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How Neoliberal Ideology Destabilized the World Balance: Krugman and Galbraith

by Kai Ruhsert Wednesday, Oct. 07, 2009 at 4:22 AM

"If the depression has not openly erupted, all the features of the 1930s are having a spectacular comeback." (Paul Krugman) To free the US from the claws of private interests, James Galbraith urges the public authority to set social and ecological norms.


By Kai Ruhsert

[This article published September 21, 2009 is translated from the German on the Internet, http://www.nachdenkseiten.de/wp-print.php?p=4207.]

The trauma of the Great Depression of the 1930s still haunts the minds of economists. In the new edition of his book “The Return of Depression Economics,” Paul Krugman, 2008 Nobel Prize winner for economics, warns: “If the depression has not openly erupted, all the depression features of the 1930s are having a spectacular comeback.” In re-reading his book, one is amazed by his correct predictions based on his analyses. His analyses show why the world economy is on the same wrong track as several decades ago.

Two books of the American economists Paul Krugman (“The Return of Depression Economics”) and James K. Galbraith (“Predatory State”) agree in essential points.


Economic crises have regularly returned since the 1990s. The crises in Latin America, Asia and Russia were hardly noticed in the industrial states. In industrial states, the real estate crisis and the subsequent Internet speculation bubble occurred in these years.

Every time the storm broke out very suddenly completely out of the blue. In the growing threshold countries, the recommended policy of opening markets and the competitive economy was diligently realized but the investors suddenly withdrew. Developed industrial states – national economies with the same orthodox-liberal orientations – seemed to have freed themselves from the tyranny of economic cycles and imagined they were on the perpetual growth path thanks to new technologies, free commodity markets and then free financial markets. After every recession, “good” arguments were found again and again to defend the adopted line of economic- and financial policy.

In a spirited essay, James K. Galbraith confirms Krugman’s analyses. In both books, the ideology of economic freedom, competition without limits, tax cuts for the super-rich, the monetarist obsession of fighting inflation and the budget orthodoxy of balanced budgets are tackled. According to Krugman, the supply-side economy is an “intellectually hollow Corpus” and a “fanatical ideology.” Galbraith puts more coal on the fire. Monetarism leads to financial crises “always and everywhere.”


Both authors show how the deregulation of the financial markets gave the financial industry a de-stabilization power position for which the real economy has to pay. This phenomenon first spread when the Keynesian Bretton Woods system was ended in 1971 after the US abandoned the convertibility of the dollar in gold and left the economy to anarchy.

Galbraith says the economic- and financial policy practiced in the US really runs counter to the neoliberal credo. At the beginning of the 1980s, the American Federal Reserve raised the prime interest rate to combat inflation to 20% with the consequence of a worse recession. After this experience, a permanent low interest policy has been pragmatically followed in the US without an inflationary development – a clear refutation of the monetarist dogma…

Under the last Bush presidency, the conventional vocabulary of “market and competition” helped annul meaningful regulations and at the end promoted private interests in the areas of security, social security and schools. With its actual policy, according to Galbraith’s judgment, the American rightwing bids farewell to the officially propagated “free market mythology.”

Both authors urge a political reversal and a new policy that breaks with practices based on the neoliberal credo. According to Paul Krugman, all financial activities must be regulated. The freedom of international capital streams is put in question and re-regulated. In the current recession phase, Krugman pleads for the rediscovery of Keynes and measures that strengthen aggregate economic demand.

Galbraith is for an end to the low-wage policy that brings more social inequality, a freeze on the policy of cuts in the social net. This policy was sold to the public – in a false way – as the price for securing the prosperity of rising generations. To free the US from the claws of private interests, Galbraith urges the public authority to set social – for example, minimum- and maximum wages – and ecological norms. He proposes a kind of public future planning. He wants farsighted planning of infrastructure investments in the are3as of transportation, environment and energy.

In the opinion of reviewer Adrian de Tricornet, Krugman and Galbraith with their books want to break the economic taboo in the US and free democratic thinking from its helplessness toward the neoliberal consensus. To revive and renew the economic- and finance-policy debate, the crisis has to assume global dimensions.


"2009 Preliminary Report of the UN Stiglitz Commission" (109 pages, pdf)

"VIDEO: Conversation with John Kenneth Galbraith." 52 minutes
link to www.google.com

"VIDEO: Chomsky on Reagan and Friedman Economics"

"Capitalism is the Problem: System Error" by Bernd Druck and Yaak Pabst

"The Crisis of Capitalism: Credit-Doping" by Rainer Roth

"The Crisis of Speculative Capitalism" by Rudolf Hickel

"Economic Policy after the Financial Crisis" by Kai Burmeister and Till von Treek

"One Nation, Two National Economies" by Max Fraad Wolff

VIDEO: Eduardo Galeano on Grit TV"
link to lauraflanders.firedoglake.com

"Blame Canada" by the Stimulator on www.submedia.tv

May knowledge-maximization replace profit-maximization! (cf. Rainer Roth)


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