Dowlphin’s Contemporary Capitalism in 3,550 words
In this section Dowlphin outlines why Keynesianism was discredited and replaced by Monetarism, which in turn was also discredited – to give rise to the ‘Political Rage’ we see around us.
The first Industrial Revolution of the late 17th century was the context in which Adam Smith argued for unleashing the protectionist local and estate-based constraints that feudal lords and kings imposed on the emerging manufacturing clases. Smith claimed that the wealth of nations would be enhanced if individuals were free to take advantage of the specialisation made possible by new manufacturing processes and that competition and free trade would ensure that output was maximised while prices were constrained. The new policies were complemented by a naval superiority that expanded Britain’s borders to create an empire into which it sold its products.
The Revolution served Britain and it spread into Europe, but wages hardly increased. The profits went to the merchants, industrialists and to a small middle class that could read and write. It was the harsh world of Dickens, Marx and Darwin – poverty and servitude amidst complacency and entitlement. Throughout the 18th century, there were local revolts, frequent smaller and greater wars and a good deal of intellectual ferment, but apart from some patronising notions from the likes of Ricardo and J.S.Mill, the dominant economic policy-making narrative continued to be Smith’s laissez-faire free market model.
As economies developed and urbanised, workers began to agitate for better conditions – shorter hours, higher wages, increased safety and political representation. There was a good deal of both agitation and resistance, but workers began to win these gains only after the horrors that slaughtered them on the battlefield and the labour shortages that followed World War I. Simultaneously, the industrial structures of capitalism became increasingly corporatised but the economic policy narrative continued to be one of laissez-faire and free markets.
The World War I victors enjoyed prosperity until the stock market crash of 1929 and the subsequent economic collapse. Unemployment rates soared above 20% and stayed there. Whether the unemployment persisted because monetary authorities didn’t print enough money or because government sought to balance budgets continues to be debated among economists, but in either case, the laissez-faire narrative was losing its legitimacy – both as a result of the evident increased in monopolisation/corporatisation and of the Depression. The critical role of central government as a regulator of both activity and fairness came to be increasingly recognised and accepted.
Whatever the cause of the crash, there was some recovery, albeit weak, as a result of Roosevelt-inspired government expenditure programs for dams, post offices, telephone infrastructure and the arts. Full recovery only came with World War II’s demand for soldiers, goods and services – financed by budget deficits and an increase in government debt.
Economists feared that there would be a return to mass unemployment after the War but they were wrong. Economic growth accelerated as a result of pent-up private demand after years of going without – for whitegoods, entertainment, clothes and babywear. This was complemented by government demand for defence, highway systems, science research and higher education.
It was in this context that the Keynesian economic model came to dominate policy making after the War. The model, named after the influential British Treasury economist John Maynard Keynes, argued against the commonly free-market laissez-faire view that markets were self-correcting and led to the best economic results possible. Keynes argued that open free competitive markets could lead, as in the 1930s, to permanent high mass unemployment. He further argued that short-term budget deficits could increase employment and that the taxes subsequently collected would fund the earlier short term deficits – i.e. that national debt need not be a problem. Keynes also argued that short-term budget surpluses could offset inflationary pressures as effectively as measures which tightened the supply of money. It seemed as if the regular cycles of boom and bust that Marx had argued was endemic to capitalism could be made obsolete within the capitalist system. A Fabian Socialism became the orthodoxy for several decades in the most prestigious graduate schools.
It was also in this context that the class politics that had dominated the first half of the century was subsumed by the politics of identity. And it was in this context, that Labour and Capital agreed on an implicit accord which “guaranteed” industrial peace if real wages increased at about 2-3% p.a., unemployment was kept below 4-5% of the workforce and price inflation was limited to 2-3% p.a. Gross Domestic Production (GDP) needed to grow at a 3.5-4.5% per annum to accommodate population growth, a 35/40-hour work-week and a 45/50-week year. This was historically ambitious given that throughout most of human history, GDP grew at less than 0.1%, accelerated to only 1% p.a. after the Industrial Revolution and accelerated again to 2% p.a. from the 1870s to the 1930’s Great Depression. The Labour and Capital accords were implicit rather than contractual and the nature and specifics of implementation varied between economies and over time.
In the context of the current malaise that afflicts contemporary economies, it is an open question whether the accord parameters were sustainable in the long-run. But the long-term was of little interest in the 1950s, particularly since economic growth had become a political necessity at the ballot box.
