The following is the text of an address delivered by Sir Courtney at a tribute held in honour of Dr Trevor Farrell by the Economics Department, UWI, St Augustine on Wednesday, October 8th, 2008. The conference title was “The Economy 2008: Planning in a Turbulent Environment”
I am deeply honoured by the invitation to deliver the keynote address at this Conference in recognition of the outstanding service of Dr. Trevor Farrell to the Faculty of Economics, in particular, and to the University of the West Indies in general. Indeed, this is my first time speaking on this University Campus in a purely academic context. Almost sixty years ago I first set foot on Trinidadian soil; today I feel that I have at last arrived.
In the interest of full disclosure, I must reveal that Trevor and I have been intellectual soul brothers for more than three decades. When I returned to Barbados in the early 1970s, Trevor was the only professional economist in the region who shared my conviction that management was a crucial but neglected factor in Caribbean economic development. Over the years we have consoled each other in our solitude, shared ideas and brought new and important literature to each other’s attention. However, my fraternal relationship with Trevor has not been without its impositions. He sent his graduate students to intern at the Central Bank of Barbados when I was Governor, and later required me to read Masters theses for the less-than-princely sum of US$50 each, the lowest rate of compensation in my career as a Consultant.
My original choice of topic, The Meaning of Manage-ment: the Missing Factor in Caribbean Political Economy, was intended to focus on issues of management and economics that Trevor and I had most frequently discussed. However, the cataclysmic and terrifying implosion of the US financial system, with its shock waves spreading throughout the global financial system, seemed a much more urgent subject. As a resident of the USA over the past two decades, I have had, so to speak, a front row view of the unfolding drama. I have therefore switched to the topic, The Global Financial Crisis and the Collapse of the Neo-Liberal Paradigm.
The current crisis is the most devastating in recent economic history. Iconic Wall Street institutions, like Bear Stearns, Lehman Brothers and Merrill Lynch, have vanished; the world’s largest mortgage insurers, Fannie Mae and Freddie Mac, have been nationalized, and the world’s largest insurance company, AIG, with operations in 100 countries and with over 100,000 employees, survives only by the grace of the US Treasury to the tune of $85 billion. Martin Wolf, in the Financial Times of October 1st, puts it this way,
We are watching the disintegration of the financial system… Finance is the web of intermediation, binging economic agents to one another, across space and time. Without it, no modern economy could survive.
Indeed the crisis threatens the very position of the United States as the world’s sole Super Power, for it is the tremendous advantage it enjoys as the world’s leading financial centre, and issuer of the international reserve currency that provides the financial resources to support its global responsibilities and ambitions. The $700 billion initially voted by Congress is a mere downpayment on the cost of returning that country to its former pre-eminence. For one, the problem of foreclosures that have thrown more than one million Americans out of their homes has hardly been addressed.
The thrust of my argument is that this economic crisis, the most severe since the Great Depression of the 1930s, represents a spectacular failure of Neo-Liberalism, and is therefore an occasion for its displacement by a new paradigm or, at least, its radical reconstruction. However, in my reading of the daily Press – The Washington Post, The New York Times, The Financial Times and The Economist – I have come across only one academic economist, Dr. De Grauwe, Professor of Economics at the University of Leuven and Centre for European Studies, who has touched on this issue. His column in the Financial Times of July 23rd, 2008, is captioned “Cherished Myths have Fallen Victim to Economic Reality.” With regard to central banks in developed countries he concludes,
The macroeconomic models they have today certainly do not provide them with the right tools to be successful. They will have to use other intellectual constructs to succeed.
My hopes were later lifted by, of all persons, a theoretical physicist. The title of Mark Buchanan’s column in the New York Times of Wednesday, October 1, 2008, read, “This Economy Does Not Compute”. He was commenting on the bumbling efforts of US government officials and leaders in the Congress to come up with a ‘bail out’ plan to bring the financial crisis under control.
