The end of an era

The latest edition of the New Yorker magazine has a cartoon for the ages. Just as the executioner’s axe is poised to fall on the neck of a hapless king, a messenger turns up holding a scroll in his hand, shouting: “Stop! Wait! Government’s no longer the problem − it’s the solution!”  There will be few better summaries of the first weeks of the Obama administration’s valiant efforts to save the US economy from the simultaneous collapse of its financial system, housing market and automobile industry – all of which could still continue to decline past the point of salvage if the gargantuan stimulus package recently passed by Congress fails to achieve its desired effects.

Within its first weeks the new administration has almost mastered the calm public manner necessary for round-the-clock crisis management, so much so that the ongoing demise of neoliberalism – the economic philosophy which held sway over most of the developed world for almost a generation − has largely disappeared from the headlines. While the US holds its collective breath and waits for the results of Obama’s trillion-dollar gamble on transformative government, the world’s richest nations have begun a comprehensive volte-face on their doctrinaire embrace of the powers of free markets.

Neoliberalism became a dominant economic philosophy almost as quickly as it is becoming  defunct. In most accounts, its ascent began when Paul Volcker took control of the US Federal Reserve in July 1979 and began to pursue radical anti-inflationary policies that placed measures of national economic well-being above the human costs of widespread unemployment and industrial decline. Margaret Thatcher soon embraced a similar philosophy in Britain. The core recipe was simple enough: rapid deregulation and the withdrawal of government would unleash the hidden potential of the markets. Once government stepped out of the way the miracle of unfettered capitalism would sweep all before it. A thousand clichés bloomed around the idea of the “invisible hand” of the market ushering in a new era of global prosperity. True believers averted their gaze from the misery of the unemployed and spoke confidently about how soon this temporary misfortune would be offset by the creation of newer and better jobs.

A string of early successes in places like Chile – which had prospered despite the social and political costs of installing General Pinochet – convinced the leading theorists that the formula could be repeated anywhere. Once you were prepared to ignore immediate, local evidence that seemed to contradict the millenarian capitalism of the free marketeers – the sudden destruction of traditional livelihoods, for instance, or the overnight disappearance of fragile industries and the replacement of local goods with cheap foreign imports – the blessings of a robust economy were said to be assured. Local colour was a distraction from the underlying forces that had to be harnessed, so developing nations in which two out of every three citizens still earned their livelihoods from the land were encouraged to industrialise agricultural production and let the surplus labour find its way to new markets. It didn’t much matter that the bureaucrats devising these theories lived in countries where less than five per cent of the population was connected to the land, or that their economies relied on giant farms and expensive modern machinery to produce the necessary harvests.

As time passed, and the contradictions mounted, the theorists grew defensive. Many developing countries seemed to come apart under the economic strain of the new outlook, but instead of allowing the doctrine to evolve through falsification, the savants of neoliberalism concluded that it was local ignorance and irrationality that was slowing the pace of the inevitable. Convinced that the world could be understood purely through the prism of economic abstractions they refused to yield anything to experience. Individual politicians who dared to question their ideas of management − like the obstinate Michael Manley − were humbled by the IMF’s strait-jacket. No special pleading was allowed.  Around the world the growing gap between rich and poor, the explosive growth of slums and cheap, migrant labour was taken as proof that the free market was an irreversible force and the only sensible course was to accept the new reality and learn to cope.

Then, in a few short months, everything changed. Suddenly the world’s wealthiest economies were exposed to repeated lashes from the unfettered markets they had created. With mounting foreclosures and job losses, with frozen credit and a looming economic depression, many of the G-8 countries have begun to re-regulate their economies and intrude in the free market with unseemly haste. It seems now that the bracing qualities of Schumpeter’s “creative destruction” and the bitter pill of free-market reform are best understood when they can be observed from afar. When rich countries suffer the consequences of a flawed economic theory then something new has to be found, and quickly.

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