. The same can be said about the emergence of neoliberalism. The present presents a context out of which the future will emerge but we citizens of the US have some power to affect the nature of the changes. Kotz’s book provides information and analysis to help us understand where we have been as well as encouragement to build our own futures.

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