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Neoliberal Crisis Policy has Failed

by Sonja Forcher Thursday, Sep. 29, 2016 at 11:24 AM

The term "invisible hand of the market" goes back to Adam Smith. This assumes all economic activity promotes the common good. Neoliberalism's survival is surprising because its theoretical assumptions are dubious. People cling to neoliberal prescriptions against reality.



By Sonja Forcher

[This article published in the August 2016 edition of the Austrian Arbeit & Wirtschaft is translated from the German on the Internet. Sonja Forcher is the editor of this journal.]

The market is superior to the state. The state only has the task of removing all restrictions to access to the market and protecting economic freedoms and private property. In (neo-) liberal theory, an invisible hand and self-healing powers make the market a kind of miracle machine (Wunderwuzzi). But we don't get far with all these sublime ideas when we glance at the reality of neoliberal policy. Nevertheless, faith in the market's wisdom is still held today. That explains why the European policy of defeating crises relies on neoliberal prescriptions.


Another phenomenon must be considered. Because the state was mistrusted, many neoliberal theoreticians wanted to put chains on it. The German political scientist Thomas Biebricher compares this with the myth of Odysseus who was moored to the mast to not succumb to the song of the sirens.

The comparison to debt brakes and all kinds of other political-economic resolutions on the European plane is remarkable. Neoliberals regard all mistakes of the state as further evidence the state should unconditionally take its finger away from the economy. On the other hand, they find many excuses for market failure while their faith in the supposed wisdom of the market continues unbroken.

The financial markets provoked the crisis, not the state. These markets went completely off course after they were liberalized by neoliberals. The state fulfilled a function of cushioning the losses of unbridled private parties. In truth, the reality is even more insidious. After private pensions were promoted, simple employees worried about their lives in old age. Speculators were not the only ones threatened by the crisis.

Deregulation, flexibilization, privatization, and further strengthening of capital by cutting back worker rights occur. In the summer of 2015, we wrote in detail about negative consequences of these measures in European crisis countries. In Europe, there are timid efforts in other directions. But the urgently necessary change of course is still in the future. Instead, all kinds of neoliberal myths are experiencing a boom season. The reality is the neoliberal crisis policy has failed. The Austrian economic location and social state were well designed. Measures in the interests of employees like minimum wages have positive effects. In this volume, we set facts against the myths.

Today the IMF puts in question the mantra that neoliberal reforms bring more growth. Instead, the neoliberal reforms brought massive inequalities that curb growth. These reforms are bad for people and for society as a whole, as the recent upswing of rightwing populism demonstrates.


The German weekly "Die Zeit" briefly referred to the G20 declaration that the advantages of economic growth must be "distributed more broadly." The German weekly referred this change of course back to fear of strengthened rightwing populists. Hopefully, we will concentrate more intensively on these discoveries. Deeds must finally follow words.


Neoliberalism decays to a contested term

By Sonja Forcher

[This cover story in the August 2016 edition of the Austrian Arbeit & Wirtschaft is translated abridged from the German on the Internet,]

Greedy and ruthless speculators lead frivolous lives while other people lose their jobs and their life foundation. Some theoreticians desire an economy that leads to such excesses. Neoliberals take a defensive attitude when their economy is said to lead to excess. Neoliberalism is a contested term that nowadays describes everything going wrong.


In fact, neoliberal ideas are increasingly put in question. Even the IMF admitted neoliberalism leads to more inequality, not more growth. The demand for privatizations and dethronement of the state is not connected with a completely free economy. Rather the IMF is for a strong state.

What is neoliberal in Agenda Austria?... So-called law-and-order neoliberals had faith in a strong state. Appeals to the variety of neoliberal thinkers relativize the negative consequences of neoliberal policy as excesses.

Some question whether neoliberalism exists in practice. The German political scientist Thomas Biebricher quotes the gangster Keyser from the film "The usual Suspects." Keyser says modifying a Baudelaire quotation: "The devil's greatest trick is to get the world to believe it doesn't exist at all."

What does that have to do with this neoliberalism that is almost treated like a hot potato? A glance at history is rewarding. Neoliberals arose in demarcation to liberals. Liberals played an important role in pushing back the monarchy. Tariffs and guilds restrict the economic activity of the bourgeoisie. State intervention in the economy was a thorn in their eye. Liberals moved the market into the center. Adam Smith was one of the most important liberal thinkers. The term "invisible hand of the market" goes back to him. This assumes that all economic activity promotes the common good.

The state was charged with only providing the best framing conditions for economic activity. Foreign trade is another important element for liberals. In the sense of an international division of labor, countries should concentrate on those products they can produce more inexpensively than others.

So much for the forerunners. The worldwide economic crisis at the beginning of the 20th century was an important trigger for the genesis of neoliberalism. Neoliberals saw the cause for the worldwide economic crisis in the excesses of liberalism. Their goal was to revitalize liberalism.

Freiburg law and order liberals were the first neoliberal school. They were convinced the economy needs a certain regulation to reach the freest possible competitive conditions. A strong state does not need to be unconditionally massive. Law and order liberals were not negative toward social and political activities. The state could provide a basic social security and equal access to education or raise taxes to make possible equal starting conditions.

