The Moral Failures of Neoliberal Economics.
An ethical and practical deconstruction of British austerity, American economic exceptionalism, and the neoliberal doctrine that links them.
Many dismiss ‘neoliberal’ as a useful economic term, arguing instead it has become meaningless in the quantity and flippancy of its use. It relates to the economic thinking that rose to global political prominence following the breakdown of the post-war Keynesian consensus, it’s key theories often attributed to Friedrich Hayek and Milton Friedman, and promotes the privatisation of public goods, mass deregulation, and untrammelled free-trade. Despite it’s utility as the appropriate nomenclature for the late 20th Century resurgence of classical liberalism, I can see how many with opposing views can become tired of the word. It has become somewhat of a motif within the essays of many left-wing critics of capitalism; a buzzword that signifies the presence of an insidious ideological bogeyman. It is no ‘bogeyman’ as such; it has grown our economies, raised the standing of living, and lifted people out of poverty – to criticise something is not to ignore it’s positive effects.
However, the rein of neoliberal thought appears to be ending. Whilst pursuing efficiency, growth, and above all, profit, we are forgetting what it means to be human. In the name of ‘progress’, we are regressing; inequality rising, psychological and spiritual epidemics, destruction of the ecological equilibrium – these are the consequences of the systematic subservience of the democratic state to the plutocracy of the market; the failure to adequately resist the commodification and commercialisation of human conduct. Thus neoliberalism now stands as a barrier to true progress. The power of capital still holds dominion over much of human civilisation, but paradigms don’t stay in place forever, and this current one is fast approaching critical mass. There are times in human history where the wheels of change start spinning; new ideas penetrate the dialogue, vibrations rising to a steady hum, developing to a rhythm that spreads. It is known as a tipping point. And we are beginning to tip.
The current prevalence of the term ‘neoliberal’ is emblematic of a wider trend in recent discourse. As the crisis moment wanes and economies set upon the sluggish path back to transient stability, the shock waves of the financial crash have begun to rock the political landscape, manifest in the UK by the supposedly unimaginable rise of Corbyn, and the loud protest against globalism that was Brexit. Other precedents can be observed throughout the world, from Melenchon and Sanders to Trump and Le Pen. Critiques of capitalism within the political, intellectual and journalistic arenas have too increased in prominence, see for example, Theresa May’s interventionist, Red-Tory rhetoric. This shift in perspective occurred as a product of the revelatory nature of the global crash: we opened our eyes and saw economics in moral terms. We saw the repossessions, the homelessness, the poverty. And faced with the real human cost of policy decisions, we must reassess if the current economic framework is just; if it is truly working for ordinary people. The financial crisis allowed us to identify the inherent weakness, instability and iniquity of the neoliberal order. The British austerity of 2010 to the present are its death throes; the logical continuation and attempted preservation of a toxic set of ideas, and the horrendous wealth and, subsequently, power inequalities of the United States is its purest form.
Let us briefly trace the recent origins of this pervasive ideology, charting its role in the crash of 2008 and the austerity that followed. In 1971, the collapse of the Bretton Woods exchange rate system, which tied a nation’s currency to their gold reserves, allowed currencies to float, setting off the great deregulatory push that was politicised and amplified by Thatcher and Reagan. The 80’s saw the emergence of the New Right who attacked social solidarity, crippled trade unions and employed regressive tax cuts, all justified by an alluring political narrative espousing the noble ideals of freedom, ruthless competition, and entrepreneurship. In the 90’s, the left embraced neoliberalism and gave birth to the Third Way, nurturing and enabling the deregulatory agenda: President Clinton repealed Glass-Steagall, the bill put in place by Roosevelt that separated commercial and investment banking following the Great Depression; and Blair’s New Labour removed Clause 4 from the parties manifesto, abandoning their historical commitment to socialism, whilst failing to recognise the danger posed by an increasingly powerful City of London. The justification for this sustained political lapse in control was that the banks were being kept in line by the benevolent invisible hand, guiding us along the path of strong growth and prosperity, free from the ‘dead hand’ of the state. Whilst bonuses boomed in the years leading up to 2008, the steel towers of JP Morgan, Lehman Brothers and Goldman-Sachs gradually grew too big to fail, propped up by fraudulent CDO’s and derivatives. When they finally did, it exposed the deep structural failings of an unregulated financial market and the avaricious individualism which is incentivised throughout wider society. The recklessness of the establishment, and their shaping and exploitation of our institutions, meant the rest of us – those who had no place in the testosterone fuelled trading rooms of the banks that created the crash, or the offices parliaments of politicians who, in their blind faith in market forces, failed to prevent it through legislation – were forced to endure the consequences. Outside of Iceland, the fraudulent conduct of arrogant financiers was punished with fines that amounted to little more than slaps on the wrists for these mercantile behemoths. A taxpayer funded bank bailout was coordinated by the Treasury. Millions were left homeless, but at least the executives got their bonuses.
