Even before the results of the UK referendum, the European Union was facing a crisis of popular legitimacy. The result, especially in England and Wales, was certainly driven by the fear of more immigration, irresponsibly whipped up by xenophobic right-wing leaders who now appear uncertain themselves of what to do with the outcome. But it was as much a cry of pain and protest from working communities that have been damaged and hollowed out by three decades of neoliberal economic policies. And this is why the concerns of greater popular resonance across other countries in the EU – and the idea that this could simply be the first domino to fall – are absolutely valid. So the bloc as a whole now faces an existential crisis of an entirely different order, and its survival hinges on how its rulers choose to confront it.
Regular Triple Crisis contributor Gerald Epstein is a professor of economics and a founding co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts-Amherst. In early May, he sat down with Triple Crisis co-editor Alejandro Reuss to discuss the rise of “inflation targeting”—the emphasis on very low inflation, to the exclusion of other policy objectives, in central bank policy-making—around the world. This is the first of three parts.
Alejandro Reuss: When we talk about central banks and monetary policy, what precisely is meant by the phrase “inflation targeting”? And how does that differ from other kinds of objectives that central banks might have?
Gerald Epstein: Inflation targeting is a relatively new but very widespread approach to central bank policy. It means that the central bank should target a rate of inflation—sometimes it’s a range, not one particular number, but a pretty narrow range—and that should be its only target. It should use its instruments—usually a short-term interest rate—to achieve that target and it should avoid using monetary policy to do anything else.
So what are some of the other things that central banks have done besides try to meet an inflation target? Well, the United States Federal Reserve, for example, has a mandate to reach two targets—the so-called “dual mandate”—one is a stable price level, which is the same as an inflation target, and the other is high employment. So this is a dual mandate. After the financial crisis there’s a third presumption, that the Federal Reserve will look at financial stability as well. Other central banks historically have tried to promote exports by targeting a cheap exchange rate. Some people have accused the Chinese government of doing this but many other developing countries have targeted an exchange rate to keep an undervalued exchange rate and promote exports. Other countries have tried to promote broad-based development by supporting government policy. So there’s a whole range of targets that, historically, central banks have used.
Politics, Economics, Industry, and Trade
(Part 2 in a Four-Part Series)
It is true, but more so a truism, to assert that reviving the debilitated economies of the Arab World requires an end to conflicts and the creation of a politically stable environment, conducive to both domestic and foreign investment—investment of the higher output to capital ratio type—along with rising internal demand. Yet, as true as this assertion may seem, the regional security/insecurity arrangement is now anchored in a bellum americanum, or continuous war condition, emerging from more acute international divisions over regional control. The spinoffs of war on the political and economic side are regressive. On the national political scene, a process of “selective democracy” similar to the one practiced in ancient times—as opposed to universal or popular democracy—enshrines the right of the few at the expense of the many. On the macroeconomic side, policies may have taken a turn into a sort of extreme neoliberalism, as in lifting subsidies on essential commodities in countries that already experience a high rate of child malnutrition (Everington 2014).
Politics and Economics
The current policy interface between external shocks/conflicts and the national economy is based almost entirely on the unrealistic assumptions of an even playing field, a risk-free environment, and a market that works best with little government intervention. Not that demanding a limited role for the government in the economy would be necessarily functional anywhere, but to propose a small government under war or war-like conditions, as did the international financial institutions (IFIs), is beyond the pale. When the elephants in the room–the wars or their resonances and the lopsided institutional context–are overlooked, then it is no longer myopia which is causing the past errors to be repeated, it is rather its marked lack of will to carry out development.
David M. Kotz
David M. Kotz is a professor of economics at the University of Massachusetts Amherst and the author of The Rise and Fall of Neoliberal Capitalism (Harvard University Press, 2015). This article originally appeared in the January/February 2016 issue of Dollars & Sense magazine.
Neoliberal capitalism had, at its core, a basic contradiction: Rising profits spurred economic expansion, but at the same time the source of the rising profits—the suppression of wage growth—created an obstacle to expansion. With wages stagnating, and with government spending rising more slowly, who would buy the output of an expanding economy? For a while, this simmering “demand problem” was forestalled, as risk-seeking financial institutions extended credit to the hard-pressed families whose wages were stagnating or falling. Debt-fueled consumer spending made long expansions possible despite the stagnation of wages and of government spending. Big asset bubbles provided the collateral enabling families to borrow to pay their bills.
