On Growth and Effective Demand: Neoliberalism is causing this latest crisis

The Daily Kos


First Published By NY Expat Brit on THU SEP 22, 2011 AT 04:53 PM PDT

If you have been watching the economic news in the past few days you have probably seen that the International Monetary Fund (IMF) and World Bank have been saying that we are moving towards another crisis (http://www.guardian.co.uk/…).

However, they are placing the cause of the crisis as initiating in the financial sector and that is how it is being reported by most of the news (e.g.http://www.guardian.co.uk/…http://www.bbc.co.uk/…).

Instead, I would argue that the policies advocated by the IMF and the World Bank are responsible for the coming economic crisis and that its foundations will be in the real economy concomitant with a financial component.

That is why stupid comments along the lines of David Cameron that additional austerity measures to get public debt and deficits under control to ensure economic growth are so insidious and misguided (http://www.guardian.co.uk/…); the policies suggested by Cameron, et al actually are growth reducing rather than growth enhancing.

Increased VAT (commensurate with rising inflation reducing real wages), rising unemployment due to the attack on the public sector, and wage freezes and attacks on state pensions for public sector workers (leading to decreases in their money wages or take home pay) decrease economic growth due to falling demand for goods and services.

Moreover, those that are being forced to pay for the stabilisations of the banks and financial sector following the 2008 crash are not those responsible for the crisis; rather they are the victims of the crisis and hence are those least able to cope with further attacks on their incomes. 

Let’s put aside the question of fairness (as that is really irrelevant in an economic system based upon wealth and income inequality), the reality of the situation is that they are destroying the possibility of economic recovery due to the impoverishment of the majority of the population whose effective demand is needed for economic growth as well as for the system to function coherently.

In effect, the chickens are coming home to roost as the potential for economic growth is being undercut due to the neoliberal economic ideology justifying the destruction of incomes of the majority in the advanced capitalist world.

The 2008 crisis and its impact on the current situation:

The 2008 economic crisis was essentially based in the financial sector which then clearly spread to the real economy.

This crisis was fundamentally caused by neoliberal economic policies calling for deregulation of the financial and banking sector, dangerous and unregulated speculation on financial markets and the creation of effective demand through credit provision (extension of credit at very expensive terms for the working and middle class) rather than through fiscal policy.

The lack of sustainability of this type of artificial effective demand creation is what led to the sub-prime crisis as well as the indebtedness of both banks and individuals which has then also led to decreased effective demand.

Perceived decreases in sustained expected demand is what is behind the private sector’s unwillingness to further invest, increase employment and output and hence create further economic growth.

To prevent the globalised capitalist economy from collapsing, bank and financial sector losses were covered by governments either in the form of nationalisations or provisions of capital and liquidity to these banks.

Additional economic measures to keep international trade moving and to slightly maintain effective demand due to rising unemployment and loss of income were introduced in the form of minimal fiscal stimulus packages.

The obvious impact of government bail-outs of banks and financial sector losses and the minimal fiscal stimuli were rising public debt and deficits in the advanced capitalist world.

This has led to the “crisis” that we are seeing in the EU (especially in the eurozone) and in the US. Essentially, there is no problem with running high deficits in a period of economic crisis; in fact, that is how a recovery is enabled through stimulation of effective demand by increasing incomes of the majority of the population in the hopes of ensuring investment, increased employment and economic growth.

Moreover, if we consider that growth in capitalism is demand dependent not only in the short-run, but structurally, then the destruction of the social welfare state and the state/public sector will undermine profitability in a system dependent upon constant growth in the rate and mass of profits.

The madness of neoliberalism and the crisis in the Eurozone:

The public debt and deficit “problem” is being used to consolidate a long-term attack on the standards of living of the majority in the advanced capitalist world.

In fact, as part of a long-term union busting agenda, the attack has moved to the last bastion of organised labour, the state (or public) sector.

The question of public debt and deficits and their extent has become increasingly relevant due to Hayekian economic theory utilised by the economists and policy makers to justify this attack.

The structure of trade and economic policies in the EU (German export-led growth is based upon low wages and pensions in Germany; goods are sold in the European periphery whose economies are sustained by large welfare states and hence require public deficits and debt) has contributed to the crisis.

In the eurozone, part of the problem that we are seeing derives from the monetarist foundations of the euro which limits the amount of government deficits as a prerequisite for membership.

The situation in Greece is beyond recovery; there is no question that Greece will need to default as they cannot repay their public debt.

While abrogation of the debt (at least the foreign portion) would be a more sensible policy and leaving the eurozone would enable greater potential for economic growth, instead the IMF, European Central Bank (ECB) and EU are insisting on the introduction of austerity measures.

In fact, Greece has been told today that they will not be able to leave the eurozone or abrogate their debt (http://www.bbc.co.uk/…).

