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A Short History of Neoliberalism

By Susan George

Conference on Economic Sovereignty in a Globalising
World
March 24-26, 1999
 
original article:
http://www.igc.org/globalpolicy/globaliz/econ/histn

The Conference organisers have asked me for a brief
history of neo-liberalism which they title "Twenty
Years of Elite Economics". I'm sorry to tell you that
in order to make any sense, I have to start even
further back, some 50 years ago, just after the end of
World War II.
In 1945 or 1950, if you had seriously proposed any of
the ideas and policies in today's standard neo-liberal
toolkit, you would have been laughed off the stage or
sent off to the insane asylum. At least in the Western
countries, at that time, everyone was a Keynesian, a
social democrat or a social-Christian democrat or some
shade of Marxist. The idea that the market should be
allowed to make major social and political decisions;
the idea that the State should voluntarily reduce its
role in the economy, or that corporations should be
given total freedom, that trade unions should be
curbed and citizens given much less rather than more
social protection--such ideas were utterly foreign to
the spirit of the time. Even if someone actually
agreed with these ideas, he or she would have
hesitated to take such a position in public and would
have had a hard time finding an audience.
However incredible it may sound today, particularly to
the younger members of the audience, the IMF and the
World Bank were seen as progressive institutions. They
were sometimes called Keynes's twins because they were
the brain-children of Keynes and Harry Dexter White,
one of Franklin Roosevelt's closest advisors. When
these institutions were created at Bretton Woods in
1944, their mandate was to help prevent future
conflicts by lending for reconstruction and
development and by smoothing out temporary balance of
payments problems. They had no control over individual
government's economic decisions nor did their mandate
include a licence to intervene in national policy.
In the Western nations, the Welfare State and the New
Deal had got underway in the 1930s but their spread
had been interrupted by the war. The first order of
business in the post-war world was to put them back in
place. The other major item on the agenda was to get
world trade moving--this was accomplished through the
Marshall Plan which established Europe once again as
the major trading partner for the US, the most
powerful economy in the world. And it was at this time
that the strong winds of decolonisation also began to
blow, whether freedom was obtained by grant as in
India or through armed struggle as in Kenya, Vietnam
and other nations.
On the whole, the world had signed on for an extremely
progressive agenda. The great scholar Karl Polanyi
published his masterwork, The Great Transformation in
1944, a fierce critique of 19th century industrial,
market-based society. Over 50 years ago Polanyi made
this amazingly prophetic and modern statement: "To
allow the market mechanism to be sole director of the
fate of human beings and their natural
environment...would result in the demolition of
society" [p.73]. However, Polanyi was convinced that
such a demolition could no longer happen in the
post-war world because, as he said [p.251], "Within
the nations we are witnessing a development under
which the economic system ceases to lay down the law
to society and the primacy of society over that system
is secured". Alas, Polanyi's optimism was
misplaced--the whole point of neo-liberalism is that
the market mechanism should be allowed to direct the
fate of human beings. The economy should dictate its
rules to society, not the other way around. And just
as Polanyi foresaw, this doctrine is leading us
directly towards the "demolition of society".
So what happened? Why have we reached this point half
a century after the end of the Second World War? Or,
as the organisers ask, "Why are we having this
conference right now?" The short answer is "Because of
the series of recent financial crises, especially in
Asia". But this begs the question--the question they
are really asking is "How did neo-liberalism ever
emerge from its ultra-minoritarian ghetto to become
the dominant doctrine in the world today?" Why can the
IMF and the Bank intervene at will and force countries
to participate in the world economy on basically
unfavourable terms. Why is the Welfare State under
threat in all the countries where it was established?
Why is the environment on the edge of collapse and why
are there so many poor people in both the rich and the
poor countries at a time when there has never existed
such great wealth? Those are the questions that need
to be answered from an historical perspective.
As I've argued in detail in the US quarterly journal
Dissent, one explanation for this triumph of
neo-liberalism and the economic, political, social and
ecological disasters that go with it is that
neo-liberals have bought and paid for their own
vicious and regressive "Great Transformation". They
have understood, as progressives have not, that ideas
have consequences. Starting from a tiny embryo at the
University of Chicago with the philosopher-economist
Friedrich von Hayek and his students like Milton
Friedman at its nucleus, the neo-liberals and their
funders have created a huge international network of
foundations, institutes, research centers,
publications, scholars, writers and public relations
hacks to develop, package and push their ideas and
doctrine relentlessly.
