Economics students at the University of Manchester have demanded that after the 2008 financial crash new economics thinking is taught as part of their degree course. They complained that neo-liberal economics is taught “as if it was the only theory”. Their call has been taken up by other students at other universities and also a number of famous economists.
Up until the 1990′s when the US thinker Francis Fukuyama wrote “The End of History and the Last Man” there were basically two economic systems, capitalism and Marxism. Both however had variations in the way economists thought about them and how they were implemented. Severe economic problems in the 1930’s led many economists to believe that rise of Hitler and hence the second world war had its roots in German hyperinflation and international currency devaluation. Economists such as John Maynard Keynes believed a new economics was called for. In 1944 as the second world war still raged, economists and officials (including Keynes) from 44 countries met in New Hampshire at a place called Bretton Woods. (Interestingly India was allowed to attend as it was preparing for independence.) They thrashed out an agreement named after its meeting place. The Bretton Woods system called for currencies to tie themselves to the US dollar and the dollar to link itself to gold. In addition institutions such as the International monetary fund (IMF) were created.
For the next 30 years many parts of the global economy prospered. The boom was driven by both post war reconstruction and cheap energy. Even the communist block boomed. In the early 1960’s it looked like the Soviet Union might even overtake the USA in GDP. This prompting Nikita Khrushchev to boast “We will bury you”. In the West what became known as the post war consensus dominated. This had the following characteristics; high social spending, government intervention in markets, low inflation and full employment as a political priority. Inequality fell.
However, problems were being stored up for the future. In the UK and other countries the unions became very powerful, driving up wages and costs. After all if you didn’t like your job you could walk across the road and get another one, as I heard one ex car worker from Linwood in Scotland recall on the radio. Meanwhile in the developing world the postwar boom had little effect. They remained poor. The Soviet economy tanked due an attempt to keep up with Western arms spending.
All this came to an end in the 1970’s. As the cost of the Vietnam war escalated the US pulled out of Bretton Woods unilaterally in 1971. The agreement collapsed. In 1973 the oil crisis partly driven by cold war tensions, erupted. The era of cheap energy that had driven the boom started to come to a close. Inflation rose and labour unrest grew as unions tried to maintain the standard of living of their members. A number of right wing economists such as Milton Friedman became very influential. They called for another type of new economics. The characteristics of this new economics were the opposite of the postwar consensus. They included rigorous control of inflation at the cost of unemployment, privatisation of state assets, a minimal role for the state, low taxation and control of trade unions. If this new economics had a name, it was the “Washington consensus” or “neo-liberalism”.
These economists found willing acolytes in the form of Reagan and Thatcher in the 1980’s. In the UK (which had had to be bailed out by the IMF) union legislation was introduced. Privatisation took place. Taxes were cut in the US and UK. Government spending was cut. Unemployment and inequality rose. Bill Clinton was persuaded to repeal the banking act that separated the high Street and investment arms of banks. In the UK banks were allowed to offer mortgages. The UK government scrapped exchange controls allowing the free movement of money out of the country. It also liberalised the city of London. In the period of 1989-91 communism collapsed. These changes plus information technology advances and the opening up of China, Russia, India to capitalism in the 1980-90’s led to huge capital flows around the world. This began the process of globalisation. By the noughties a vast middle class had been created in India, China and other developing countries. Global inequality fell. As more and more off-shoring took place the cost of almost anything dropped. However in the West inequality did not fall. Median wages in the US, UK and other countries stagnated. The oil price also started rising around 2000. By 2007/8 it looked as if neo-liberalism had won. Most people were better off in the West despite falling wages and a huge new middle class had been created in the developing world.
In 2008 everything changed, or should have. An economic collapse as severe as that in the 1930’s occurred. This time the economic problems were not created by government mismanagement or trade unions, but by greedy and under regulated banks. And a record oil price. Briefly the new economics that had become the default setting was forgotten. Governments spent money to reflate their economies. The UK and US introduced unconventional economics (quantitative easing) which continues to this day. Most governments (apart from the US) under pressure from rising debt then reverted, cutting public spending. This led to the Euro zone crisis. Greece, Ireland, Portugal and Cyprus had to be bailed out by the European and World banks. As I write this the global economy is struggling to recover. However, neo-liberalism that led to the near collapse of the global economy is not dead. Hence the complaints of the Manchester and other students. Neo-liberalism works for some people in China and India. Even there it could be argued it fails many. However, in the West it really only works for the super wealthy. It also takes no account of limits to growth (ecological considerations). We need a new economics. Something I will return to in another post.
This is a rewrite of a post I lost due to server problems. My fault but very annoying all the same. I think this rewrite is better. However, if you have read it before you must judge for yourself.