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

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Why the elites always rule

Since an Italian sociologist coined the word “elite” in 1902, it has become a term of abuse. But history is the story of one elite replacing another – as the votes for Trump and Brexit have shown.

Donald Trump’s successful presidential campaign was based on the rejection of the “establishment”. Theresa May condemned the rootless “international elites” in her leader’s speech at last October’s Conservative party conference. On the European continent, increasingly popular right-wing parties such as Marine Le Pen’s Front National and the German Alternative für Deutschland, as well as Poland’s ruling Law and Justice party, delight in denouncing the “Eurocratic” elites. But where does the term “elite” come from, and what does it mean?

It was Vilfredo Pareto who, in 1902, gave the term the meaning that it has today. We mostly think of Pareto as the economist who came up with ideas such as “Pareto efficiency” and the “Pareto principle”. The latter – sometimes known as the “power law”, or the “80/20 rule” – stipulates that 80 per cent of the land always ends up belonging to 20 per cent of the population. Pareto deduced this by studying land distribution in Italy at the turn of the 20th century. He also found that 20 per cent of the pea pods in his garden produced 80 per cent of the peas. Pareto, however, was not only an economist. In later life, he turned his hand to sociology, and it was in this field that he developed his theory of the “circulation of elites”.

The term élite, used in its current socio­logical sense, first appeared in his 1902 book Les systèmes socialistes (“socialist systems”). Its aim was to analyse Marxism as a new form of “secular” religion. And it was the French word élite that he used: naturally, one might say, for a book written in French. Pareto, who was bilingual, wrote in French and Italian. He was born in Paris in 1848 to a French mother and an Italian father; his father was a Genoese marquis who had accompanied the political activist Giuseppe Mazzini into exile. In honour of the revolution that was taking place in Germany at the time, Pareto was at first named Fritz Wilfried. This was latinised into Vilfredo Federico on the family’s return to Italy in 1858.

When Pareto wrote his masterpiece – the 3,000-page Trattato di sociologia ­generale (“treatise on general sociology”) – in 1916, he retained the French word élite even though the work was in Italian. Previously, he had used “aristocracy”, but that didn’t seem to fit the democratic regime that had come into existence after Italian unification. Nor did he want to use his rival Gaetano Mosca’s term “ruling class”; the two had bitter arguments about who first came up with the idea of a ruling minority.

Pareto wanted to capture the idea that a minority will always rule without recourse to outdated notions of heredity or Marxist concepts of class. So he settled on élite, an old French word that has its origins in the Latin eligere, meaning “to select” (the best).

In the Trattato, he offered his definition of an elite. His idea was to rank everyone on a scale of one to ten and that those with the highest marks in their field would be considered the elite. Pareto was willing to judge lawyers, politicians, swindlers, courtesans or chess players. This ranking was to be morally neutral: beyond “good and evil”, to use the language of the time. So one could identify the best thief, whether that was considered a worthy profession or not.

Napoleon was his prime example: whether he was a good or a bad man was irrelevant, as were the policies he might have pursued. Napoleon had undeniable political qualities that, according to Pareto, marked him out as one of the elite. Napoleon is important
because Pareto made a distinction within the elite – everyone with the highest indices within their branch of activity was a member of an elite – separating out the governing from the non-governing elite. The former was what interested him most.

This is not to suggest that the non-governing elite and the non-elite were of no interest to him, but they had a specific and limited role to play, which was the replenishment of the governing elite. For Pareto, this group was the key to understanding society as a whole – for whatever values this elite incarnated would be reflected in society. But he believed that there was an inevitable “physiological” law that stipulated the continuous decline of the elite, thereby making way for a new elite. As he put it in one of his most memorable phrases, “History is the graveyard of elites.”

***

Pareto’s thesis was that elites always rule. There is always the domination of the minority over the majority. And history is just the story of one elite replacing another. This is what he called the “circulation of elites”. When the current elite starts to decline, it is challenged and makes way for another. Pareto thought that this came about in two ways: either through assimilation, the new elite merging with elements of the old, or through revolution, the new elite wiping out the old. He used the metaphor of a river to make his point. Most of the time, the river flows continuously, smoothly incorporating its tributaries, but sometimes, after a storm, it floods and breaks its banks.

Drawing on his Italian predecessor Machiavelli, Pareto identified two types of elite rulers. The first, whom he called the “foxes”, are those who dominate mainly through combinazioni (“combination”): deceit, cunning, manipulation and co-optation. Their rule is characterised by decentralisation, plurality and scepticism, and they are uneasy with the use of force. “Lions”, on the other hand, are more conservative. They emphasise unity, homogeneity, established ways, the established faith, and rule through small, centralised and hierarchical bureaucracies, and they are far more at ease with the use of force than the devious foxes. History is the slow swing of the pendulum from one type of elite to the other, from foxes to lions and back again.

