The high cost of neoliberalism

Financial liberalisation undermines democracy, handing power to a “virtual senate” that acts on beha

In the contemporary world of state-capitalist nations, loss of sovereignty can lead to a diminution of democracy, and a decline in the ability of states to conduct social and economic policy on their own terms. History shows that, more often than not, loss of sovereignty leads to liberalisation imposed in the interests of the powerful. In recent years, the regime thus imposed has been called "neoliberalism". It is not a very good term, as the social-economic regime in question is not new; nor is it liberal, at least as the concept was understood by classical liberals. The very design of neoliberal principles is a direct attack on democracy.

The central doctrine of neoliberalism is financial liberalisation, which took off in the early 1970s. Some of its effects are well known. With the increase in speculative capital flows, countries were forced to set aside much larger reserves to protect their currencies from attack. It is striking that countries which maintained capital controls - among them India and China - avoided the worst of the Asian financial crisis of 1997-98.

In the United States, meanwhile, the share of the financial sector in corporate profit rose from just a few per cent in the 1960s to over 30 per cent in 2004. Concentration also increased sharply, thanks largely to the deregulatory zeal of the Clinton administration. By 2009, the share of banking industry assets held by the 20 largest institutions stood at 70 per cent.

Among the consequences of financialisation is the creation of what an analysis by the investment bank Citigroup calls "plutonomy". The bank's analysts describe a world that is dividing into two blocs: the plutonomy and the rest. The US, UK and Canada are the key plutonomies: economies in which growth is powered by - and largely consumed by - the wealthy few. In plutonomies, these rich consumers take a disproportionately large slice of the national pie. Two-thirds of the world's economic growth is driven by consumption, primarily in the pluto­nomies, which monopolise profits as well.

The virtual senate

Citigroup's "plutonomy stock basket" has far outperformed the world index of developed markets since 1985, when the Reagan-Thatcher programmes for enriching the very wealthy were taking off. This is a substantial extension of the "80-20 rule" that is taught in business schools: 20 per cent of your customers provide 80 per cent of the profits, and you may be better off without the other 80 per cent. Corporations recognised years ago that modern information technology allows them to identify profitable customers to whom they can provide grand treatment, while deliberately offering skimpy services to the rest, creating a form of "consumer apartheid".

Financial liberalisation also creates what some international economists have called a "virtual senate" of investors and lenders, who "conduct moment-by-moment referendums" on government policies. If the virtual senate determines that those policies are irrational - meaning that they are designed to benefit people, not profit - then it can exercise its "veto power" by capital flight, attacks on currency and other means. Take one recent example: after Hugo Chávez was elected president of Venezuela, capital flight escalated to the point where assets held abroad by wealthy Venezuelans equalled a fifth of the country's GDP. With capital flow liberalised, governments face a "dual constituency": voters and the virtual senate. And even in the richest countries, the private constituency tends to prevail.

The Bretton Woods system put in place at the end of the Second World War was designed on the understanding that capital controls and regulated currencies would create a space for government action responding to public will - for some measure of democracy, that is. Keynes considered the most important achievement of Bretton Woods to be the establishment of the right of governments to restrict capital movement. In dramatic contrast, in the neoliberal phase that followed, the US treasury department came to regard free capital mobility as a "fundamental right", unlike such alleged rights as those guaranteed by the United Nations Universal Declaration of 1948: to health, education, decent employment and security - entitlements that the Reagan and Bush administrations dismissed as "preposterous", "letters to Santa Claus", mere "myths".

In earlier years, the public had not been much of a problem. In his definitive history of the international monetary system, the economist Barry Eichengreen observes that, in the 19th century, governments had not yet been "politicised by universal male suffrage and the rise of trade unionism and parliamentary labour parties". This meant that the severe costs imposed by the virtual senate of lenders and investors could be transferred to the general population.

But with the radicalisation of the general public during the Great Depression and the anti-fascist war that followed, this luxury was no longer available to private power and wealth. Hence, in the Bretton Woods system, Eichengreen writes, "limits on capital mobility sub­stituted for limits on democracy as a source of insulation from market pressures". It is only necessary to add the obvious corollary: with the dismantling of that system from the 1970s on, functioning democracy was restricted.