Part of the reason, he offered, is that economists still try to understand markets by using ideas from traditional economics, especially so-called equilibrium theory. He cited the efforts of a few pioneers “who are building computer models able to mimic market dynamics by simulating their workings from the bottom up.”
Readers of my most recent publication, The Practice of Economic Management: A Caribbean Perspective will be aware of my relentless criticism, over more than two decades, of the Neo-Liberal paradigm, as encapsulated in the so-called “Washington Consensus”. Following this introduction I examine the concept of the ”paradigm”, the intellectual construct on which my presentation hangs. Secondly, I chronicle the rise of the Neo-Liberal paradigm in the 1980s and 1990s. Thirdly, I identify the factors leading up to the current crisis in the US financial system and its effects on the global financial system. Fourthly, I speculate on Life after Neo-Liberalism for the United States and the global community. In conclusion, I suggest some lines along which you might proceed in the search for an appropriate paradigm of Caribbean economic development.
The Concept of the Paradigm
The generic meaning of “paradigm” is “model” or “pattern”. Its usage has in recent times been extended to mean the model underlying the theories and practice of a scientific subject, no doubt reflecting the influence of Thomas Kuhn’s seminal work, The Structure of Scientific Revolutions. Kuhn adopted the concept of the “paradigm” to explain the processes by which radical changes in scientific thinking are introduced – what modern scholars now refer to as a ”paradigm shift”. The most famous case of a scientific revolution was the overthrow of the Ptolemaic geocentric paradigm, placing the earth at the centre of the universe with the sun and planets revolving around it, by the heliocentric Copernican paradigm, which places the sun at the centre of the cosmos with the earth and other planets revolving around it.
Kuhn at first identified two essential conditions for a successful paradigm change: first, the existing paradigm must suffer an unacceptable technical breakdown, thus creating a crisis; secondly, a novel and clearly superior paradigm must be available. He did concede, however, that in the above example ”several factors external to science played a particularly large role.” In his postscript to the third edition of The Structure of Scientific Revolutions he therefore introduced the element of community into his concept of the paradigm: “… it stands for the entire constellation of beliefs, values, techniques, and so on shared by the members of a given community.” (4) He goes on, “If this book were being rewritten, it would therefore open with a discussion of the community structure of science, a topic that has recently become a significant subject of sociological research and that historians of science are also beginning to take seriously.” In other words, pressures from the community can critically influence the overthrow or triumph of a paradigm. This is especially true in respect of the social sciences for reasons that Magnus Blomstrom and Bjorn Hettne explain:
Since society is in a continuous state of flux, the social sciences are particularly prone to paradigm crises; however, the process of adjustment is hampered by the fact that theories may serve both ideological and legitimizing purposes. The paradigm change must therefore be politically sanctioned.
Rise of the Neo-Liberal paradigm
Neo-Liberalism is the direct descendant of the laissez-faire paradigm inaugurated by Adam Smith’s The Wealth of Nations in 1776 and elaborated by successive Classical economists, culminating with Alfred Marshall’s Principles of Economics in 1920. The Classical paradigm failed to deal effectively with the Great Depression of the 1930s and was superseded by the Keynesian paradigm. Throughout the Cold War there were two competing paradigms, the Keynesian in the West and Marxist-Leninist in the Eastern Bloc. While leaving the vast majority of economic decisions to the Private Sector, John Maynard Keynes, in 1936, had advocated contra-cyclical regulation of government spending through the use of monetary and fiscal policy towards the maintenance of economic stability with full employment (7). Marxist-Leninism espoused a command economy in which the vast majority of economic decisions were taken by a central planning authority. When in the 1980s Keynesian policies failed to resolve the problem of “stagflation”, i.e. the simultaneous occurrence of inflation and unemployment, President Reagan in the United States and Margaret Thatcher in the United Kingdom gave ideological respectability and political legitimacy to a vigorous counter-revolution launched by the Chicago School of Economics, under the leadership of Milton Friedman. Keynesianism was overthrown and the Classical laisez-faire paradigm reinstated.
