ABSTRACT
Finally, I turn to the question of why the neo-liberal approach has been so widely accepted in western development circles and subsequently integrated into these circles within the developing world. The answer leads back to the fall in the share of labor and the rise in the share of capital in western GDP, as well as to the New Wall Street System (NWSS) which evolved in response to these changes in income shares and further intensified them. Neo-liberal ideology about the market and the government has provided a powerful narrative to legitimize these changes. Western development agencies translated this ideology into policy agendas and projected them onto the developing world, helping to produce the instabilities and failure of catch up described earlier. As of 2007-09 we are in the midst of a crisis of the global economy, not a crisis in the global economy – the first since the Great Depression. In a crisis of the system, the circuit breakers and built in stabilizers do not work, and the system does not readily reset. It has changed from a liquidity crisis (credit crunch) into a solvency crisis; from one in which most banks, firms and households are solvent but short of credit, to one in which a large proportion of banks, firms, and households are insolvent, their assets worth less than their debts. We do not have or cannot deploy the policy instruments which might steer us out of a solvency crisis in short order. It will continue to morph unpredictably around the world for several years, during which time world economic growth will be very low. Even developing countries not directly entangled in the inverted pyramid of credit-debt relations at the heart of the First World debt crisis will be badly hit. To see how the dynamics of a “crisis of the system” are playing out, consider Britain as an uncontrolled experiment. At first sight, everyday life continues as normal. In London, West End theaters and opera houses remain fully booked. Yet the country underwent the fastest fall in house prices ever recorded in its history (down by 15 percent on average in the year to October 2008, as compared with the previous highest annual fall of 8 percent in 1992); the stock market fell some 47 percent between the peak in June 2007 and end-October 2008; consumption fell; the number of people made redundant or put on shorttime work rose across almost all sectors other than fast food. The British state, hitherto famous for its advocacy of free markets and light regulation, crossed multiple red lines in a panicky “interventionist” direction. The Bank of England set the central bank interest rate to the lowest in its 300-year history. The state assumed a large ownership share in the banking system. The state also raised spending by borrowing, in lieu of raising direct taxes, to the point where fears mounted of a UK sovereign default, which jeopardizes the continued financing of government debt. Yet despite this “shock and awe” response, banks still hoarded cash, rather than lent, because of a pervasive lack of confidence in counter parties. The slump ground on . . . As we begin to rebuild the global financial system, societies will no longer tolerate the practice of privatized gains and socialized losses, which has been the modus operandi of the financial sector for the past 20 years (Icelanders call it “the devil’s socialism”). We will end up with a more stable, but less
“innovative,” system in which the state has a bigger role. More of the financial sector will be operated like a public utility (rather than like a casino) and subject to a similar kind of regulation as for pharmaceuticals, alcohol, gambling, explosives and other products with large “externalities,” or even kept in public ownership to protect the public good of stable financial intermediation. Regulation will have to be much more multilateral than it has been, on the principle that the domain of regulation must coincide with the domain of the market. The G7/8 has already been superseded by the G20 which includes China, India, Brazil, Mexico, Turkey and South Africa. The economics profession for the most part slept into the crisis. It bears a good part of the blame for brainwashing millions of people around the world that (a) governments hamper economic growth, (b) private markets create the wealth, and therefore, in terms of my title, (c) markets should be “master” rather than “means.” The argument – expressed in the admittedly extreme terms of a Wall Street Journal editorial entitled “Keynes really is dead” – is that:
[G]overnment spending is less efficient, and thus less productive, than private spending. The government tends to spend on items (welfare, subsidies) that produce less economic growth than private investment does. The profound point about government spending is that the money has to come from somewhere, which means the private sector. The government must take it either through taxation or borrowing. “But either way,” says University of Chicago Professor of Finance John Cochrane, “no new wealth is created.”