Real choices

In Latin America, specialists and polling organisations have, for some time, observed that the extension of formal democracy was accompanied by an increasing disillusionment about democracy and a lack of faith in democratic institutions. A persuasive explanation for these disturbing tendencies was given by the Argentinian political scientist Atilio Boron, who pointed out that the new wave of democratisation in Latin America coincided with neoliberal economic "reforms", which undermine effective democracy. The phenomenon extends worldwide, although it appears that the tendency may have reversed in recent years, with departures from neoliberal orthodoxy.

The annual polls on Latin American opinion by the Chilean polling agency Latinobaró­metro, and their reception in the west, are interesting in this respect. Few elements of the reigning western orthodoxy are upheld with more fervour than the view that Chávez is a tyrant dedicated to the destruction of democracy. The polls are therefore a serious annoyance that have to be overcome by the usual device: suppression.

The November 2007 poll had the same irritating results as in the preceding few years: Venezuela ranked second behind Uruguay in satisfaction with democracy and third in satisfaction with leaders. It ranked first in the assessment of the current and future economic situation, equality and justice, and education standards. True, it ranked only 11th in favouring a market economy but, even with this flaw, overall it ranked highest in Latin America on matters of democracy, justice and optimism, far above the US favourites Colombia, Peru, Mexico and Chile.

The Latin America analyst Mark Turner has written of an "almost total English-speaking blackout about the results of this important snapshot of [Latin American] views and opinions". He also found the usual exception: there were reports of the finding that Chávez is about as unpopular as Bush in Latin America, a fact that will come as little surprise to those who are familiar with the bitterly hostile coverage to which the Venezuelan president is subjected in the media, not least (and this is an odd feature of this putative dictatorship) in his country.

In the US, faith in institutions has been declining steadily. It is interesting to compare recent presidential elections in the richest country in the world and the poorest country in South America, Bolivia. In the 2004 US presidential election, voters had a choice between two men born to wealth and privilege, who attended the same elite university, joined the same secret society where privileged young men are trained to take their place in the ruling class, and were able to run in the election because they were supported by pretty much the same conglomerations of private power. Their announced programmes were similar, consistent with the needs of their primary constituency: wealth and privilege.

By contrast, in the December 2005 election in Bolivia, voters were familiar with the issues: control of resources, cultural rights for the indigenous majority, problems of justice in a complex multi-ethnic society and many others. They eventually chose Evo Morales, someone from their own ranks, and not a representative of narrow sectors of privilege. There was real participation, extending over years of intense struggle and organisation.

Election day was not just a brief interlude for pushing a lever and then retreating to passivity and private concerns, but one phase in ongoing participation in the workings of the society. The comparison, and it is not the only one, raises some questions about where democracy promotion is most needed.

Latin America has real choices, for the first time in its history. The usual modalities of imperial control - violence and economic strangulation - are much more limited than before. There are lively and vibrant popular organisations providing the essential basis for meaningful democracy. Latin American and other former colonies have enormous internal problems and there are sure to be many setbacks, but there are promising developments as well. It is in these parts of the world that today's democratic wave finds its basis and its home. That is why the World Social Forum has met in Porto Alegre, Mumbai, Caracas, Nairobi, not in northern cities, though by now the global forum has spawned many regional and local offshoots, doing valuable work geared to problems of significance in their own regions.

The former colonies, in Latin America in particular, have a better chance than ever before to overcome centuries of subjugation, violence and foreign intervention, which they have so far survived as dependencies with islands of luxury in a sea of misery. These are exciting prospects for Latin America, and if the hopes can be realised, even partially, the results cannot fail to have a large-scale global impact as well.

Extracted from "Hopes and Prospects" by Noam Chomsky (Hamish Hamilton, £18.99)
© Noam Chomsky 2010 penguin.co.uk

Jeremy Corbyn. Photo: Getty
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Lexit: the EU is a neoliberal project, so let's do something different when we leave it

Brexit affords the British left a historic opportunity for a decisive break with EU market liberalism.

The Brexit vote to leave the European Union has many parents, but "Lexit" – the argument for exiting the EU from the left – remains an orphan. A third of Labour voters backed Leave, but they did so without any significant leadership from the Labour Party. Left-of-centre votes proved decisive in determining the outcome of a referendum that was otherwise framed, shaped, and presented almost exclusively by the right. A proper left discussion of the issues has been, if not entirely absent, then decidedly marginal – part of a more general malaise when it comes to developing left alternatives that has begun to be corrected only recently, under Jeremy Corbyn and John McDonnell.