The economic crisis of 2008 marked the end of the ability of the neoliberal form of capitalism to promote stable economic expansion. In the wake of the massive housing-bubble collapse and financial crash, the previous debt-and-bubble-based growth machine cannot be revived. The banks continue to find new speculative ventures and corporate profits remain high, but this process no longer brings normal economic expansion.
The election of businessman Mauricio Macri to the presidency in Argentina signals a rightward turn in the country and, perhaps, in South America more generally. Macri, the candidate of the right-wing Compromiso para el cambio (Commitment to Change) party, defeated Buenos Aires province governor Daniel Scioli (the Peronist party candidate) in November’s runoff election, by less than 3% of the vote.
Macri is the wealthy scion an Italian immigrant family that made its money on the basis of government contracts. He went on to work for the family business and later, defying his father’s wishes, became president of the most popular professional soccer club in the country, Boca Juniors. In 2007, he won election as mayor of the capital city, Buenos Aires—the springboard for his eventual election to the presidency.
This is a momentous change in Argentina’s history, since it is the first time that a right-wing party has won the presidency by electoral means. In the past, conservatives had only gained power through military coups or by disguising neoliberal policies under more progressive electoral promises and the mantle of a left-of-center party—as in Carlos Menem’s Peronist government in the 1990s.
The Power of Mexico’s Capitalists
Dan La Botz, Guest Blogger
Dan La Botz is co-editor of New Politics and editor of Mexican Labor News and Analysis. This is the second part of a two-part series. The first part is available here.
Mexico’s capitalist class is wealthy, well organized, and politically powerful. Mexican businesspeople have for many decades been organized in the Employers Confederation of the Mexican Republic (COPARMEX) which brings together “more than 36,000 member companies across the country are responsible for 30% of GDP and 4.8 million formal jobs.” COPARMEX, and other business organizations, such as the National Chamber of the Manufacturing Industry (CANACINTRA), have worked for years, principally through the PAN but also with the PRI to develop policies, write legislation, and to lobby for their political agenda.
The Mexican capitalists brought neoliberal government to power in two stages: First, the victory within the PRI of the so-called “Technocrats” over the “Dinosaurs” (that is, the neoliberals over the economic nationalists) in the 1980s and 1990s. Second, the electoral victory of the PAN. The two PAN administrations—under Vicente Fox (2000-2006) and Felipe Calderón (2006-2012)—demonstrated that the party was incapable of governing Mexico. Fox’s administration failed to deliver on its promises to the business class, while Calderón initiated the disastrous war on drugs with the tens of thousands of dead and forcibly disappeared as well as widespread police and army human rights violations.
Neoliberal Capitalism, Financialized Capitalism, or Globalized Capitalism?
David Kotz, Guest Blogger
David Kotz is a professor of economics at the University of Massachusetts-Amherst and the author of The Rise and Fall of Neoliberal Capitalism (Harvard University Press, 2015). This is the second installment of a two-part series based on his book. Part 1 is available here.
While it is widely agreed that capitalist economies underwent significant change after around 1980, there are different interpretations of the new form of capitalism that emerged. There is no agreement about the best organizing concept for post-1980 capitalism. Some view it as financialized capitalism, some as globalized capitalism, and some as neoliberal capitalism. These different conceptions of contemporary capitalism have implications for our understanding of the problems it has produced, including the financial and economic crisis that emerged from it in 2008. Focusing on the U.S. economy, I presented a case in part 1 that “neoliberal capitalism” is the best overall concept for understanding the form of capitalism that arose around 1980. Here, I deal more specifically with the shortcomings of alternative interpretations – focused on the concepts of “financialization” and “globalization,” respectively.
Why Not “Financialization”?
