Abstract
Economics has grown into the most influential of the social sciences; This chapter gives an overview of its development into a body of social theory and presents the main features of continuing debates within this framework. Its main focus, however, is on the ascendancy of market fundamentalist neoliberal ideology from the mid-1980s to the GFC: a period of initial economic hubris, but subsequent diminution of economists’ role in guiding political decisions. Neoliberalism has successfully diminished the role of government and encouraged replacement of publicly provided services with private providers, but often at the expense of the public interest element of these services and of the critical role of fiscal policy in responding to severe economic downturn. These developments may have set the stage for the rise of populism in the US and Europe. More critically to the overall message of this book, the preoccupation with commercial price signals has led to a stronger recognition of the need for all entities, government and private, to recognize their responsibilities for use of all forms of capital, including environmental and human capital. Economics must continue its critical role in guiding social and political development, but the linkages both within economics and between economics and other disciplines must be strengthened to enable government at all levels and markets to operate together to achieve the broader social good. This chapter focuses mainly on rebalancing macroeconomic policy and introducing more detailed strategies and actions for broader social policy, as discussed in the chapters of Part II.
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Notes
- 1.
As noted earlier, the rise of neoconservative academic views, notably Francis Fuku yama’s declaration of the ‘end of history’, also had an important influence in cementing neoliberal influence on economic policy, at least temporarily. (Fukuya ma’s own views have changed somewhat since then as discussed in Chap. 7.) Though distinct from economic neoliberalism, the idea of self-evident superiority of Western democratic capitalism appeared to have a strong influence on the neoconservative administrat ion of George W. Bush, which seemed wholly persuaded that liberal democracy could be transferred easily to other countries, and in particular would be welcomed in the Middle East. At that time, after the collapse of the USSR, US-style governance and policies were generally seen by formerly planned economies as offering the best model for reform. The case in the theocratic Middle East was much less evident, as is now evident.
- 2.
Nicholas Wapshott’s The Clash that Defined Modern Economics gives an overview of the twists and turns in this debate. His account makes it clear, however, that political factors weighed at least as heavily as the resolution of differences in economic theory.
- 3.
Ha yek’s classic contribution to the debate, The Road to Serfdom, was written during the Second World War and explicitly directed against state dominance of capital and production under Nazism and Communism. The economic elements of Ha yek’s argument were anti-Keynesian and based on a firm belief that free competitive markets could deliver most of what society wanted. Though the book was well received, it was of little influence in terms of macroeconomic policy until the Reagan/Thatc her political ascendancy. He did, however, clearly eschew “dogmatic laissez-faire”, favouring “making the best possible use of the forces of competition as a means of coordinating human efforts” (p. 37). His arguments were to the effect that terms like the “common good” and “general welfare” had no clear meaning, and that “it would be impossible for any mind to comprehend the infinite variety of different needs of different people which compete for the available resources and to attach a definite weight to each” (p. 62). Nowadays practical planning can be defined more constructively (albeit with no immunity to criticism) and seen as a necessary though difficult task of government—not as a road to serfdom.
- 4.
S ee Friedman (1962, revised edition 2002).
- 5.
The Tru mp administration’s calls for greatly increased infrastructure investment in the US appears welcome in this context (as of March 2017), but it is quite unclear what fiscal outcome will eventually be determined in November through the fiscally conservative Republican legislature.
- 6.
The aggressive reforms of government implemented by Margaret Th atcher and Ronald Rea gan conferred an enormous impetus to anti-government sentiment in many Western countries. An initial intellectual impetus came directly from Hay ek—though technically probably more influentially from Milton Fried man. Broader public support for cutting the size and scope of government arose from a number of sources. Particularly in Britain there was widespread and justified frustration with the inefficiencies of public administration, growth of a complex array of regulatory bodies and frustration with the power of unions. Rea gan/That cher policies did not definitively establish neoliberalism nor wholly reject Keynesian macroeconomic demand management, and they did address a number of real problems. But their initial success set a solid base for subsequent popularizing and consolidating the ‘small government’ ideological stance. Wapshott (2011) argues that Reagan’s economic successes came from a combination of Keynesian spending (on defence) as much as his supply-side lowering of tax rates, deregulation and Volcker’s tight (Friedman-inspired) monetary policies. (pp. 262–5). Much political weight during this time, however, was given to the need to reduce big government.