The laissez-faire thinking that lay the foundations for the fall of the subprime mortgage sector runs through the veins of not just the United States, but the United Kingdom too, and its hold on the biology of the body politic was evident in our response to the economic downturn of 2008. Contrary to what Cameron told us with his unnervingly plastic face, and Osborne with a seemingly perma-coked gaze, the austerity of the coalition was not a necessary decision. With the statesman rhetoric of tough-choices signifying a fiscally responsible government in stark contrast to Labour’s economic incompetence – an aptly Machiavellian strategy from the most successful political party in Western Europe, who, with the help of a largely sympathetic press, portrayed Labour as directly responsible for the financial crisis and the following recession, claiming the crash was due to Blair & Browns excessive spending, and as a result, Labour cannot be trusted. Just refer to any one of Cameron’s PMQ’s and the hot-takes of conservative columnists and see them use the same line of attack to cast Labour as too irresponsible to reside in Downing Street. One could argue that New Labour failed to foresee the cracks in the neoliberal paradigm, as Tony Blair has himself conceded, but this is not unique to any one government, instead it was the accepted orthodoxy of almost all Western nations at the time. The depth and speed of the cuts made suggest a motivation independent of fiscal stability: an ideological choice in pursuit of smaller government, using threats of Greek-scale economic disorder lest we pay down our debt to convince us of its urgency. A debt which ballooned following emergency monetary policy undertaken by Brown to mitigate the catastrophic damage of the banking crisis. Yet we took the bait and believed them, agreeing to tighten our metaphorical belts. And even today, austerity remains. Whilst moderated, Theresa, and her party of Judas’ waiting to throw the self-proclaimed saviour under the bus, still continue their insistence on austerity, promising a future, always 5 years away, where the books are finally balanced.
It’s hard not to see the tragedy in the situation. In order to reduce the debt created by bankers, the Conservative’s prescribed solution stems from the same school of thought as that which sustained the negligent freedom of financiers in the first place. The traits of small state thinking is found in both the financial crash and its austerian aftermath. The cuts that followed heavily affected the quality of the public realm and inhibited economic recovery, forcing the most vulnerable to take the brunt in cuts to local budgets, disability benefits and other social expenditures and provisions, ultimately leaving less money in the pockets of consumers, and driving many into homelessness and poverty. Whilst these tough decisions were being made, the rationing experienced by the many was juxtaposed by the £70 billion worth of tax cuts that mainly benefited the most well-off. It seems the Tory promise of ‘we’re all in this together’ was just another lie. The rejection of a Keynesian approach by the Tories demonstrates their commitment to both big business and the free market, defending austerity on the basis it will inspire confidence in the British economy, wooing multinationals who would come to pull us out of our economic downturn. Coupled with a reduction of the state and business-friendly tax cuts, the market was keen to assume its role as the rightfully dominant societal force, in accordance to neoliberal doctrine. A survey of British academic economists in April 2015 revealed that the vast majority (ignoring those undecided: 81%) believed it had a negative effect on the public finances, whilst, on the same day, a letter published in the Telegraph signed by business leaders claimed the opposite, supporting the Conservative-led Government. The immorality of austerity is even more pertinent when one understands who it benefited.
Moreover, the academic case against austerity is equally as strong as the moral one. The textbook macroeconomic response to combat a sudden recession is to employ fiscal stimulus, expanding the economy out of it’s depression by increasing government spending or cutting taxes. The opposite approach, fiscal contraction, requires cutting government spending or raising taxes — in the case of the Conservative austerity programme, they employed budget cuts and hikes to indirect taxes, hoping to inspire business confidence and attract investment in order to reduce the debt and deficit and save us from recession. Instead, the recession was prolonged and deepened; the warnings of most economists were vindicated. Yanis Varoufakis at a Cambridge Union debate energetically illustrated a deep fault in Austerian thinking: despite what much of the media and many politicians communicate, national economics does not have to follow the same rules as individuals or households. As a result, in times of economic slump, the parsimonious contraction of state spending does not produce healthier finances as there is no independence between income and expenditure like there is with personal or household finances — they are intrinsically linked. He explains: if a state with 80% debt to GDP ratio, and a state budget of 40% of GDP, decided to cut their state expenditure in half, the debt to GDP ratio will extend to 100%. Even by it’s own measures, austerity seems like a redundant option.
