HOW NEOLIBERALISM GAINED HEGEMONY


By Armin Thurnher


[This article published on August 20, 2014 is translated from the German on the Internet, http://blog.arbeit-wirtschaft.at.]



In democracy, the approval of the masses must be gained, not only their applause. The pressing question is: Why do the masses vote against their own interests and applaud those who champion goals opposed to the well-being or welfare of the masses? The answer is often amazingly or shamefully simple. Blinded by the self-produced illusion of enlightenment in a creation that we call the public, we think nothing is stronger than the power of argument. Ideas prevail because power if on their side, not because they are better.


The history of the public could be written as a forum of democracy with the attempt to convince others and at the same time as a misused forum of manipulation. The history of economic paradigm shifts could be contrasted to a history of media paradigm shifts. The withdrawal of the public-legal reality should be understood as a moment of a neoliberalized system.


Institutions in a democratic public slip out of the control of the state or public institutions. The one-sided education at the economic universities, the increasing private enterprise prize money of think-tanks and journalists and the growth of the PR economy (that exceeded the media industry in 2012 in personnel) must be understood as part of the neoliberal offensive. At the end is the nearly unquestioned dominant paradigm.


FROM A SECT TO CULTURAL HEGEMONY


Naturally there is a competition for minds and hearts. Many thinkers who grapple with our question quote Antonio Gramsci, the Italian Marxist, whose concept of cultural hegemony aims at an intellectual contest. According to Gramsci, only the one with a political concept can gain cultural hegemony. How this concept is enforced is the crucial question.


The triumphant advance of so-called neoliberalism is an example of the amazing triumphant advance of an ideology whose consequences worked against those who elected them or their representatives since the 1970s in the leading states of the West. Why and how was this possible?


In view of the massive neoliberal paradigm burdening politics and the public, another worldview seemed hardly possible. However another worldview dominated because of the crisis in the late 1920s and 1930s. After 1945, neoliberalism was nothing more than an economic sect. This must be remembered. Even institutions like the World Bank and the World Trade Organization were founded in the Keynesian spirit to regulate international competition and not keep a tight reign on individual states and deregulate the competition.


The destructive experiences of crises and wars, totalitarianism and National Socialism make a controlled international coexistence look desirable. Full employment was the goal and tamed capitalism the way. This “embedded liberalism” (David Harvey) with its state-managed industries, restrained mobile financial capital and dominant public media limited capitalism. Removing these limitations was the goal of neoliberalism.


SECURING POWER BY EMBEDDING THE ECONOMY


The crisis of the 1970s brought great problems to the Keynesian system; the position of the economic elite was also endangered. The system of moderate capitalism whether called embedded, Rheinish or social-market economy, made itself felt in re-distribution. The stock ownership of the top one percent of US society dropped steeply around 1970 to an all-time low since 1913. The propertied upper class had to act if it did not want to lose its position.


The upper class acted. In the US from 1978 to 1999, the top 0.1 percent of income earners increased their share of the national income from two to six percent; similar gains occurred everywhere as in Great Britain. After 1989 oligarchies arose in Russia and other ex-communist countries. Other countries like China, India, Mexico and Sweden opened themselves to neoliberalism.


The noble contest of arguments in economics borders on fiction because a base competition of interests is staged here. Cultural hegemony is either forced by sheer exercise of power as in Chile or Argentina or very simply bought – a somewhat more subtle form of exercising power.


The Mont-Pelerin Society could be the starting point for the triumphant advance of neoliberalism. These meetings served as the intellectual basis. Neoliberalism was still a sect.


“THE ECONOMY LEARNED TO SPEND MONEY AS A POLITICAL CLASS”


This changed when a lawyer later nominated by Nixon to be a federal judge, Lewis Powell directed a confidential memo to the American economic elite. The American economy must steel itself against those who want to destroy it, Powell wrote. An offensive at the universities, schools, media and courts would push through a new economic thinking. Seldom has a memo been so far-reaching.