They have built this highly efficient ideological
cadre because they understand what the Italian Marxist
thinker Antonio Gramsci was talking about when he
developed the concept of cultural hegemony. If you can
occupy peoples' heads, their hearts and their hands
will follow. I do not have time to give you details
here, but believe me, the ideological and promotional
work of the right has been absolutely brilliant. They
have spent hundreds of millions of dollars, but the
result has been worth every penny to them because they
have made neo-liberalism seem as if it were the
natural and normal condition of humankind. No matter
how many disasters of all kinds the neo-liberal system
has visibly created, no matter what financial crises
it may engender, no matter how many losers and
outcasts it may create, it is still made to seem
inevitable, like an act of God, the only possible
economic and social order available to us.
Let me stress how important it is to understand that
this vast neo-liberal experiment we are all being
forced to live under has been created by people with a
purpose. Once you grasp this, once you understand that
neo-liberalism is not a force like gravity but a
totally artificial construct, you can also understand
that what some people have created, other people can
change. But they cannot change it without recognising
the importance of ideas. I'm all for grassroots
projects, but I also warn that these will collapse if
the overall ideological climate is hostile to their
goals.
So, from a small, unpopular sect with virtually no
influence, neo-liberalism has become the major world
religion with its dogmatic doctrine, its priesthood,
its law-giving institutions and perhaps most important
of all, its hell for heathen and sinners who dare to
contest the revealed truth. Oskar Lafontaine, the
ex-German Finance Minister who the Financial Times
called an "unreconstructed Keynesian" has just been
consigned to that hell because he dared to propose
higher taxes on corporations and tax cuts for ordinary
and less well-off families.
Having set the ideological stage and the context, now
let me fast-forward so that we are back in the twenty
year time frame. That means 1979, the year Margaret
Thatcher came to power and undertook the neo-liberal
revolution in Britain. The Iron Lady was herself a
disciple of Friedrich von Hayek, she was a social
Darwinist and had no qualms about expressing her
convictions. She was well known for justifying her
programme with the single word TINA, short for There
Is No Alternative. The central value of Thatcher's
doctrine and of neo-liberalism itself is the notion of
competition--competition between nations, regions,
firms and of course between individuals. Competition
is central because it separates the sheep from the
goats, the men from the boys, the fit from the unfit.
It is supposed to allocate all resources, whether
physical, natural, human or financial with the
greatest possible efficiency.
In sharp contrast, the great Chinese philosopher Lao
Tzu ended his Tao-te Ching with these words: "Above
all, do not compete". The only actors in the
neo-liberal world who seem to have taken his advice
are the largest actors of all, the Transnational
Corporations. The principle of competition scarcely
applies to them; they prefer to practise what we could
call Alliance Capitalism. It is no accident that,
depending on the year, two-thirds to three-quarters of
all the money labeled "Foreign Direct Investment" is
not devoted to new, job-creating investment but to
Mergers and Acquisitions which almost invariably
result in job losses.
Because competition is always a virtue, its results
cannot be bad. For the neo-liberal, the market is so
wise and so good that like God, the Invisible Hand can
bring good out of apparent evil. Thus Thatcher once
said in a speech, "It is our job to glory in
inequality and see that talents and abilities are
given vent and expression for the benefit of us all."
In other words, don't worry about those who might be
left behind in the competitive struggle. People are
unequal by nature, but this is good because the
contributions of the well-born, the best-educated, the
toughest, will eventually benefit everyone. Nothing in
particular is owed to the weak, the poorly educated,
what happens to them is their own fault, never the
fault of society. If the competitive system is "given
vent" as Margaret says, society will be the better for
it. Unfortunately, the history of the past twenty
years teaches us that exactly the opposite is the
case.
In pre-Thatcher Britain, about one person in ten was
classed as living below the poverty line, not a
brilliant result but honourable as nations go and a
lot better than in the pre-War period. Now one person
in four, and one child in three is officially poor.