Ceding Brexit to the right was very nearly the most serious strategic mistake by the British left since the ‘70s. Under successive leaders Labour became so incorporated into the ideology of Europeanism as to preclude any clear-eyed critical analysis of the actually existing EU as a regulatory and trade regime pursuing deep economic integration. The same political journey that carried Labour into its technocratic embrace of the EU also resulted in the abandonment of any form of distinctive economics separate from the orthodoxies of market liberalism.

It’s been astounding to witness so many left-wingers, in meltdown over Brexit, resort to parroting liberal economics. Thus we hear that factor mobility isn’t about labour arbitrage, that public services aren’t under pressure, that we must prioritise foreign direct investment and trade. It’s little wonder Labour became so detached from its base. Such claims do not match the lived experience of ordinary people in regions of the country devastated by deindustrialisation and disinvestment.

Nor should concerns about wage stagnation and bargaining power be met with finger-wagging accusations of racism, as if the manner in which capitalism pits workers against each other hasn’t long been understood. Instead, we should be offering real solutions – including a willingness to rethink capital mobility and trade. This places us in direct conflict with the constitutionalised neoliberalism of the EU.

Only the political savvy of the leadership has enabled Labour to recover from its disastrous positioning post-referendum. Incredibly, what seemed an unbeatable electoral bloc around Theresa May has been deftly prized apart in the course of an extraordinary General Election campaign. To consolidate the political project they have initiated, Corbyn and McDonnell must now follow through with a truly radical economic programme. The place to look for inspiration is precisely the range of instruments and policy options discouraged or outright forbidden by the EU.

A neoliberal project

The fact that right-wing arguments for Leave predominated during the referendum says far more about today’s left than it does about the European Union. There has been a great deal of myth-making concerning the latter –much of it funded, directly or indirectly, by the EU itself.

From its inception, the EU has been a top-down project driven by political and administrative elites, "a protected sphere", in the judgment of the late Peter Mair, "in which policy-making can evade the constraints imposed by representative democracy". To complain about the EU’s "democratic deficit" is to have misunderstood its purpose. The main thrust of European economic policy has been to extend and deepen the market through liberalisation, privatisation, and flexiblisation, subordinating employment and social protection to goals of low inflation, debt reduction, and increased competitiveness.

Prospects for Keynesian reflationary policies, or even for pan-European economic planning – never great – soon gave way to more Hayekian conceptions. Hayek’s original insight, in The Economic Conditions of Interstate Federalism, was that free movement of capital, goods, and labour – a "single market" – among a federation of nations would severely and necessarily restrict the economic policy space available to individual members. Pro-European socialists, whose aim had been to acquire new supranational options for the regulation of capital, found themselves surrendering the tools they already possessed at home. The national road to socialism, or even to social democracy, was closed.

The direction of travel has been singular and unrelenting. To take one example, workers’ rights – a supposed EU strength – are steadily being eroded, as can be seen in landmark judgments by the European Court of Justice (ECJ) in the Viking and Laval cases, among others. In both instances, workers attempting to strike in protest at plans to replace workers from one EU country with lower-wage workers from another, were told their right to strike could not infringe upon the "four freedoms" – free movement of capital, labour, goods, and services – established by the treaties.

More broadly, on trade, financial regulation, state aid, government purchasing, public service delivery, and more, any attempt to create a different kind of economy from inside the EU has largely been forestalled by competition policy or single market regulation.

A new political economy

Given that the UK will soon be escaping the EU, what opportunities might this afford? Three policy directions immediately stand out: public ownership, industrial strategy, and procurement. In each case, EU regulation previously stood in the way of promising left strategies. In each case, the political and economic returns from bold departures from neoliberal orthodoxy after Brexit could be substantial.

While not banned outright by EU law, public ownership is severely discouraged and disadvantaged by it. ECJ interpretation of Article 106 of the Treaty on the Functioning of the European Union (TFEU) has steadily eroded public ownership options. "The ECJ", argues law professor Danny Nicol, "appears to have constructed a one-way street in favour of private-sector provision: nationalised services are prima facie suspect and must be analysed for their necessity". Sure enough, the EU has been a significant driver of privatisation, functioning like a ratchet. It’s much easier for a member state to pursue the liberalisation of sectors than to secure their (re)nationalisation. Article 59 (TFEU) specifically allows the European Council and Parliament to liberalise services. Since the ‘80s, there have been single market programmes in energy, transport, postal services, telecommunications, education, and health.