The relevance of Pareto’s theories to the world today is clear. After a period of foxes in power, the lions are back with renewed vigour. Donald Trump, as his behaviour during the US presidential campaign confirmed, is perfectly at ease with the use of intimidation and violence. He claimed that he wants to have a wall built between the United States and Mexico. His mooted economic policies are largely based on protectionism and tariffs. Regardless of his dubious personal ethics – a classic separation between the elite and the people – he stands for the traditional (white) American way of life and religion.

This is in stark contrast to the Obama administration and the Cameron government, both of which, compared to what has come since the votes for Trump and Brexit, were relatively open and liberal. Pareto’s schema goes beyond the left/right divide; the whole point of his Systèmes socialistes was to demonstrate that Marxism, as a secular religion, signalled a return to faith, and thus the return of the lions in politics.

In today’s context, the foxes are the forces of globalisation and liberalism – in the positive sense of developing an open, inter­connected and tolerant world; and in the negative sense of neoliberalism and the dehumanising extension of an economic calculus to all aspects of human life. The lions represent the reaction, centring themselves in the community, to which they may be more attentive, but bringing increased xenophobia, intolerance and conservatism. For Pareto, the lions and foxes are two different types of rule, both with strengths and weaknesses. Yet the elite is always composed of the two elements. The question is: which one dominates at any given time?

What we know of Theresa May’s government suggests that she runs a tight ship. She has a close – and closed – group of confidants, and she keeps a firm grip on the people under her. She is willing to dispense with parliament in her negotiation of Brexit, deeming it within the royal prerogative. Nobody yet knows her plan.

The European Union is a quintessentially foxlike project, based on negotiation, compromise and combination. Its rejection is a victory of the lions over the foxes. The lions are gaining prominence across the Western world, not just in Trumpland and Brexit Britain. Far-right movements have risen by rejecting the EU. It should come as no surprise that many of these movements (including Trump in the US) admire Vladimir Putin, at least for his strongman style.

Asia hasn’t been spared this movement, either. After years of tentative openness in China, at least with the economy, Xi Jinping has declared himself the “core” leader, in the mould of the previous strongmen Mao Zedong and Deng Xiaoping. Japan’s prime minister, Shinzo Abe, has also hardened his stance, and he was the first world leader to meet with President-Elect Donald Trump. Narendra Modi in India and Rodrigo Duterte in the Philippines are in the same mould, the latter coming to power on the back of promising to kill criminals and drug dealers. After the failed coup against him in July, Recep Tayyip Erdogan has also been cracking down on Turkey.

***


In Les systèmes socialistes, Pareto elaborated on how a new elite replaces the old. A, the old elite, would be challenged by B, the new, in alliance with C, the people. B would win the support of C by making promises that, once in power, it wouldn’t keep. If that sounds like the behaviour of most politicians, that is because it probably is. But what Pareto was pointing out was how, in its struggle for power, the new elite politicised groups that were not political before.

What we know of Trump supporters and Brexiteers is that many feel disenfranchised: the turnout in the EU referendum could not have been greater than in the 2015 general election otherwise, and significant numbers of those who voted for Trump had never voted before. There is no reason to think that they, too, won’t be betrayed by the new leaders they helped to bring to power.

In the last years of his life, Pareto offered a commentary on Italy in the 1920s. He denounced the state’s inability to enforce its decisions and the way that Italians spent their time flaunting their ability to break the law and get away with it. He coined the phrase “demagogic plutocracy” to characterise the period, in which the rich ruled behind a façade of democratic politics. He thought this particularly insidious for two reasons: those in power were more interested in siphoning off wealth for their personal ends than encouraging the production of new wealth, and consequently undermined national prosperity (remember Pareto’s training as an economist); and, as the demagogic elites govern through deceit and cunning, they are able to mask their rule for longer periods.

Much has been made of Trump’s “populism”, but the term “demagogic plutocrat” seems particularly apt for him, too: he is a wealthy man who will advance the interests of his small clique to the detriment of the well-being of the nation, all behind the smokescreen of democratic politics.

There are other ways in which Pareto can help us understand our predicament. After all, he coined the 80/20 rule, of which we hear an intensified echo in the idea of “the One Per Cent”. Trump is a fully paid-up member of the One Per Cent, a group that he claims to be defending the 99 Per Cent from (or, perhaps, he is an unpaid-up member, given that what unites the One Per Cent is its reluctance to pay taxes). When we perceive the natural inequality of the distribution of resources as expressed through Pareto’s “power law”, we are intellectually empowered to try to do something about it.

Those writings on 1920s Italy landed Pareto in trouble, as his theory of the circulation of elites predicted that a “demagogic plutocracy”, dominated by foxes, would necessarily make way for a “military plutocracy”, this time led by lions willing to restore the power of the state. In this, he was often considered a defender of Mussolini, and Il Duce certainly tried to make the best of that possibility by making Pareto a senator. Yet there is a difference between prediction and endorsement, and Pareto, who died in 1923, had already been living as a recluse in Céligny in Switzerland for some time – earning him the nickname “the hermit of Céligny” – with only his cats for company, far removed from day-to-day Italian politics. He remained a liberal to his death, content to stay above the fray.