This is the meaning of survival of the fittest: people
who cannot heat their houses in winter, who must put a
coin in the meter before they can have electricity or
water, who do not own a warm waterproof coat, etc. I
am taking these examples from the 1996 report of the
British Child Poverty Action Group. I will illustrate
the result of the Thatcher-Major "tax reforms" with a
single example: During the 1980s, 1 percent of
taxpayers received 29 percent of all the tax reduction
benefits, such that a single person earning half the
average salary found his or her taxes had gone up by 7
percent, whereas a single person earning 10 times the
average salary got a reduction of 21%.
Another implication of competition as the central
value of neo-liberalism is that the public sector must
be brutally downsized because it does not and cannot
obey the basic law of competing for profits or for
market share. Privatisation is one of the major
economic transformations of the past twenty years. The
trend began in Britain and has spread throughout the
world.
Let me start by asking why capitalist countries,
particularly in Europe, had public services to begin
with, and why many still do. In reality, nearly all
public services constitute what economists call
"natural monopolies". A natural monopoly exists when
the minimum size to guarantee maximum economic
efficiency is equal to the actual size of the market.
In other words, a company has to be a certain size to
realise economies of scale and thus provide the best
possible service at the lowest possible cost to the
consumer. Public services also require very large
investment outlays at the beginning--like railroad
tracks or power grids--which does not encourage
competition either. That's why public monopolies were
the obvious optimum solution. But neo-liberals define
anything public as ipso facto "inefficient".
So what happens when a natural monopoly is privatised?
Quite normally and naturally, the new capitalist
owners tend to impose monopoly prices on the public,
while richly remunerating themselves. Classical
economists call this outcome "structural market
failure" because prices are higher than they ought to
be and service to the consumer is not necessarily
good. In order to prevent structural market failures,
up to the mid-1980s, the capitalist countries of
Europe almost universally entrusted the post office,
telecomms, electricity, gas, railways, metros, air
transport and usually other services like water,
rubbish collection, etc. to state-owned monopolies.
The USA is the big exception, perhaps because it is
too huge geographically to favour natural monopolies.
In any event, Margaret Thatcher set out to change all
that. As an added bonus, she could also use
privatisation to break the power of the trade unions.
By destroying the public sector where unions were
strongest, she was able to weaken them drastically.
Thus between 1979 and 1994, the number of jobs in the
public sector in Britain was reduced from over 7
million to 5 million, a drop of 29 percent. Virtually
all the jobs eliminated were unionised jobs. Since
private sector employment was stagnant during those
fifteen years, the overall reduction in the number of
British jobs came to 1.7 million, a drop of 7%
compared to 1979. To neo-liberals, fewer workers is
always better than more because workers impinge on
shareholder value.
As for other effects of privatisation, they were
predictable and predicted. The managers of the newly
privatised enterprises, often exactly the same people
as before, doubled or tripled their own salaries. The
government used taxpayer money to wipe out debts and
recapitalise firms before putting them on the
market--for example, the water authority got 5 billion
pounds of debt relief plus 1.6 billion pounds called
the "green dowry" to make the bride more attractive to
prospective buyers. A lot of Public Relations fuss was
made about how small stockholders would have a stake
in these companies--and in fact 9 million Brits did
buy shares--but half of them invested less than a
thousand pounds and most of them sold their shares
rather quickly, as soon as they could cash in on the
instant profits.
From the results, one can easily see that the whole
point of privatisation is neither economic efficiency
or improved services to the consumer but simply to
transfer wealth from the public purse--which could
redistribute it to even out social inequalities--to
private hands. In Britain and elsewhere, the
overwhelming majority of privatised company shares are
now in the hands of financial institutions and very
large investors. The employees of British Telecom
bought only 1 percent of the shares, those of British
Aerospace 1.3 percent, etc. Prior to Ms Thatcher's
onslaught, a lot of the public sector in Britain was
profitable. Consequently, in 1984, public companies
contributed over 7 billion pounds to the treasury. All
that money is now going to private shareholders.
Service in the privatised industries is now often
disastrous--the Financial Times reported an invasion
of rats in the Yorkshire Water system and anyone who
has survived taking Thames trains in Britain deserves
a medal.