A major casualty of this paradigm-shift was the banishment of development economics from the mainstream of the discipline. Indeed, it has almost disappeared from the curricula of leading American universities. The findings of distinguished development economists on the critical importance of institutions in economic development were thrown out the window and, flying in the face of history, the catalytic role of Government in economic development was denied. Our own Nobel Laureate, Sir Arthur Lewis, had made the latter case most forcefully:
No country has made economic progress without stimulus from intelligent governments, least of all England, the foundations of whose greatness as an industrial power were laid by a series of intelligent rulers, from Edward III onwards; or the United States, whose governments, state and federal, have always played a large part in shaping economic activity…
Instead, economic development was treated as subject to the law of free market infallibility. Once we got prices right, The Economist argued, economic development would automatically follow.
The collapse of the Soviet Union in 1989 was seen as a victory for laissez-faire economics over Marxist-Leninism, and a more virulent and triumphalist mutation, known as “Neo-Liberalism”, evolved to become the dominant economic paradigm in the 1990s. Neo-Liberal economists soon began to occupy the top posts at leading American universities and the US Treasury, and there was a changing of the guard at the IMF and World Bank. The new dispensation came to be known as the “Washington Consensus”, and its mandate, in the words of President George W Bush, was “to ignite a new era of global economic growth through free markets and free trade.”
The underlying tenet of the Neo-Liberal paradigm is that the unfettered workings of the free market ensure outcomes that cannot be improved upon by government intervention. A collateral aspect of Neo-Liberalism is the valuation of the interest of individuals above those of society. As Mrs Thatcher infamously remarked, “There are no societies, only individuals.” As if individuals could survive in the absence of society! The markets postulated within the Neo-Liberal paradigm are even more remarkable than those of the Classical and Keynesian paradigms, which at least distinguished between various types – monopolistic, imperfect, monopoly, etc. Neo-Liberal markets are populated by ‘rational’ participants, are universally ’efficient’ and can process all available information, making it impossible for mere mortals to outperform them. Above all, Neo-Liberal markets always know what is best for human beings.
Moreover, price theory, the central model of the paradigm, can be used, according to Karl Brunner, “to explain the whole range of social phenomena.” Indeed, Neo-Liberal markets more resemble deities than intellectual constructs. No wonder that one often hears politicians, businessmen, and even professional economists, proclaim their “belief” in the “free market”. My response is that I believe only in God!
The major policy prescriptions of the Neo-Liberal school were:
1. Financial liberalization: removal of interest rate ceilings, abolition of exchange rate controls and the floating of currencies.
2. Financial globalization: removal of restrictions on inward and outward capital flows.
3. Deregulation and privatization of government enterprises
4. Free trade: removal of restrictions on imports and exports.
The Washington international financial institutions, together with the World Trade Organization, were the agencies designated to carry out the mandate of the “Washington Consensus”.
Cracks in the Neo-Liberal paradigm have been evident for some time. In the 1990s attempts at financial liberalization promoted by the IMF- under the influence of Dr, Ronald McKinnon’s thesis of “financial repression” – turned out badly in Latin America, while in Jamaica the entire indigenous banking sector collapsed.
The same decade also saw the eruption of financial crises in Mexico, Argentina, Brazil, Russia and Thailand, following the opening of their financial markets to unfettered inflows and outflows of capital. Meanwhile, the FTAA negotiations have gone nowhere and the latest WTO negotiations are deadlocked.
The spectacular collapse of Long Term Capital Management, a hedge fund run by Nobel Laureates Myron Scholes and Robert Merton, proved, in retrospect, to be a shadow cast by coming events; only a “bailout” by its creditors, orchestrated by the Federal Reserve Bank of New York, avoided a wider collapse in the financial markets. The events of the last few weeks leave the Neo-Liberal paradigm completely discredited. It is a bitter irony that Government, whose intervention into the free market is so deplored by Neo-Liberals, has had to come to the rescue of the “free market”.
(Reprinted from Trinidad & Tobago Review)