Some economists view “financialization” as the best overall concept for understanding contemporary capitalism. Financialization can best be understood, however, as an outgrowth of neoliberal capitalism. The rise in financial profit, which gave the financial sector a place of growing importance in the economy, came quite late in the neoliberal era. As figure 2 shows, only after 1989 did financial profit begin a long and steep climb, interrupted by a fall in the mid 1990s, and then a sharp rise to a remarkable 40% of total profit in the early 2000s. It was only in the 2000s that financialization fully blossomed. At that time, commentators noted, Wall Street was beginning to draw a large percentage of elite college graduates.
The “financialization” of the U.S. economy in recent decades, important though it is, was itself driven by neoliberal restructuring. The neoliberal institutional structure, including financial deregulation, enabled financial institutions to appropriate a growing share of profits. Furthermore, financialization cannot account for many of the most important economic developments in contemporary capitalism. It cannot explain the dramatic shift in capital-labor relations from acceptance of compromise by the capitalists to a striving by capitalists to fully dominate labor.. It cannot explain the sharp rise in inequality. And it cannot explain the deepening globalization of capitalism.
Why Not “Globalization”?
Like financialization, “globalization” has been presented by some analysts as the best framework for understanding the contemporary form of capitalism. Capitalism has, indeed, become significantly more integrated on a world scale in recent decades, including the emergence of global value chains and a truly global production process in some sectors.
The degree of globalization of capitalism has gone through ups and downs in history. Capitalism became increasingly globalized in the decades prior to World War I. Then the cataclysm of two world wars and the Great Depression reversed the trend, and capitalism became less globally integrated over that period. After World War II, the process of globalization resumed, gradually at first. Around the late 1960s, globalization accelerated somewhat measured by world exports relative to world GDP, as figure 3 shows. After 1986 the trend became more sharply upward. Thus, in contrast to financialization, which emerged later than neoliberalism, the globalization process in this era began before neoliberalism emerged, although globalization accelerated in the neoliberal era, particularly after 1990.
However, many of the most important features of capitalism since 1980 cannot be understood or explained based on globalization any more than they can be on the basis of financialization. Globalization cannot fully explain the rapidly rising inequality in the contemporary era, which has been quite extreme in the United States yet milder even in some other countries, such as Germany, that are more integrated into the global economy. Globalization cannot explain the financialization process and the rise of a speculatively-oriented financial sector, nor can it explain the series of large asset bubbles. Like financialization, globalization has been an important feature of neoliberal capitalism, but it is not its defining feature.
Neoliberalism as the Key Concept
Both financialization and globalization are fundamental tendencies in capitalism. Financial institutions have an ever-present tendency to move into speculative and risky activities to gain the high profits of such pursuits. Even more so, globalization is a tendency present from the rise of capitalism, since the capital accumulation drive always spurs expansion across national boundaries. Then why do these phenomena characterize one era of capitalism more than another?
Both of these tendencies can be obstructed for long periods of time, or released, depending on the prevailing institutional form of capitalism. Financialization was held in check from the mid 1930s to 1980 by financial regulation, and globalization was hindered from World War I until the 1960s by the world wars, the Great Depression, and then the state regulation of trade and international investment allowed under the post-World War II Bretton Woods monetary system. The neoliberal restructuring starting in the late 1970s can explain all of the key economic developments in contemporary capitalism, with the processes of financialization and globalization—released by neoliberal capitalism—forming a part of the account.
These differences in analysis are important, since they represent different views of the basic characteristics of the current era of capitalism and different diagnoses of the origins of the current crisis. Proposals to overcome the current crisis that focus only on reigning in financialization or reconfiguring globalization would be insufficient unless part of a restructuring that replaces neoliberalism with something new.
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Today, many Chileans—and many sympathizers from around the world—will commemorate and mourn the anniversary of the 1973 military coup. The coup ended the three years of the Unidad Popular (the socialist-led “People’s Unity” government, or UP) and forty years of civilian rule and electoral government in Chile. The day of the coup ended with La Moneda, the presidential palace, a burned and bullet-riddled ruin, and with the country’s freely elected socialist president, Salvador Allende, dead from a self-inflicted gunshot wound. The military dictatorship that came to power on Sept. 11, 1973, would become notorious worldwide for the kidnapping, rape, torture, and murder of political opponents. Its apologists would, meanwhile, turn a blind eye to its atrocities, and laud the results of its neoliberal economic policies as an “economic miracle.”