Like all good liberals, Pareto admired Britain above all. As an economist, he had vehemently defended its system of free trade in the face of outraged opposition in Italy. He also advocated British pluralism and tolerance. Liberalism is important here: in proposing to set up new trade barriers and restrict freedom of movement, exacerbated by their more or less blatant xenophobia, Trump and Brexit challenge the values at the heart of the liberal world.

***


What was crucial for Pareto was that new elites would rise and challenge the old. It was through the “circulation of elites” that history moved. Yet the fear today is that history has come to a standstill, that elites have ­become fossilised. Electors are fed up with choosing between the same old candidates, who seem to be proposing the same old thing. No wonder people are willing to try something new.

This fear of the immobility of elites has been expressed before. In 1956, the American sociologist C Wright Mills published The Power Elite. The book has not been out of print since. It is thanks to him that the term was anglicised and took on the pejorative sense it has today. For Mills, Cold War America had come to be dominated by a unified political, commercial and military elite. With the 20th century came the growth of nationwide US corporations, replacing the older, more self-sufficient farmers of the 19th century.

This made it increasingly difficult to ­distinguish between the interests of large US companies and those of the nation as a whole. “What’s good for General Motors,” as the phrase went, “is good for America.” As a result, political and commercial interests were becoming ever more intertwined. One had only to add the Cold War to the mix to see how the military would join such a nexus.

Mills theorised what President Dwight D Eisenhower denounced in his January 1961 farewell speech as the “military-industrial complex” (Eisenhower had wanted to add the word “congressional”, but that was thought to be too risky and was struck out of the speech). For Mills, the circulation of elites – a new elite rising to challenge the old – had come to an end. If there was any circulation at all, it was the ease with which this new power elite moved from one part of the elite to the other: the “revolving door”.

The Cold War is over but there is a similar sense of immobility at present concerning the political elite. Must one be the child or wife of a past US president to run for that office? After Hillary Clinton, will Chelsea run, too? Must one have gone to Eton, or at least Oxford or Cambridge, to reach the cabinet? In France is it Sciences Po and Éna?

The vote for Brexit, Trump and the rise of the far right are, beyond doubt, reactions to this sentiment. And they bear out Pareto’s theses: the new elites have aligned themselves with the people to challenge the old elites. The lions are challenging the foxes. Needless to say, the lions, too, are prototypically elites. Trump is a plutocrat. Boris Johnson, the co-leader of the Leave campaign, is as “establishment” as they come (he is an Old Etonian and an Oxford graduate). Nigel Farage is a public-school-educated, multimillionaire ex-stockbroker. Marine Le Pen is the daughter of Jean-Marie Le Pen. Putin is ex-KGB.

Pareto placed his hopes for the continuing circulation of elites in technological, economic and social developments. He believed that these transformations would give rise to new elites that would challenge the old political ruling class.

We are now living through one of the biggest ever technological revolutions, brought about by the internet. Some have argued that social media tipped the vote in favour of Brexit. Arron Banks’s Leave.EU website relentlessly targeted disgruntled blue-collar workers through social media, using simple, sometimes grotesque anti-immigration messages (as a recent profile of Banks in the New Statesman made clear) that mimicked the strategies of the US hard right.

Trump’s most vocal supporters include the conspiracy theorist Alex Jones, who has found the internet a valuable tool for propagating his ideas. In Poland, Jarosław Kaczynski, the leader of the Law and Justice party, claims that the Russian plane crash in 2010 that killed his twin brother (then the country’s president) was a political assassination, and has accused the Polish prime minister of the time, Donald Tusk, now the president of the European Council, of being “at least morally” responsible. (The official explanation is that the poorly trained pilots crashed the plane in heavy fog.)

It need not be like this. Silicon Valley is a world unto itself, but when some of its members – a new technological elite – start to play a more active role in politics, that might become a catalyst for change. In the UK, it has been the legal, financial and technological sectors that so far have led the pushback against a “hard” Brexit. And we should not forget how the social movements that grew out of Occupy have already been changing the nature of politics in many southern European countries.

The pendulum is swinging back to the lions. In some respects, this might be welcome, because globalisation has left too many behind and they need to be helped. However, Pareto’s lesson was one of moderation. Both lions and foxes have their strengths and weaknesses, and political elites are a combination of the two, with one element dominating temporarily. Pareto, as he did in Italy in the 1920s, would have predicted a return of the lions. But as a liberal, he would have cautioned against xenophobia, protectionism and violence.

If the lions can serve as correctives to the excesses of globalisation, their return is salutary. Yet the circulation of elites is a process more often of amalgamation than replacement. The challenge to liberal politics is to articulate a balance between the values of an open, welcoming society and of one that takes care of its most vulnerable members. Now, as ever, the task is to find the balance between the lions and the foxes. l

Hugo Drochon is the author of “Nietzsche’s Great Politics” (Princeton University Press)

This article first appeared in the 12 January 2017 issue of the New Statesman, Putin's revenge