Treasury economists throughout the capitalist world pushed tax levers and expenditure buttons to manage demand according to the wishes of their masters – the politicians. The “left” side of politics aimed to increase demand and GDP by encouraging consumers and workers to spend while the “right” side sought to increase demand by ensuring that businesses made handsome profits that would “trickle down” to workers indirectly. The “left” side of politics would sell lower unemployment at the cost of somewhat higher inflation while the “right” side of politics would sell lower inflation at the cost of somewhat higher unemployment. Capitalist economies became “mixed” economies; politics became a market place; Marx’s “class struggle” was replaced by “me-versus-you” greed-and-envy; and Budget night became a reality TV show focused on the “hip pocket nerve”.
So long as economies were growing, conflict was avoided by material prosperity, better health and extended education. In the aftermath of World War II, there were fears that Western economies would fall back into Depression, but pent-up demand instead buoyed economic activity. There was little unemployment and apart from a bubble due to wool purchases for the Korean War, there was effectively no inflation. The marginal tax rate for high income earners was over 50%, protectionist tariffs were high, wealth taxes were common, financial capital movements and interest rates were subject to government control, migrants added 1% to the population every year and apart from fear of the Yellow Peril and the pesky “Communists” that were thought to be in unions, universities, the arts and the media, there was security, prosperity and hope for a better future, at least in the West. Business cycles were not ended, but compared to the business cycles of the eighteenth and nineteenth centuries, they appeared mild and even benefitted productivity growth.
The fly in the ointment was that politicians found it difficult to budget for surpluses in boom times but always found it easy to budget for deficits. This lead to increases in public debt relative to GDP, but Economics has no problem with public debt that finances public investments which yield future benefits. It is only a problem if the increase in debt is due to the interest on the debt or if it dampens economic growth. As deficits continued even during periods of full employment, a view was taking hold that government was crowding out private investment and that increasing public debt was limiting economic growth.
Policy makers were caught by surprise when unemployment and inflation both increased significantly in the 1970’s, productivity and growth both slowed while industrial unrest increased. The implicit accord of the immediate post War II years came under strain. A simultaneous increase in both unemployment and inflation was impossible in the Keynesian model which viewed unemployment and inflation as trade-offs.
Economists became increasingly disillusioned with Keynesianism as unemployment levels began to hover around 8% (compared to 1% in the early 60’s). Moreover, there was the spectre of 1930s-style German hyperinflation, when inflation looked as if it would continue to accelerate beyond 10%. Economic growth continued to slow as optimism gave way to pessimism.
One influential economist, Milton Friedman at the University of Chicago, rejected the Keynesian model in arguing that it was based on the false assumption that workers would be content with increases in money wages even when their price-adjusted value declined. He went out on a limb in 1970 to predict that the adoption of Keynesian policies would lead to simultaneous increases in both inflation and unemployment – referred to as “stagflation”. This contradicted the Keynesian notion that unemployment and inflation were inversely related – an empirical formulation known as the Phillips curve. Friedman further argued that the increases in government debt that accompanied Keynesian policies would stifle productivity growth as inept bureaucrat-led projects and programs crowded out more innovative and creative private sector investments. His predictions proved true in the 1970s.
He further argued that the Depression of the 1930s was due to policy mistakes by monetary authorities rather than inadequate demand and that it was a government-induced shrinking money supply that transformed what would have been a mild recession into a deep Depression. He concluded that monetary authorities should focus on the simple rule of increasing money supply by a constant rate consistent with long-term population and productivity growth instead of attempting the impossible task of predicting and managing the whims and fancies of the market and the serendipity of technology. He argued that markets would correct themselves and that bureaucrats only made things worse.
Friedman argued in Capitalism and Freedom that in general, government regulations and interventions not only decreased efficiency, but more often than not led to unfair outcomes. His call for less government intervention in the economy and decreases in the size of government was complemented by Friedrich Hayek’s Road to Serfdom, which argued that government intervention stifled freedom and would lead to technologic serfdom.
The Freidman-Hayek policy agenda, referred to as Monetarism in Economics and Libertarianism in Politics and Political Philosophy, ousted the Keynesian pro-government agenda. It was an agenda that promoted a radical purist “laissez-faire” (translated “leave to do”) economy in which the role of government was only to maintain law and order and the security of the state – a police force and a military. It was a model that called for tax cuts, social expenditure cutbacks, government budget balance, corporatisation and privatisation of government assets and the deregulation of all private markets including labour, finance and health markets.
The Friedman-Hayek model influenced politicians such as Margaret Thatcher, Ronald Reagan and John Howard and later it inspired the radical Neo-Conservative Movement. It has now come to split the right-side of politics between the new radical “dries” who espouse constitutional anarchy on the one hand and the traditionalist “wets” who espouse a carefully constructed civil society on the other: Tea Party versus Romney Establishment Republicanism in the US; Bernadi/Abbott versus Turnbull in Australia; and Cameron versus English Brexiters.