Essentially, the austerity measures are being used to impoverish the poor, working and middle classes to make them pay for the banking crisis.

It is not about saving the Greek economy, in fact, these measures will make economic recovery more precarious if not impossible.

The austerity measures that are being demanded by the IMF, ECB and EU for Greece include privatisation of national industries and services (http://www.bbc.co.uk/…).

This will lead to increased unemployment and decreased wages for those that are actually rehired (as they are no longer part of the unionised public sector).

Attacks on the pension schemes will impoverish retirees.

Cutbacks in the social welfare state and state sector have a twofold effect:

1)    Domestically: it is a direct attack on state sector unionised labour and will lead to decreased incomes and rising unemployment which will not be replaced by private sector investment due to declining effective demand.

Decreased pensions will impoverish the elderly dependent upon state pensions. Private sector investment and growth depends on perceived increased expected demand and that is implausible in the context of shrinking incomes for the majority.

Moreover, privatisations will not garnish sufficient revenue upon sale to eliminate public sector debt and deficits; additionally whatever revenues the public sector provides will now be in the hands of the private sector.

So, essentially, the Greeks are being forced to increase unemployment and lower incomes to meet the demands of international capitalism (http://www.bbc.co.uk/…);

2)    International and Regional: in the context of the role of the peripheral economies in the eurozone, German dependence upon the effective demand of those living in Greece, Spain, Italy, etc for their products means that this will also undercut German economic growth.

As such, we are literally seeing a cutting your nose to spite your face situation on the part of the Germans, IMF, and ECB that are trapped in the neoliberal and capitalist ideology of competitiveness, efficiency and free-markets.

As of yet, Chinese effective demand is insufficient to replace that of the poor, working and middle classes of the advanced capitalist world. The fact that German exports are also purchased in the US and other countries that are introducing austerity measures will certainly affect the German economy.

Problems have arisen in Italy as it has become apparent that they will not be able to pay their public debt. Part of the history behind the initial creation of public debt derived (http://en.wikipedia.org/…http://www.nationsencyclopedia.com/…) due to the manner in which they responded to the crisis of the late 1970s-early 80s.

Instead of moving towards elimination of the manufacturing sector, privatisation of nationalised industries and free markets which were the choice of the US and UK, they deliberately sustained industries and manufactures that were uncompetitive in the context of a capitalist economic system.

This led to the initial creation of public debt as failing industries were actually nationalised.

Economic growth in Italy was enabled in a different manner than in the US and UK and that was not a problem until revenues started to collapse meaning debt could no longer be paid.

Additional recent problems and the introduction of first the requirements of the eurozone and then neoliberal economic policy have made the public debt beyond payment.

This was compounded by insufficient public and private sector investment, corruption, tax avoidance and evasion, privatisation of these industries under Berlusconi.

The “AlItalia” attempted privatisation was scandalous and indicative of the level of corruption that has become the norm in Berlusconi’s Italy (http://en.wikipedia.org/…http://www.telegraph.co.uk/…,http://www.time.com/…) it was literally sold first cheaply to his cronies and then sold to Air France under the line that a nationalised industry could not be sold overseas directly.

This combined with tax cuts in a country where tax avoidance is common and increasing attack on the public sector (whose workers actually are the few that regularly pay taxes) has meant insufficient government revenue to continue payment on debt.

The introduction of austerity measures in Italy (in a country where there is already an insufficient social welfare state and a labour market that is both underdeveloped as well as based upon labour-subcontracting) will not solve the problems in Italy’s economy, but instead will create further problems; increasing revenue rather than austerity measures would be a more coherent economic policy, but that is not in the interest of Italy’s upper classes to close tax loopholes and deal with tax evasion (http://www.guardian.co.uk/…).

Economic Crises

What we need to understand is that economic crises are part and parcel of the functioning of the capitalist economic system.

While they can be mitigated due to the introduction of regulation of the financial and banking sector and the creation of the social welfare state and public sector, they are not capable of being eliminated.

The hubris of Gordon Brown and Co. in thinking that they had beaten boom and bust has been clearly demonstrated.

In fact, economic crises serve an important role for the system as they wipe out redundant capital that is causing lowering rates of profit; the centralisation of capital that arises from these crises (and which we saw following the 2008 crisis where the remaining banking and financial institutions those that went under) is normal in this situation.

Crises take different forms dependent upon their cause; but essentially the causes are as interrelated as the various sectors and classes in the world economy.

Whether these crises are cyclical or structural becomes relevant as the manner in which the response to the crisis differs.

Structural crises require more than simple fiscal stimulation or short-term measures to deal with the problem. They require a restructuring of the system away from the needs of the system towards fulfilling the needs of the majority of the population.

As such, abandoning the rubric of competitiveness and efficiency is what is needed to address the problem and that is running contrary to the way in which the economists and politicians running the system understand the economic system itself.  

