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Neoliberalism as Greatest Error in the History of Economic Thought

by Rudolf Hickel Wednesday, Nov. 23, 2011 at 8:54 PM

Efficiency and prosperity can only be realized on capitalist markets when the economic system is bound in a social order under the primacy of politics. Democratic legitimated politics and the provision of public goods is derived from the "anatomy of market failure."


To repair the perversion of the system, capitalism must be stripped of power in favor of politics

By Rudolf Hickel

[This article published 10/22/2011 is translated from the German on the Internet,]

Since its historical acceptance, capitalism and crisis are two sides of one coin. The reason is simple. The motive in using market forces is the single entrepreneurial goal, forcing up the yield on invested capital, the profit rate. Social-political goals are not considered in products produced through this production method. The dominant profit-oriented business economy tries to externalize the produced social, ecological and job-related risks in favor of a narrow-minded and purely operational profit and loss calculation.

An answer to the question whether this capitalism with its destructive potential can still be saved can be found in an arduous learning process. Efficiency and prosperity can only be realized on capitalist markets when the economic system is bound in a social order under the primacy of politics. The agenda of democratic legitimated politics is derived from the “anatomy of market failure” (Francis Bator, 1958). The provision of public goods as in the area of education belongs here, as Adam Smith explained in his standard work from 1776. The social risks for paid laborers of losing their financial base produced through profit-oriented production demand a functioning social state. The discovery of the social market economy in the 1950s still invoked today in fancy speeches should be welcomed. The aggregate economic irrationality often appearing in the teamwork of individual economic rationality requires a control policy against the system-immanent production of economic crises and mass unemployment. The goal “ecological sustainability” is at the top of the agenda of state action today since this individual economic profit-economy has alarmingly burdened the environment by externalizing ecological costs.

One would think this concept of rescuing capitalism through a policy directed at the causes of crisis production would be a matter of course. Unfortunately there is no talk of this. This rescue concept is attacked again and again and thwarted on account of the dogma of the powerful “entrepreneurial investment monopoly” (Erich Preiser). A fundamental democracy deficit is clear. Today’s market economy has nothing to do with the competition idyll invoked in textbooks to which businesses are subject. Rather monopolistic competition dominates. Businesses do not adjust to market guidelines… There is also influence on politics on many planes. The primacy of the economy over politics dominates. Through massive lobbying, market-dominating businesses influence legislation. Today’s bailout programs for the banks bear the signatures of bank CEOs.

The history of the relation of economy and politics is certainly marked by different epochs. For example, the influence of politics on the economy was very clear in the 1950s and 1960s. This changed in the most recent stage that began politically in the middle of the 1980s. Economically this development can be paraphrased with the term neoclassicism and politically with the polemical term neoliberalism. After the economic and political collapse of the deeply undemocratic states of command socialism, the strategy of a radical deregulation of capitalist market forces was implemented. The gradual dismantling of the social state through reduction of legally guaranteed existential security in old age, reorganization of the health system and opening of the low wage sector in Agenda 2010 occurred in Germany. These attacks on the social pillars of the market economy are well-known. However the drastic deregulation of the financial markets represented a Novum. A financial market-driven capitalism was carried out that resulted in an extremely dangerous worldwide system crisis. If a comprehensive policy of regulating the financial markets is not implemented at once, this deregulated capitalism will not be rescued. This means ever-faster recurring crises with losses in general prosperity and massive strains for those dependent on work income. At the end the democratic foundation will also be endangered.

On October 20, 1986 Maggi Thatcher gave the starting shot for the core meltdown on the financial markets threatening today with the awkward imperative “Cast away the rules that curb success.” With the “Big Bang,” a suspension of important regulations was triggered at the London financial center. In 1994 Bill Clinton followed with the suspension of regulations for US banks: “The new rules make us economically stronger and more efficient; they are good for consumers.” The separation between commercial banks and investment banks carried out with the 1933 Glass-Steagal Act from the knowledge of the mis-developments in the worldwide economic crisis at the end of the 1920s was subsequently abolished. The result was an explosive expansion of the production of fictitious money through money without relation to the real economy. Even if hesitantly, the German social-green coalition in 2003 opened the floodgates in Germany through approval of completely uncontrolled credit guarantees (derivatives) and hedge funds.

The deregulation of the financial markets to help the financial industry has led to the following malformations that have nothing to do with insuring businesses against risks in the real economy. With the hardly transparent multiple packaging of credits in structured products, the rating agencies then intensified the disaster with the best ratings.

- The highly speculative businesses on the financial markets exploded. The volume of financial transactions was 65 times higher than world production in 2010. These are speculative businesses.

- Completely oversized financial markets have uncoupled from the value-creating economy. High profits on the financial markets instead of spending in the domestic economy caused the relative uncoupling.

- New financial products were created for speculative goals. The greatly praised financial innovations quickly proved to be “toxic products.” All these products have nothing to do with real value-creation. The fictional money was created ou9t of money by irresponsible financial alchemists.

The collapse of the Lehman Brothers investment bank is only a code for the fall of this highly speculative financial market in 2007. Bank holidays threatened as harbingers of bank collapses. The rescue before the collapse of the production- and bank-economy succeeded in Germany in the short-term and shows political counter-measures can be successful in the era of globalization. A few weeks before, previously tabooed economic programs, a bailout program for the banks and short-term rules for money prevented the collapse. The lesson is clear: permanently ensuring this policy is worthwhile.

The latest financial market crisis shows neoliberalism has failed. Robert Schiller from Yale University rightly declared: “Neoliberalism is the greatest error in the history of economic thought.” Dominant or prevailing economics should face this discovery. The “Council of the Five Wise” also blamed itself in November 2008. A mild economic depression was forecast for the 2009 crisis year with a fall of production around five percent. Even if economic development was termed very efficient and stable in the macro-models of the financial sector, the embarrassing misjudgments on economic development are astounding.

One conclusion from the collapse of the dogma of the beneficial effects of deregulated markets is: the capitalist market economy must be stripped of power in favor of the priority of politics. Rigorous regulation of the financial markets is central. The idea of separating the helping functions of commercial banks from high-risk investment banking is important. However the control limitation and prohibition of the most dangerous speculative instruments is crucial. Snatching these business fields from investment bankers is imperative… Unprotected short-selling of stocks and loans should be absolutely prohibited.

Finally, only half of the credits may be packaged in the future. Banks must use their own hard capital for the other half. In addition, the migration from investment- and hedge funds into “shadow banks” must be prevented.

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