Inflation and the threat of hyperinflation were brought under control in the early 1980’s by a combination of unexpected tight monetary policies, high unemployment and wage-price industrial relations policies. Inflation decreased rapidly but it took almost a decade for unemployment to return to 5%. The credit was given to and accepted by the Monetarists who correctly predicted the stagflation, even though tight money, high unemployment and industrial relations compacts were not inconsistent with the theoretical Keynesianism that the politicians had botched.
Even though the policies that broke the inflation threat was consistent with Keynesianism as well as Monetarism, Dowlphin, like many other economists, gave the credit to the Monetarists because, unlike the Keynesians who assumed that politicians were like philosopher-kings, the Monetarists incorporated political skulduggery into their model. The Monetarists advocated rules that constrained the ability of politicians to manage the economy where the Keynesian econocrats allowed the politicians that they advised a free hand.
The Monetarist policy agenda was two-pronged – fiscal and regulatory. The fiscal agenda involved cutbacks to government, and the regulatory agenda involved privatisation, corporatisation and deregulation.
Despite their Monetarist rhetoric, budgets continued to be in deficit under Thatcher, Reagan and Howard as Treasurer. In regard to the fiscal agenda, “right”-leaning politicians talked the talk but didn’t walk the walk. It was ultimately the “left”-leaning parties (Clinton, HawKeating, and Blair) that went through bitter internal struggles to reform themselves as they came to reluctantly accept the Monetarist agenda – not from conviction and ideology but from the competitive pressures of a globalised economy and emerging technologies. It was no longer possible to hide behind protectionist policies once information and communication technologies intensified the competition between nations while shrinking the virtual distance between them.
It is politically easier to promise tax cuts than to decrease expenditure, but by implementing cuts with a commitment to budget balance, politicians “forced” themselves into a corner and then optimised electoral advantage by focusing mainly on those cutbacks which would have adverse consequences in the long-term and to the politically voiceless. Thus
- there were immediate electoral dividends in offering tax cuts to the growing middle class, special interest groups and wealthy donors
- there was little short-term cost to productivity-reducing cutbacks in capital infrastructure, research and development where adverse consequences would only be felt in the future when the politicians of the day had long left politics
- there was little electoral disadvantage for decreasing transfers to social security recipients or overseas charities.
The productivity and income redistribution effects that would be felt by the politicians and citizens of the 2010s was of only marginal concern to the politicians of 1980s and 1990s, just as the issues of the 2040s are of little concern to the politicians of the 2010s.
The privatisation-corporatisation-deregulation agenda of the Monetarists faced strong ideological opposition but little electoral backlash and was implemented in ways that were to be politically popular. The agenda absolved government of the minutiae of detail required to regulate, monitor and arbitrate finance markets, utility markets and labour markets; it turned working class citizens into shareholder capitalists; and it was popularly seen as making life simpler by those who resented the “needless” red-tape of the “nanny state”. The theoretical Monetarist rationale was that
- a) self-regulation, tort law and competition in an informed market would indirectly be as effective as direct regulation in minimising civil wrongs and unfair practices and that
- b) minimal government oversight of minutiae would lead to a more dynamic economy.
Much as the Vietnam War coincided with the end of Keynesianism’s philosopher-princes, the collapse of Communism in 1989 confirmed the ascendancy of Monetarism by demonstrating the superiority of “free market” capitalism. The spectre of the Washington consensus of policy prescriptions promoted by the International Monetary Fund, the World Bank and the US Treasury Department bestrode economic globalisation. American-style Democracy and Capitalism offered the zenith of History – a Golden Age of peace in which disagreements could and would be resolved by compromises and negotiation much as MacDonalds hamburgers offered freedom from hunger with cheap fast food.
The Asian Crisis of 1997 and the Argentine Depression of 1998-2003 began to undermine the Monetarist Washington Consensus outside the Anglo-European economies. (Japan’s economic stagnation was a puzzle that was explained by the ageing of the population – a demographic reality that Anglo-European economies face but, apart from Germany, prefer to ignore).
The nail in Monetarism’s coffin came with the Global Financial Crash in 2007-8, even though the financial collapse in 1997 of Long-Term Capital Management Corp. should have sounded a warning bell in regard to Wall Street risk-management financial technologies. For LTCM had two Nobel Prize winners (Scholes and Merton) on the Board of Directors because of their insights into “new methods of determining the value of derivatives”, but Wall Street and the City of London continued using the Black-Scholes-Merton techniques as if LCTM had never proved the Nobel Prize winners wrong. The 2007-8 Globnal Financial Crisis began in the US and spread quickly to Europe and the rest of the world.
Alan Greenspan in testimony to the US Congress’ House Oversight Committee admitted that
“I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms”.