- 7.
See “Never Saw It Coming: Why the Financial Crisis Took Economists by Surprise,” Foreign Affairs, 92(6), pp. 88–96 November/December 2013. He cites IMF as late as spring of 2007, declaring that “global economic risks [had] declined” (p. 89). He looked to avoiding future collective failure through a more complete analysis of ‘homo economicus’ and Key nes’ ‘animal spirits’ via behavioural economics and more effective incorporation of such findings in forecasting models. Sebastian Mallaby (2016) in a compendious biography and exposition of the development of the financial system and policies extols the virtues of Gre enspan as Fed Chairman relative to his predecessors Burns and Volcker by controlling inflation and moderating volatility (see Appendix 1). His failure to control the shadow-banking sector and the housing crisis of course shattered that reputation. Mallaby suggests that failure was partly due his upbringing and non-assertive personality. Ben Bernanke in a Brookings post of November 3, 2016, however did not find this explanation plausible.
- 8.
The Economist article, Nightmare on Main Street, August 20, 2016, highlights the continuing problems being encountered in the United States; this time not because of the operations of private sub-prime lenders, but because of the continuing subsidized operations of Freddy Mac and Fanny Mae (who were part of the sub-prime crash) and direct federal subsidization. See http://www.economist.com/news/briefing/21705316-how-america-accidentally-nationalised-its-mortgage-market-comradely-capitalism. See also Stiglitz (2016) p. 162.
- 9.
In this context, the Economist (Comradely capitalism, August 20, 2016) noted that new concerns are emerging with respect to a potential bubble vis-à-vis US housing stock, which at $26 trillion is the largest asset class in the world and, with $11 trillion of debt is “probably the biggest concentration of financial risk to be found anywhere”. But this time the risk-takers are not the big banks and their shadow-banking subsidiaries: “Some 65–80% of all home loans are [now] repackaged by organs of the state.”
- 10.
He notes later, however (p. 23), comments by Thomas Ferguson and Robert Johnson that “the evidence that the Lehman bankruptcy sundered world markets is overwhelming”. If blame is to be attributed, however, likely it started earlier and more broadly. Ro ss Garnaut (2009) makes the point that the 1998 bailout of hedge fund Long-Term Capital Management, organized by then-Fed Chairman, Green span, had established the ‘too big to fail’ principle that shadow banking would be protected by the implicit government guarantee (the Gree nspan put). Gillian Tett (2015) describes the almost complete lack of knowledge and information on risks being taken by the shadow banking sector by the banks or the Federal Reserve, which she attributes to ‘the silo effect’, which should be studied and countered both within government and any large enterprise. Michael Lewis’ book, The Big Short (2010) and the 2015 film of the same name, dramatically illustrate the nature of operations and misunderstanding of risks at all levels of mortgage-based lending and the derivatives market.
- 11.
The need for and virtue of fiscal stimulus was widely supported by G20 participants and the IMF, and was seen initially to be successful in halting and reversing the economic downturn by end-2009. But by mid-2010, the political mood shifted dramatically toward fiscal austerity primarily by reducing spending and aiming for a balanced budget or budget surplus, quite contrary to the Keynesian approach that had been used with some success up to that point. As Wolf points out, research by prominent economists argued for the need to limit debt and to promote what was termed as ‘expansionary contraction’ of government, but this view was not widely supported by leading economists.
- 12.
As described b y Krugman (2007), conservative anti-government views were becoming strongly entrenched in the Republican Party, which became increasingly dominant in Congress from the 1990s onwards, particularly from the first mid-term election of the Cli nton presidency, and then in Obama’s final mid-term election.
- 13.
Athanasios Orphanides, in his article What Caused the Crash? The Political Roots of the Financial Crisis, Foreign Affairs, June 16, 2015, cites Jean-Claude Juncker, the President of the European Commission, as saying: “We all know what to do, we just don’t know how to get reelected after we’ve done it.” This quote is also included in John Lanchester’s New Yorker review of 2016.
- 14.
Murdoch almost invariably in recent years takes a strong and broadly neoliberal position on government or opposition policies with an explicit intention of shaping public opinion in a business-friendly direction. His effectiveness in this regard has been well documented by David McKnight (2012).
- 15.