Economist Paul Krugman’s Guardian Long Read, The Austerity Delusion, deconstructs the post-crisis arguments for austerity that formed the intellectual basis for Osborne and Cameron’s coalition politics. He writes:
“…all of the economic research that allegedly supported the austerity push has been discredited. Widely touted statistical results were, it turned out, based on highly dubious assumptions and procedures — plus a few outright mistakes — and evaporated under closer scrutiny… It is rare, in the history of economic thought, for debates to get resolved this decisively.”
The economic research to which he refers belongs to three Harvard economists: Alberto Alesina, Carmen Reinhart and Kenneth Rogoff, the latter two being directly cited by Osborne as statistical justification for his forthcoming cutting-spree. Krugman explains that Alesina’s contribution, Large Changes in Fiscal Policy: Taxes versus Spending, analysed “all large fiscal policy changes in advanced countries between 1970 and 2007, and claimed to find evidence that spending cuts, in particular, were often “associated with economic expansions rather than recessions””. Unfortunately for Alesina, and the many others who took his work as a vindication of their economic suppositions, his methods led to significant misidentifications, throwing the merit of his conclusions into doubt. Following an IMF review of his research, and further examination on the macroeconomic effect of post-crisis austerity measures across advanced economies, a consistent negative correlation between the extent of austerity and the rate of GDP growth was found. His hypothesis of expansionary austerity was, as it turns out, incorrect.
So what, then, of Reinhart and Rogoff, who co-authored the 2010 paper, Growth in a Time of Debt, arguing that should a nation-state exceed the critical limit of a 90% debt-to-GDP ratio, economic catastrophe would follow? Under close examination by researchers from the University of Massachusetts, the Reinhart-Rogoff work followed a similar fate to Alesina’s: found to be “partly driven by a spreadsheet error”, their results failed to convince, and did not confirm the 90% figure as a fiscal point of no return.
The austerity debate still rages in Britain today, but it’s proponents appear to be scarpering. Facing the Sisyphean task of Brexit, Chancellor Phillip Hammond recognises the necessity of policies that revitalise our manufacturing sector as well as wider infrastructure, a desire which will no doubt clash with their obsession to reach a budget surplus. Factoring in the public rejection of austerity that partly fuelled the Conservatives Pyrrhic victory this June, we may see Tory advisers rethinking their economic message to drop the reduction of government spending as a priority. With an emboldened Corbyn lurking in the wings of Westminster, all red-faced and scruffy like a socialist St. Nick, the business-centric, technocratic field of British politics is experiencing a shock to the system. For the most important achievement of Labour’s campaign was to breakdown the wall between scientific, pragmatic economic decisions and the harsh reality of people’s lived, subjective experiences, in order to demonstrate the human cost of prioritising growth over sustainability, and profit over people. Decisions made in backrooms, boardrooms, and stock-trading floors not only influence the digits of complex pecuniary measurements and indicators, but more importantly, they impact real human lives in ways that cannot be so easily measured with numbers and graphs. Labour succeeded because they offered hope in turbulent times, putting forward a radical, collective vision; they connected to the communal heart of politics.
On the other side of the Atlantic, austerity is largely an irrelevance, with our deficit-reduction fetish failing to take hold. However, a graver example of the damage of neoliberalism resides on the shores of America, one that, for the last few decades, has been accelerating. And, at least for the foreseeable future, shows no signs of slowing down.
In the Kingdom of Capital, money reins supreme and inequality blossoms. It is the wealthiest country in the history of Earth, yet for many, that prosperity is a distant fantasy. The richest 10% of the population hold 76% of the total wealth, leaving the poorest 50% to share only 1%. From Beverly Hills to the Upper East Side, the rich and successful flaunt their wealth. In Flint, Michigan, the poor drink poison water. After losing much of it’s economic stability with the loss of manufacturing jobs, Flint was essentially broke, with 40% of it’s population living in poverty. ‘Emergency Managers’ appointed by governor Rick Snyder employed cost-cutting measures, deciding to stop buying water from Detroit and instead obtain it from Lake Huron nearby. In the intermediary time, they used water from the Flint river, which had high levels of lead. When this knowledge was brought to the attention of the authorities, they ignored the desperate residents. When you’re poor in America, your concerns matter little.