Within a few years, the Chamber of Commerce increased its membership from 60,000 to a quarter of a million firms. Its financial power soared. Already in 1972 it spent $900 million a year for its propaganda goals, “an enormous amount for that time” Harvey noted. The Chamber of Commerce founded think-tanks, published books and influenced media, institutions and debates that the European public failed to notice for a long time. The authority of neoliberal thinkers seemingly sanctioned by Nobel Prizes helped (seven Nobel Prizes for members of the Mont-Pelerin Society in 18 years). The head of the Nobel Prize committee, the Swedish central banker Erik Lundberg, was a member of the Mont-Pelerin Society.


The economy learned “to spend money as a political class.” That is social theoretician David Harvey’s description. Soon no blade of grass could grow any more if it did not look neoliberal. The media seldom complain about itself and its change any more than the well-outfitted think-tanks and PR agents. In a European initiative, students decry the dominant neoliberal monocracy and deficient pluralism at economic universities.


NEOLIBERAL FREEDOM CONCEPT AS ANOTHER SUCCESS ELEMENT


The triumphant advance of neoliberal ideology rested on the attractiveness of the freedom concept already polemically underlined in Hayek’s main work “The Road to Serfdom.” Human dignity and individual freedom were explicitly stressed in the Manifesto of the Mont-Pelerin Society. In truth, the economic problems of Keynesian governed states and the emancipation movements of the 1968ers created the misunderstandings that contributed to the success of the neoliberal sect ideology. The protest of the 68ers was directed against state institutions, against public institutions felt to be petrified and against musty cultural conventions. Their rebellion sought to sweep away structures for very different motives than the motives of neoliberals. Strange alliances resulted while the emancipatory impulses of 1968 fizzled out culturally. Economic interest groups instrumentalized these anti-state impulses for themselves.


The classical “protective” employee-defensive organizations like unions became increasingly unattractive and seemed unliberated as exponents of “bondage.” On the other hand, the liberated market shone with the promise of post-modern consumer jobs all the more attractively. How these ended, namely in the debacle of diverse bursting speculative bubbles, stands on another accounting page.


THE NEOLIBERAL THREAT IS NOT BANISHED


Karl Polanyi, the great Vienna economic analyst, described the transformation of the society of the 19th century into an industrialized market society that makes everything into a commodity. “The conclusion is incredible but unavoidable. The shifts caused by such institutions (those of the market) must inevitably tear to pieces interpersonal relations and threaten the natural living space of people with destruction.”


In 1943 Polanyi was convinced the times were past when society would allow control over the economy to be snatched away again. He did not experience the regime of Margaret Thatcher who callously drew the conclusion from the ideology of the sect brought to power and declared “There is no such thing as society.” There was no alternative, she said. On the other hand, there were many arguments but they could not convince the majority. The powerful persuaders had the upper hand up to today. How long will this last?
















RISE AND MISERY OF THE GLOBAL FINANCIAL SYSTEM


By Thomas Zotter


[This article published August 29, 2014 is translated abridged from the German on the Internet, http://blog.arbeit-wirtschaft.at/aufstieg-und-elend-des-finanzsystems/#more-6483.]


The financial system was expanded and triggered the most serious economic crisis in decades that cost millions their jobs and all of us our prosperity. The financial system should be shriveled back to health. With his book “How much bank do we need?” the German economist Thomas Fricke showed conclusively the system errors that led to the system hitting the wall. Deficient morality and human failure were not central even if both were on the agenda in the bank industry.


An answer occurs to learned Austrians. We do not need a certain bank. In the Hypo Alpe-Adria bank, all the errors that could be made were made by management and politics. Firstly, people in southeast Europe turned the big speculation wheel without adequate securities and controls. Enormous losses occurred… Misguided decisions maximize the costs for taxpayers. Similar cases like Hypo Alpe-Adria erupted all over Europe. Unfortunately more will follow.


EXCESSIVE PROFITS LED TO MORAL DECLINE IN THE BANK INDUSTRY


Unlike many who set deficient morality and human failure in the bank industry at the center of their narrative of the crisis. Fricke, the former “chief economist” of the Financial Times of Germany, convincingly reconstructs the system error. As a very high morality hardly existed in the financial system before the excesses, the system also did not suddenly fall into disrepair. Rather the high profits first made possible the redistribution potential. Sooner or later, public decency goes to ruin in every branch that can easily skim profits out of nothing.