Exactly the same mechanisms have been at work
throughout the world. In Britain, the Adam Smith
Institute was the intellectual partner for creating
the privatisation ideology. USAID and the World Bank
have also used Adam Smith experts and have pushed the
privatisation doctrine in the South. By 1991 the Bank
had already made 114 loans to speed the process, and
every year its Global Development Finance report lists
hundreds of privatisations carried out in the Bank's
borrowing countries.
I submit that we should stop talking about
privatisation and use words that tell the truth: we
are talking about alienation and surrender of the
product of decades of work by thousands of people to a
tiny minority of large investors. This is one of the
greatest hold-ups of ours or any generation.
Another structural feature of neo-liberalism consists
in remunerating capital to the detriment of labour and
thus moving wealth from the bottom of society to the
top. If you are, roughly, in the top 20 percent of the
income scale, you are likely to gain something from
neo-liberalism and the higher you are up the ladder,
the more you gain. Conversely, the bottom 80 percent
all lose and the lower they are to begin with, the
more they lose proportionally.
Lest you thought I had forgotten Ronald Reagan, let me
illustrate this point with the observations of Kevin
Phillips, a Republican analyst and former aid to
President Nixon, who published a book in 1990 called
The Politics of Rich and Poor. He charted the way
Reagan's neo-liberal doctrine and policies had changed
American income distribution between 1977 and 1988.
These policies were largely elaborated by the
conservative Heritage Foundation, the principle
think-tank of the Reagan administration and still an
important force in American politics. Over the decade
of the 1980s, the top 10 percent of American families
increased their average family income by 16 percent,
the top 5 percent increased theirs by 23 percent, but
the extremely lucky top 1 percent of American families
could thank Reagan for a 50 percent increase. Their
revenues went from an affluent $270.000 to a heady
$405.000. As for poorer Americans, the bottom 80
percent all lost something; true to the rule, the
lower they were on the scale, the more they lost. The
bottom 10 percent of Americans reached the nadir:
according to Phillip's figures, they lost 15% of their
already meagre incomes: from an already rock-bottom
average of $4.113 annually, they dropped to an inhuman
$3.504. In 1977, the top 1 percent of American
families had average incomes 65 times as great as
those of the bottom 10 percent. A decade later, the
top 1 percent was 115 times as well off as the bottom
decile.
America is one of the most unequal societies on earth,
but virtually all countries have seen inequalities
increase over the past twenty years because of
neo-liberal policies. UNCTAD published some damning
evidence to this effect in its 1997 Trade and
Development Report based on some 2600 separate studies
of income inequalities, impoverishment and the
hollowing out of the middle classes. The UNCTAD team
documents these trends in dozens of widely differing
societies, including China, Russia and the other
former Socialist countries.
There is nothing mysterious about this trend towards
greater inequality. Policies are specifically designed
to give the already rich more disposable income,
particularly through tax cuts and by pushing down
wages. The theory and ideological justification for
such measures is that higher incomes for the rich and
higher profits will lead to more investment, better
allocation of resources and therefore more jobs and
welfare for everyone. In reality, as was perfectly
predictable, moving money up the economic ladder has
led to stock market bubbles, untold paper wealth for
the few, and the kind of financial crises we shall be
hearing a lot about in the course of this conference.
If income is redistributed towards the bottom 80
percent of society, it will be used for consumption
and consequently benefit employment. If wealth is
redistributed towards the top, where people already
have most of the things they need, it will go not into
the local or national economy but to international
stockmarkets.
As you are all aware, the same policies have been
carried out throughout the South and East under the
guise of structural adjustment, which is merely
another name for neo-liberalism. I've used Thatcher
and Reagan to illustrate the policies at the national
level. At the international level, neo-liberals have
concentrated all their efforts on three fundamental
points:
 
free trade in goods and services
free circulation of capital
freedom of investment
Over the past twenty years, the IMF has been
strengthened enormously. Thanks to the debt crisis and
the mechanism of conditionality, it has moved from
balance of payments support to being quasi-universal
dictator of so-called "sound" economic policies,
meaning of course neo-liberal ones. The World Trade
Organisation was finally put in place in January 1995
after long and laborious negotiations, often rammed
through parliaments which had little idea what they
were ratifying. Thankfully, the most recent effort to
make binding and universal neo-liberal rules, the
Multilateral Agreement on Investment, has failed, at
least temporarily. It would have given all rights to
corporations, all obligations to governments and no
rights at all to citizens.