The idea of the market as a spontaneous order goes back to the Austrian economist Friedrich August Hayek. "With this basic idea of the market as a spontaneous order, knowledge is generated and actions coordinated so goods and services are produced for which a demand exists in the most efficient way. Much is implied here: an all-knowing market and invisible little hands.


For the US economist Milton Friedman, the misguided monetary policy of the US Federal Reserve was responsible for the 1929 world economic crisis. Friedman urged coupling the money supply to the expected economic growth and constantly evaluating it. He supported an expansion of market mechanisms to other areas.

So much for theory. While neoliberal theories may be diverse, many of their basic ideas resemble each other. A glance at these countries where neoliberal reforms were carried out shows how great are the overlappings.

Chile was regarded as a "cradle of neoliberalism as a real political project. Milton Friedman even acted as an advisor to Augusto Pinochet. Hayek also supported this dictator with dubious arguments.

The Chilean shock therapy included:

* opening the market for foreign investments

* lower state spending

* deregulation

* privatization of social programs and public property.

Reforms were carried out according to a similar model in Brazil, Uruguay, and Argentina – by military juntas as in Chile. Countries like Mexico, Argentina, and Bolivia sought bailout packages from the IMF and the World Bank after the monetary and state debt crises. These packages were tied to conditions, so-called structural adjustment programs. The so-called Washington Consensus served as the basis of the program. This catalog of measures – from savings, liberalization of the financial markets and foreign trade and deregulation of the economy to privatization of state property – includes many prescriptions supported up to today.

Low-income persons were losers of neoliberal prescriptions. High-income persons and businesses were the winners. Thomas Biebrichter's summary of the consequences of neoliberal policy in the US, Great Britain, and Germany is sobering: "The overall result is an explosion of inequality unparalleled since the Second World War that neutralized the long-term egalitarian trend characterizing all three countries from 1945 to the early 1970s."

The deregulation of the financial markets first ensured a boom. However, the great crash followed the bursting of the bubble in the form of the 2008 world economic crisis. People continue relying on neoliberal prescriptions although they largely agreed after the crisis that neoliberal policy led to the crisis.

36 African countries received financial aid from the IMF since the 1980s at the price of neoliberal reforms. Something similar occurred in many Asian countries after the Asian crisis in 1997. There can be no talk of a success of neoliberal prescriptions in all these countries. Most of the African countries that carried out corresponding reforms are among the poorest countries of the world. In Asia, the economy collapsed and poverty and unemployment rose enormously. Biebricher points to certain improvements like higher economic growth and greater prosperity. But one thing is the same in all the countries: "Social inequality has dramatically increased."

In Great Britain and the US, the neoliberal agenda is closely connected with two persons: Margaret Thatcher and Ronald Reagan. Thatcher's prescription contained a rigid money supply policy and turning away from fighting unemployment as a state task although this policy resulted in a severe recession and the loss of countless jobs. Thatcher was reelected – because of the Falkland war. In her second term in office, she applied a supply-oriented economic policy:

* tax cuts for high incomes

* a rigid budget: cuts in state spending and as a countermove raising regressive taxes, burdening low-income households more than high-income households

* privatizations

* limiting the right to strike

* public regulation of private monopolies instead of competitive policy against monopolies

* deregulation of financial- and stock exchange businesses (Thatcher strengthened London as the city of finance)

* think tanks as megaphones for spreading their own ideas.

Parallels to this policy occurred in Ronald Reagan's policy:

* considerable savings in the social area

* tax cuts in favor of the top income sectors. In one point, Reaganomics made a generous exception from its rigid austerity course. The military budget was massively expanded in warfare Keynesianism.

* deregulation in the world of finance made possible mergers of banks. The investment activity of savings- and mortgage banks was encouraged. At the same time, the regulatory authorities were weakened.

* measures against unions and restrictions of rights of employees

* think tanks.

Alongside a tremendous budget deficit, Reaganomics left an explosion of the poverty rate as a legacy. "The number of the poor grew more than six million between 1979 and 1987," as Biebricher described the most dramatic result.


Ascribing neoliberalism only to conservative or liberal parties would be too simplistic. The US – Great Britain tandem carried out the neoliberal reforms. This time, they were leftist politicians, Bill Clinton and Tony Blair, who were responsible for these reforms. Their social-political measures should not be ignored:

* austerity course

* deregulation in the energy, telecommunications and financial branches. In 1999, a momentous law was passed in the US that annulled the separation between commercial and investment banks (initiated in 1933)

* massive privatizations

* workfare/ welfare to work: According to this concept, public transfer payments had to be earned. The results were enlargement of the low-wage sector and atypical work.


At least for employees, the liberalization of the labor market led to an enlargement of the low-wage sector and to atypical working conditions. Unskilled women and minorities were particularly affected. Wages and incomes in the middle sector stagnated. On the other hand, the incomes of the top income groups soared massively. The overall outcome is skyrocketing inequality unparalleled since the Second World War that neutralized the long-term egalitarian trend that characterized all three countries from 1945 to the early 1970s," Biebricher concluded soberly.

To speak with Colin Couch, neoliberalism's survival up to now is really surprising because its theoretical assumptions are dubious. People cling to neoliberal prescriptions against all empirical reality. These prescriptions may not be the work of the devil but they are always harmful.

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