If you are rich, however, there’s no problem getting your voice heard. Corporatism dominates the political process. In 2010, the Supreme Court’s decision to rule in favour of Citizens United designated corporations and other large associations as people, and their right to unlimited, undisclosed political donations as free speech. Super PACs and direct donations allow wealthy donors like the Koch brothers to buy influence through bankrolling political campaigns, from the Presidency all the way down to the State legislature. Representatives in both the House and Senate spend much of their time appeasing and deal-making with executives, bankers and media-moguls. A recent study from researchers at Princeton University concluded that the US more resembles an oligarchy than a democracy, writing:
“ … economic elites and organised groups representing business interests have substantial independent impacts on US government policy, while average citizens and mass-based interest groups have little or no independent influence… if policy making is dominated by powerful business organisations and a small number of affluent Americans, then America’s claims to being a democratic society are seriously threatened.”
Those standing for election must buy their way to power, using donations to purchase advertising. The more financial support a candidate has, the more influence they can exert, and the correlation between money and political success is supported by a corpus of academic research. An example of such research features in George Monbiot’s book Out of the Wreckage. He writes: “An analysis by US political scientists found an almost perfect linear relationship, across thirty two years, between the money available to Congressional candidates and their share of the vote. Those who collect and spend the most money win, while those with the least lose, in almost all cases.”
This is legalised bribery, and the failure of American democracy to escape the power of market forces is emblematic of the depth at which the claws of capital have sunk into the United States. Embedding itself deep into the fundamental workings of America’s institutions and psychology, the neoliberal ideology has taken root. For example, the water protectors of Standing Rock who protested the construction of the Dakota Access Pipeline were met with pepper spray and rubber bullets from state police and private security companies alike. Disregarding their human motivations — a desire for clean drinking water, defence of the natural environment — in favour of the riches of black gold. Building upon the values of the American dream, the consequences of the individualist message inherent in the entrepreneurial character of Reaganomics and Thatcherism are born out in regards to the US attitude to healthcare. Always the exception, the US is the only major industrialised nation on Earth that does not provide universal health care. Why? Because it is not seen as a right. It is seen as a product, like everything else, and why should you have to pay for poor Doris down the street to have cancer treatment if this is the case? They should work for their life, and if they are poor, that’s their problem. Despite what their constitution declares – life, liberty and the pursuit of happiness – it is not a right. The moral obligation to help the sick and needy, and the practical advantages of pooling risks and public sector efficiency, are not important — the individual pursuit of money is.
The devaluing of human lives as evident in healthcare, the protests at Standing Rock, and the Flint water crisis, is but one symptom of neoliberalism and its inherent inequality and ethical disconnect. A new study by the economists Emmanuel Saez, Thomas Piketty, and Gabriel Zucman demonstrates how rigged the American economy truly is. It shows how income gains have overwhelmingly benefited the 1% since 1980, the decade in which economic liberalism usurped social-democracy and accelerated consumerism, at the expense of the lower and middle classes.
Looking at that sharp curve, and visualising the social evils that stem from such wealth disparities, it is nigh impossible to justify this level of inequality, in both moral and practical terms. How can you truly, honestly, justify a system which produces this distribution of resources? One that encourages the gluttonous excesses of material indulgence whilst people sleep on the streets. One that drives the obesity of millions whilst others die of hunger; or of curable disease as a result of limited access to healthcare. One that dooms many to a life of wasted potential, trapped in a poverty-stricken milieu, whilst criminal executives get bigger and bigger bonuses. The extreme hoarding of wealth is not an accident, but the logical conclusion of trickle-up economics; the systematic extraction, creation and concentration of ‘value’, stretching from New York to New Delhi and Seattle to Shanghai, afflicting not only the social foundations of Western nations but the global south as well, utilising the neo-imperialist apparatus of globalised capitalism to siphon wealth and cheap labour from developing countries. Debt payments and illicit capital flight through the international trade system accounted for a $3.3 trillion dollar outflow of wealth in 2012, dwarfing the $1.3 trillion given in aid and investment.
It is said seismic political shifts occur in cycles of every 30 or so years. Attlee’s post-war, social democratic consensus, beginning in 1945, was upheld by One-Nation conservatives well into the 1970’s. Thatcher’s ideological earthquake began in 1979, shifting the ground of politics firmly to the right as New Labour carried the free-market torch into the 00's. It is now 2017, and the tectonic plates of public, intellectual and political opinion are moving once again. In 2008 when the economy fell, so did the narrative of benevolent market efficiency underpinning it, and when one idea falls, another must take it’s place. The post-crisis atmosphere of anti-establishment, social-justice sentiment is ripe for the Left’s taking. A compelling, moral alternative of ecological market-socialism, that emphasises stewardship of the environment, democracy and freedom of opportunity above profit margins and endless growth, can, and will, succeed and breakdown the neoliberal consensus of the past few decades.