Moreover, we need to understand that capitalism is a world economic system.

In this system, different regions serve different roles to keep the system going. That is why the problems in the system cannot be addressed solely on a national level; it is an international crisis and hence must be addressed internationally.

However, the ideology under which the World Bank, IMF, ECB have addressed the problems in the system, which I would argue are structural, has not enabled a full recovery (which would be jobless given the way the world economy is structured and current economic ideology).

Rather, it is now leading to another economic crisis which will be caused by rising income and wealth inequality (a direct product of neoliberal austerity measures), rising unemployment and wage reduction (both absolute and relative) in the advanced capitalist world.

Moreover, I would argue that the manner in which the crisis is being addressed is part of a world-wide attack on the working class and that economic ideology is being used to justify and consolidate this attack.

The loss of effective demand in the advanced capitalist world caused by these policies has hindered the world economic recovery and is also creating a break-down in terms of how the system has been functioning.

Essentially both on a global level and within regional levels, the advanced capitalist world has provided the effective demand which enables the capitalist economic system to function and to grow.

The attack on incomes of the poor, working and middle classes since the 1980s through the deliberate destruction of the industrial and manufacturing sectors (and their shift to peripheral capitalist economies where wages are deliberately kept low to ensure high profits upon sale in the advanced capitalist world) which led to relative loss of income as the more well-off sectors of the working class were undermined in the attempt to crush the union movements.

This then spread to the rest of working and middle class incomes first due to wage stagnation and now due to deliberate attempts to lower both real and money wages in the advanced capitalist world.  

This is all derived from a fallacious understanding of how the capitalist system actually functions and the interrelationships between various classes that sustain the system.

A different approach

The problems that we are seeing are caused by the structural imbalances of the capitalist economic system.  

The needs of the system for constant economic growth to ensure continuing profitability have not only skewed the nature of production to suit these needs; but they have also maintained income and wealth inequality upon which the system is based.

High productivity in industry and manufactures means that relatively and absolutely less labour is needed to produce both intermediate and final goods.

In a system where the means of production and distribution are not privately controlled, that would be less of a problem; working hours could be reduced and incomes maintained.

However, in the context of a capitalist economic system centred upon profitability and where employment and incomes are determined by the needs of the system that means the creation of persistent unemployment and the ability to manipulate wages playing workers off against each other both in a domestic and international context (if the organs of the working class are weakened).

The link between wages and productivity in the post-war period deriving from strong unionisation and a strong and vital left-wing opposition (both parliamentary and extra-parliamentary) enabled the rise in incomes and the creation of a larger middle class in the advanced capitalist.

This was used to sustain economic growth in the post-war period up until the 1970s when stagflation crept into the system.

The elimination of this link stemming from neoliberal arguments of competitiveness and efficiency was the first step in the destruction of the industrial and manufacturing sectors in the advanced capitalist world. This led first to relative decreases in income and now absolute attacks on social subsistence levels of income.

This is justified by economists and politicians whose motives and class bias are to say the least rather dubious: either they are oblivious to how the system works or are too simply blinded by the ideology that it is the upper classes that make this system work (of course, since they are from the upper classes that rather suits their own personal interests).

This attack on incomes is reducing effective demand for the goods and services (produced internationally in the system), and is also contributing to increased possibility of realisation crises (realisation crises refer to the sale of goods at a price sufficient to ensure the realisation of the surplus product, that is , profits; if goods cannot be sold at these prices, profits fall … this is a question of underconsumption).

The additional problems added by lack of regulation of the banking and financial sectors (which must be addressed on an international level due to the globalised nature of the system) add to further instabilities in the system.

Rather than address the needs and wants of the majority in the world, the system’s needs predominate all political and economic policy decisions.

Extra-governmental agencies like the World Bank and IMF serve the needs of the system from the most reactionary of economic perspectives where the needs of the majority are subsumed to the needs of the wealthy and MNCs.

Control over economic decisions and the independence of the state from the needs of the system is less likely as mainstream political parties see their role as being the arms of the system rather than the representatives of their citizenry; at this point, the vast majority of mainstream political parties have adopted a neoliberal economic perspective.

We need to shift both the political and economic decision-making process.

In the absence of a strong international left-wing movement and strong unionisation (if these existed they would not be able to further consolidate this attack), further economic crises only will be used to further enrich the minority and impoverish the majority.

To add insult to injury, they will also tell us that they are saving us.

The Daily Kos

  • jeffery davies October 9, 2012 at 5:15 pm

    why aint the bankers in jail and the banks go bust wont make any difference to those in the street and why are we allowing those who abuse us in power its about their direct that its got to this the rich pay themselves outside the country thus they donot pay tax not likr us who pay dearly for them ops jeff3

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