It has certainly been important and necessary to dredge up this painful history. The military dictatorship, as Patricia Constable and Arturo Valenzuela put it in their 1991 book A Nation of Enemies: Chile Under Pinochet, had “made spies of the unscrupulous, sycophants of the ambitious, and conformists of the majority.” The experience of dictatorship left many traumatized by violence, many more cowed into submission—not only by the fear that they themselves might be tortured or “disappeared” if they spoke up, but by the idea that dreaming of a new society was a form of hubris, which would only lead to disaster. Despite eruptions of protest during the period of the dictatorship, especially in the early and mid 1980s, Chileans have really only gradually overcome this trauma and regained the ability to protest without triggering fears of another coup. Confronting this history, breaking the silence about the past, naming the guilty parties, demanding justice—all played a role in making protest possible again.
There are other things, however, to commemorate about Chile in the early 1970s, most especially the promise of a democratic socialism that was truly democratic and truly socialist—something fundamentally different from both the reformed capitalism of western European social democracy and the bureaucratic dictatorships of the Soviet bloc. The UP in Chile, the May 1968 protests in Paris, and the Prague Spring of 1968 all, in their way, rekindled hope for a new brand of humanistic and liberatory socialism. In remembering the demise of the UP (not just the government, but that era of Chilean history), we ought not to forget its positive legacies.
David Kotz, Guest Blogger
David Kotz is a professor of economics at the University of Massachusetts-Amherst and the author of The Rise and Fall of Neoliberal Capitalism (Harvard University Press, 2015). This is the first installment of a two-part series based on his book.
Part 1: What is Neoliberal Capitalism?
“Neoliberalism,” or more accurately neoliberal capitalism, is a form of capitalism in which market relations and market forces operate relatively freely and play the predominant role in the economy. That is, neoliberalism is not just a set of ideas, or an ideology, as it is typically interpreted by those analysts who doubt the relevance or importance of this concept for explaining contemporary capitalism. Under neoliberalism, non-market institutions – such as the state, trade unions, and corporate bureaucracies – play a limited role. By contrast, in “regulated capitalism” such as prevailed in the post-World War II decades – in the United States and other industrial capitalist economies – states, trade unions, and corporate bureaucracies played a major role in regulating economic activity, confining market forces to a lesser role.
A few clarifications are in order. First, capitalism cannot function without a state. After all, private property is a creation of the state, and market exchange requires contract law and associated enforcement that can only be provided by a state. However, in neoliberal capitalism the state economic role tends to be largely confined to protection of private property and enforcement of contracts. In regulated capitalism the state’s economic role expands significantly beyond those core functions of the capitalist state.
Second, the dominant role of market relations and market forces in neoliberal capitalism is embodied in a set of institutions and reinforced by particular dominant ideas. The transition from regulated capitalism to neoliberal capitalism starting in the 1970s was marked by major changes in economic and political institutions. This will be explored below.
Third, the institutions of neoliberal capitalism, while promoting an expanded role in the economy for market relations and market forces, simultaneously transform the form of the main class relations of capitalism. Most importantly, the capital-labor relation assumes the form of relatively full capitalist domination of labor. This contrasts with the capital-labor compromise that characterized the regulated capitalism of the post-World War II decades. Neoliberalism also brought change in the relation between financial and non-financial capital, as will be considered below.
There was a time when economists were inevitably concerned with development. Early economists of the 16th and 17th centuries to those of the mid 20th century were all essentially concerned with understanding the processes of economic growth and structural change: how and why they occurred, what forms they took, what prevented or constrained them, and to what extent they actually led to greater material prosperity and more general human progress. And it was this broader set of “macro” questions which in turn defined both their focus and their approach to more specific issues relating to the functioning of capitalist economies.
It is true that the marginalist revolution of the late 19th century led economists away from these larger evolutionary questions towards particularist investigations into the current, sans history. Nevertheless it might be fair to say that trying to understand the processes of growth and development have remained the basic motivating forces for the study of economics. To that extent, it would be misleading to treat it even as a branch of the subject, since the questions raised touch at the core of the discipline itself.