The evil must be tackled at the roots. Where are the roots? The core function of the banking system is really the mediation between the savings of private households and credit-financed investments of businesses – a relatively boring affair. But at the same time a market economy cannot function without it. Consequently the special position of the banking system and the risk latent in it of dragging whole economies over the edger must lead to special rules for the banking- and financial system. For many decades, the shock of the worldwide economic crisis was deep enough so these rules were not shaken.


NEOLIBERAL PROMISES AND HERD BEHAVIOR


Since the middle of the 1980s, the financial system and the banks began to gradually “deregulate” – to multiply growth, prosperity and jobs for all – according to the promise. One of the fathers of this ideology was Milton Friedman and his theory of efficient markets and stabilizing speculation. These promises turned into their opposite. There is no trace of efficiency, stabilization, self-regulation and omniscience.


When general financial education is urged today to better understand the connection between risk and expected returns, many examples show that “financially well-educated” professional investors followed the herd in banks, pension-funds and insurance companies.


In the financial crisis of the 1930s, the British economist John Maynard Keynes recognized that unregulated financial markets are marked by a herd conduct. Prices rise because everyone expects that all other speculators expect prices to keep rising. The opposite happens when everyone is pessimistic. This herd conduct endangers the stability of the real economy and does not only lead to severe fluctuations on the financial markets.


State financial monitoring is reproached by the neoliberal side for failing in the crisis. However the undeniable weakness of monitoring was the consequence of the neoliberal rejection of controls of banks and financial markets,


THE ANSWER TO THE CRISIS: RE-REGULATION IDEOLOGY (TONNENIDEOLOGIE) WITHOUT GENUINE REFORM GOALS


On international, European and natural planes, a hardly manageable number of individual regulatory measures were carried out in the years since the outbreak of the crisis. The re-regulation attempts are still inadequate – starting from the reality check proposed by Thomas Fricke. For example, the limitation and medium-term orientation to bonuses is positive (as long as it is effective). However this orientation cannot breakthrough either the system logic of herd conduct or the possibility of gaining excessive profits.


What is generally missing is shriveling the financial system back to health. Therefore further regulatory measures are necessary which should aim at the following points according to Fricke:

• stabilize the savings deflections of the herd instinct


• counteract and reverse the forces of dangerous pro-cyclical trends


• lower the dis-proportionally high yield potential of financial investments to re-channel the money streams into the real economy


• help reduce the enormous disparities in incomes and assets – leading to more stable growth


• make available funds for the real economy that in the past were channeled into the sphere of financial sorcery.


Some of the measures proposed by Fricke to realize these goals are vital and long overdue (e.g. financial transactions tax, anti-cyclical and higher capital holding requirements). Others will be a long time coming (e.g. world currency system, considerable and active regulation of government bonds and the raw material markets).


His skepticism about the effectiveness of the bank insolvency law is understandable. This law does not function as deterrence since no one thinks of bankruptcy in boom phases (see IKY-bubble). In systemic crises, the assumed participation of owner4s, creditors and the sector also strike their limits…“The best proof of the pudding is in the eating.”


CONTINUING REFORMS NECESSARY


The list of measures proposed by Fricke could be supplemented and deepened with the following points:


• Structural reforms in the banking system like stronger separation of the risks of investment banking from those of the commercial banking system. The latter fulfils the above-mentioned essential functions in the economy and therefore should also enjoy a privileged position.


• Stopping the OTC-trade especially susceptible to manipulation (trade of securities and financial instruments outside the regulated exchanges) particularly for currencies, interests, food, energy and raw materials…


• A comprehensive political-economic answer to the crisis is still needed. The excesses of the financial system are only a part of the crisis. An extensive answer will question the distribution of incomes and assets, the necessary balance of the interest groups and suggest a new sustainable prosperity model.