Greenspan had been Chairman of the Federal Reserve Board for nineteen years from 1987-2006. He is an ideological warrior in the radical Libertarian “laissez-faire” mould and mentee to novelist, philosopher, playwright and screenwriter, Ayn Rand – whose novel Fountainhead was popular with non-feminist teenage girls and Ronald Reagan in the 1960’s.
The financial system was on the brink of collapse as a result of the deregulation of the financial system. Whereas Greenspan had the courage and fortitude to admit his error, other Neoconservative ideologues seem to have denied the error to become “radical rabid” in their call for small government – ultimately forming the Tea Party rump of the US Republican Party and the right wing factions of the Australian Liberal Party and UK Conservatives.
What proved to be problematic with the laissez-faire model was that self-interested banks, credit agencies, auditors, mortgage brokers, real estate agents and financial planners chased commissions instead of making credit-worthy sales, ramped up short-term share prices instead of earning long-term sustainable corporate profits and swindled clients instead of serving them. This was encouraged by a self-righteous group-think political culture of “greed is good” and “sucker beware”. It was all enabled by opaque financial models and statistics of dubious merit that, enabled by “rocket-scientist” to create wonderful new financial instruments. The new instruments were poorly understood by old-school math-phobic managers who took it on faith that risks were contained. The few regulators still employed were swamped, bullied and ignored by Greenspan and his fellow Wall Street warriors. The result was a “bubble” in all real estate and share markets and as always, the bubble burst.
A 1930’s style Depression was avoided by having taxpayers underwrite the Federal Reserve’s lending to the collapsing financial sector and the corporations that were caught up in the bubble. The risk of Depression could in theory have been avoided by legislating a temporary moratorium on housing mortgages and a restructuring of household debt instead of a restructuring of corporate debt. But time was of the essence for a speedy resolution so politicians and econocrats worked through a small number of large corporate entities instead of managing, accounting for and dealing with millions of small householders. It turned out that a full-blown Depression was avoided, but the recession which followed exacerbated inequalities in income and wealth that was already emerging and this unleashed a wave of anger and pent-up political rage that is only now becoming evident.
Rage – Populists, Authoritarians and Radicals
The simplistic self-righteous “laissez-faire” Monetarist model is now as intellectually discredited as simplistic Keynesianism. Thus:
- workforce participation is on the decline in the US while unemployment remains high in Europe;
- the distribution of income and wealth worsens as the wages of middle-skilled workers stagnates;
- interest rates are too low to be effective;
- public debt to GDP ratios are in most economies (not Australia) at levels which make the use of Keynesian policy problematical;
- industrial unrest is beginning to break out after years of relative calm;
- young people are increasingly laden with education debt facing house prices which make the raising of a deposit to buy a home difficult;
- the mortality of mid-life white non-Hispanic males in the US is increasing as a result of suicide and drug overdoses;
- and people of colour in the US are being murdered by police forces using the hand-me-down military arsenal left over from Iraq and Afghanistan.
Meanwhile, economists and monetary authorities are searching for answers in the dark, with solutions such as
- “helicopter money” that increases effective demand by giving money away, as was done when Kevin Rudd’s government sent a $500 cheque to everyone in 2008
- increasing inflation to encourage people to buy now rather than to delay – despite the unintended adverse effects on pensioners and retirees
- government borrowing for renewable energy, transport and urban development projects – despite the already high levels of government debt to GDP.
Is it any wonder that people look to the simplistic right-field of Cruz, the populist narcissism of Trump and the simplistic left-field of Sanders? Is there any reason to trust the experience of a Wall Street political operator such as Clinton?
Nationalism, Racism, Populism, Putinesque/Chinese/Hungarian Authoritarianism and Religious Fundamentalism (overwhelmingly Islamic but also Buddhist, Hindu, Christian and Jewish) fill the vacuum left by rudderlessness and they fulfil the demands for certainty after a loss of trust in the simple Centrist narratives.
After the creative powers of the industrial revolution was undermined by its destructive capabilities in World War I, capitalist economies readjusted to a new power balance as the working classes fought for and won considerable political power. The economic system crashed in 1929-30 (for reasons that are still debated) but it recovered when Rooseveltian public expenditure programs followed by World War II defence expenditure stimulated demand – giving impetus to the Keynesian economic narrative. Economic growth was strong in the 1950s and 1960s (for reasons that are still debated) but the Keynesian model’s failure to anticipate politicians’ predisposition to buy votes led to the 1970s stagflation that was predicted by Monetarism. It too crashed in 2007-2008 – because the Monetarists failed to fully account for either group-think or the conflicts of interest in the governance and management of financial corporations.
The road to both heaven and hell are paved with good intentions
UU > UK belief + KK fact + KU speculation