Britain has long been an extreme outlier on privatisation, responsible for 40 per cent of the total assets privatised across the OECD between 1980 and 1996. Today, however, increasing inequality, poverty, environmental degradation and the general sense of an impoverished public sphere are leading to growing calls for renewed public ownership (albeit in new, more democratic forms). Soon to be free of EU constraints, it’s time to explore an expanded and fundamentally reimagined UK public sector.

Next, Britain’s industrial production has been virtually flat since the late 1990s, with a yawning trade deficit in industrial goods. Any serious industrial strategy to address the structural weaknesses of UK manufacturing will rely on "state aid" – the nurturing of a next generation of companies through grants, interest and tax relief, guarantees, government holdings, and the provision of goods and services on a preferential basis.

Article 107 TFEU allows for state aid only if it is compatible with the internal market and does not distort competition, laying out the specific circumstances in which it could be lawful. Whether or not state aid meets these criteria is at the sole discretion of the Commission – and courts in member states are obligated to enforce the commission’s decisions. The Commission has adopted an approach that considers, among other things, the existence of market failure, the effectiveness of other options, and the impact on the market and competition, thereby allowing state aid only in exceptional circumstances.

For many parts of the UK, the challenges of industrial decline remain starkly present – entire communities are thrown on the scrap heap, with all the associated capital and carbon costs and wasted lives. It’s high time the left returned to the possibilities inherent in a proactive industrial strategy. A true community-sustaining industrial strategy would consist of the deliberate direction of capital to sectors, localities, and regions, so as to balance out market trends and prevent communities from falling into decay, while also ensuring the investment in research and development necessary to maintain a highly productive economy. Policy, in this vision, would function to re-deploy infrastructure, production facilities, and workers left unemployed because of a shutdown or increased automation.

In some cases, this might mean assistance to workers or localities to buy up facilities and keep them running under worker or community ownership. In other cases it might involve re-training workers for new skills and re-fitting facilities. A regional approach might help launch new enterprises that would eventually be spun off as worker or local community-owned firms, supporting the development of strong and vibrant network economies, perhaps on the basis of a Green New Deal. All of this will be possible post-Brexit, under a Corbyn government.

Lastly, there is procurement. Under EU law, explicitly linking public procurement to local entities or social needs is difficult. The ECJ has ruled that, even if there is no specific legislation, procurement activity must "comply with the fundamental rules of the Treaty, in particular the principle of non-discrimination on grounds of nationality". This means that all procurement contracts must be open to all bidders across the EU, and public authorities must advertise contracts widely in other EU countries. In 2004, the European Parliament and Council issued two directives establishing the criteria governing such contracts: "lowest price only" and "most economically advantageous tender".

Unleashed from EU constraints, there are major opportunities for targeting large-scale public procurement to rebuild and transform communities, cities, and regions. The vision behind the celebrated Preston Model of community wealth building – inspired by the work of our own organisation, The Democracy Collaborative, in Cleveland, Ohio – leverages public procurement and the stabilising power of place-based anchor institutions (governments, hospitals, universities) to support rooted, participatory, democratic local economies built around multipliers. In this way, public funds can be made to do "double duty"; anchoring jobs and building community wealth, reversing long-term economic decline. This suggests the viability of a very different economic approach and potential for a winning political coalition, building support for a new socialist economics from the ground up.

With the prospect of a Corbyn government now tantalisingly close, it’s imperative that Labour reconciles its policy objectives in the Brexit negotiations with its plans for a radical economic transformation and redistribution of power and wealth. Only by pursuing strategies capable of re-establishing broad control over the national economy can Labour hope to manage the coming period of pain and dislocation following Brexit. Based on new institutions and approaches and the centrality of ownership and control, democracy, and participation, we should be busy assembling the tools and strategies that will allow departure from the EU to open up new political-economic horizons in Britain and bring about the profound transformation the country so desperately wants and needs.

Joe Guinan is executive director of the Next System Project at The Democracy Collaborative. Thomas M. Hanna is research director at The Democracy Collaborative.

This is an extract from a longer essay which appears in the inaugural edition of the IPPR Progressive Review.