The common denominator of these institutions is their
lack of transparency and democratic accountability.
This is the essence of neo-liberalism. It claims that
the economy should dictate its rules to society, not
the other way around. Democracy is an encumbrance,
neo-liberalism is designed for winners, not for voters
who, necessarily encompass the categories of both
winners and losers.
I'd like to conclude by asking you to take very
seriously indeed the neo-liberal definition of the
loser, to whom nothing in particular is owed. Anyone
can be ejected from the system at any time--because of
illness, age, pregnancy, perceived failure, or simply
because economic circumstances and the relentless
transfer of wealth from top to bottom demand it.
Shareholder value is all. Recently the International
Herald Tribune reported that foreign investors are
"snapping up" Thai and Korean companies and Banks. Not
surprisingly, these purchases are expected to result
in "heavy layoffs". In other words, the results of
years of work by thousands of Thais and Koreans is
being transferred into foreign corporate hands. Many
of those who laboured to create that wealth have
already been, or soon will be left on the pavement.
Under the principles of competition and maximising
shareholder value, such behaviour is seen not as
criminally unjust but as normal and indeed virtuous.
I submit that neo-liberalism has changed the
fundamental nature of politics. Politics used to be
primarily about who ruled whom and who got what share
of the pie. Aspects of both these central questions
remain, of course, but the great new central question
of politics is, in my view, "Who has a right to live
and who does not". Radical exclusion is now the order
of the day, I mean this deadly seriously. I've given
you rather a lot of bad news because the history of
the past 20 years is full of it. But I don't want to
end on such a depressing and pessimistic note. A lot
is already happening to counter these life-threatening
trends and there is enormous scope for further action.
 
This conference is going to help define much of that
action which I believe must include an ideological
offensive. It's time we set the agenda instead of
letting the Masters of the Universe set it at Davos. I
hope funders may also understand that they should not
be funding just projects but also ideas. We can't
count on the neo-liberals to do it, so we need to
design workable and equitable international taxation
systems, including a Tobin Tax on all monetary and
financial market transactions and taxes on
Transnational Corporation sales on a pro-rata basis. I
expect we will go into detail on such questions in the
workshops here. The proceeds of an international tax
system should go to closing the North-South gap and to
redistribution to all the people who have been robbed
over the past twenty years.
Let me repeat what I said earlier: neo-liberalism is
not the natural human condition, it is not
supernatural, it can be challenged and replaced
because its own failures will require this. We have to
be ready with replacement policies which restore power
to communities and democratic States while working to
institute democracy, the rule of law and fair
distribution at the international level. Business and
the market have their place, but this place cannot
occupy the entire sphere of human existence.
Further good news is that there is plenty of money
sloshing around out there and a tiny fraction, a
ridiculous, infinitesimal proportion of it would be
enough to provide a decent life to every person on
earth, to supply universal health and education, to
clean up the environment and prevent further
destruction to the planet, to close the North-South
gap--at least according to the UNDP which calls for a
paltry $40 billion a year. That, frankly, is peanuts.
Finally, please remember that neo-liberalism may be
insatiable but it is not invulnerable. A coalition of
international activists only yesterday obliged them to
abandon, at least temporarily, their project to
liberalise all investment through the MAI. The
surprise victory of its opponents infuriated the
supporters of corporate rule and demonstrates that
well organised network guerillas can win battles. Now
we have to regroup our forces and keep at them so that
they cannot transfer the MAI to the WTO.
Look at it this way. We have the numbers on our side,
because there are far more losers than winners in the
neo-liberal game. We have the ideas, whereas theirs
are finally coming into question because of repeated
crisis. What we lack, so far, is the organisation and
the unity which in this age of advanced technology we
can overcome. The threat is clearly transnational so
the response must also be transnational. Solidarity no
longer means aid, or not just aid, but finding the
hidden synergies in each other's struggles so that our
numerical force and the power of our ideas become
overwhelming. I'm convinced this conference will
contribute mightily to this goal and I thank you all
for your kind attention.

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