See Public Opinion (1922). Lippm ann in contrast to Murdo ch was mainly concerned with the development of social institutions and education as a path towards resolving the problems of easy manipulation of public opinion rather than taking advantage of them for commercial and political advantage. He knew H ayek and shared his scorn of state planning and became associated with the early stages of development of American neoliberalism, through the Walter Lippm ann Colloquy that initiated the Mont Pelérin Society, but in the end he was not a supporter of Hayekian neoliberalism.
- 16.
Edward Herman and Noam Chomsky (1988/2002), however, have put forward what they call a “propaganda theory” to explain the power and focus of the media to advance its commercial interests. While they compile an impressive range of data to show the enormous power and reach of media groups and case studies demonstrating media reach and bias, I think Lipp mann’s thesis provides a simpler explanation of recent media history and the likely trajectory of modern media; the build-up of commercial and media power is part of the story of neoli beral emergence. Herman and Chomsky focus on the virtues of democratization and conclude: “The organization and self-education of groups in the community and workplace, and their networking and activism, continue to be the fundamental elements in steps towards the democratization of our social life and any meaningful social change. Only to the extent that such developments succeed can we hope to see media that are free and independent.” (p. 307) Foucault, in contrast, saw democracy as a part of the whole biopolitical process which itself had to be explained. Foucault and Chomsky debated some of these issues somewhat inconclusively in 1971 (https://chomsky.info/1971xxxx/).
- 17.
In many respects these efforts are comparable to the work described later of Kahn eman and Tversky and John Za ller (Part III). Information on behaviour can be used to understand voting behaviour, to ‘nudge’ people in a socially appropriate direction—or simply to achieve political power.
- 18.
See Stephanie Lo and Kenneth Rogoff (2015).
- 19.
On August 5, 2016, for instance, the Financial Times said this: “The arguments for active fiscal policy at the moment are clear. Central banks have been contorting themselves into positions of ever-greater complexity—inducements to bank lending, QE, zero or negative interest rates—to try to loosen monetary conditions…the BoE’s policy rate is now down to 0.25 per cent. Yet there are a few welcome signs that fiscal rather than monetary policy may finally be taking some of the strain of stimulating a sluggish global economy.” Summ ers, in his FT blog, August 18, 2016, also notes the comments from San Francisco Fed President, John Williams, suggesting that the “currently chronically very low neutral rate has important [fiscal] policy implications”. Summ ers, however, doubts the effect of increased spending on education as having any impact through effects on the interest rate; rather, he advocates the more direct benefits of infrastructure investment. In her speech at Jackson Hole, Wyoming, in August 2016, Janet Yellen, Chair of the Federal Reserve, in explaining the modern monetary toolkit, cited as among the headwinds faced by the economy and limiting the speed of recovery “a period of contractionary fiscal policy”.
- 20.
Other theorists also advance diverse explanations and predictions on the present crisis and future of capitalism. Mark Blyth (2016) in his Foreign Affairs review, Capitalism in Crisis, reviews three recent books: historian Jürgen Kocka, largely blames modern banking and financialization; sociologist Wolfgang Streek sees the crisis as arising from conflict between capitalism and democracy and growth in reliance on debt rather than taxation for public finance; and journalist Paul Mason looks to Kondratieff’s long-term cycles and neoliberalism’s capacity to avoid necessary correction through financialization—he also sees neoliberal and global failure to address climate change as offering a challenge that capitalism may not be able to meet unless there is a fundamental change in the ‘structure of property rights’. Most of these arguments, as presented by Blyth, are covered in other analyses, but none appear to provide a clear justification for an organic theory of the evolution of capitalism.
- 21.
- 22.
A continuing program covering twelve policy areas covering three broad groups: (1) Policy Transparency, covered by the IMF; (2) Financial Sector Regulation and Supervision, developed by specialized standard setting bodies; and (3) Institutional and Market Infrastructure, developed by specialized standard-setting bodies with input from the IMF and World Bank. See http://www.imf.org/external/np/exr/facts/sc.htm. The Fiscal Transparency Initiative component of Policy Transparency was developed from principles outlined in the Kopits and Craig (1998) IMF Occasional Paper.
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Allan, W. (2017). From Neoliberalism to Social Accountability. In: The Last Empires. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-59960-1_3
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