June 17, 2010
Most of us over forty remember how it all started. The first neoliberal victories won by Margaret Thatcher in Britain led to the near collapse of the British trade union movement. The victory against Soviet-style communism and the fall of the Berlin Wall have led to ten years of economic euphoria in the West, resulting from the opening up of the Central and Eastern European markets. Unexpectedly, neoliberalism’s main economic tenets came undone during the first decade of the new century.
By way of analogy, the current sovereign debt crisis in Europe could safely be regarded as neoliberalism’s very own Stalingrad. Even before the 2007 financial crisis, the flawed logic of supply-side economists started to produce negative social results. Yes, profits accumulated for a while, but these only to a handful. True, most products became cheaper as a result of moving entire industries to former Soviet countries or to China. Lower taxes did initially benefit consumers, but provoked a dearth of social services, investment in infrastructure, hospitals and schools. After thirty years of neoliberalism, most people find themselves poorer and their children less educated than generations of the previous fifty years.
According to neoliberal theorists, economic growth, lower taxes and free trade would eventually trickle down prosperity to all. Instead, they have given rise to an ‘investing class’ who used the profits accumulated in their accounts in unproductive, i.e. speculative ways. This led to a series of bubbles – the dot.com bubble, the Japanese real estate bubble, the US sub-prime bubble – that ultimately culminated in the global financial crisis, similar in proportion if not in outcome to the one in 1929.
The situation created after 2007 led to the counter-offensive of states against mindless speculative activities, deregulation of financial markets and neoliberal economic philosophy. The latter, had it been applied in full, would have led to the withering away of states altogether. In other words, what Marxists were dreaming of doing, neoliberal societies very nearly achieved.
The counter-offensive of political administrations against neoliberalism has shaken the very foundations of the Washington consensus. Increasingly, Western politicians, industrialists and trade union bosses are talking about the opportunity of adopting a new development model, the Beijing consensus, in which state-led investment for major projects is again the main engine of economic activity.
Not surprisingly, the investing class, its rating agencies and press have resorted to savaging the European Union’s southern flank, provoking huge financial losses to the Spanish, Greeks, Italians, Irish, and ultimately to France and Germany. In this protracted battle one could foresee the signs of a social tsunami in the making. The signs are everywhere, from Athens to Bucharest, from Germany to Spain. In the months and years to come, the protests will increase in intensity and are set to sweep away entire political structures built around neoliberal tenets.
To be sure, this is not an exercise in ball gazing, but the result of an extrapolation of observable tendencies, as J.A. Schumpeter would have put it. A few years from now, huge economic inequalities within societies would cease to be acceptable. Financial speculation and low taxes would become a thing of the past. Whilst foreseeable, the outcome is not going to be reached comfortably and without defeating entrenched and powerful financial interests together with their many helpers.
Author : Spotlight on Geopolitics
Is the ‘investing class’ really a new thing? The 1929 crash and depression was preceeded by a speculative boom of incredible proportions. From my reading of things like Glabraith, it seems as though there was a very large speculative group betting on margin.
Admittedly, the last decade has created a billionaire investing class which has not existed before. And it may be these – via hedge funds – that are savaging the southern flanks of the EU, as you describe.
This has lead to a collapse, which is leading to financial austerity, which in turn is leading to social unrest and populism. But how do you tax or reign in a global elite that is wealthy beyond imagination and hyper mobile? Isn’t that the question you are trying to ask?
I was a Galbraith fan in the eighties and read most of his books including the monography about the 1929 crisis. In 1929, people were betting with money borrowed from the bank. This time around, the ‘investing class’ is betting with the wealth accumulated from lower taxes. Interestingly, the 1929 crisis happened before the introduction of income tax in the US. Lowering the taxes to the current levels, and the flourishing global tax avoidance industry have provided the extra liquidities necessary for the growth of hedge funds.
In writing my posting, I have simply tried to highlight the fact that speculative attacks and subsequent austerity measures are turning the tide against neoliberalism and its economic concepts. The social unrest is going to grow in intensity, hence the analogy with the tsunami effect.
The term ‘investing class’ has been first used by George Bush Sr. to describe what he believed is a new breed of richer investors, committed to putting their tax savings back into the economy, for productive purposes,etc. This only happened in a limited measure, apparently being more profitable to invest huge amounts of money into the speculative activities promoted by hedge funds, investment banks and the like.
There is no magic bullet to reign them in, of course, but I’m sure that every dog has his day…