By Michael Hoexter, Ph.D.
The Anti-Keynes Revolt
Against the Keynesian consensus of the WWII era and afterwards, there remained marginalized economic schools that held to ideal notions about markets and remained convinced that a reliance on government was tantamount to a “Road to Serfdom” and ultimately led to Communism. The core of the neoliberal campaign, gathered around the Mt. Pelerin Society founded by economist/social philosopher Friedrich von Hayek, denied that government management of capitalism’s excesses was needed and that the price system and the market were pure, self-regulating entities which bring maximum prosperity and liberate the individual.
While sometimes apologists for Hayek point out that he wrote in some passages of his work that he supported social welfare provisions (and was not averse to receiving support from the state himself), his teachings have led almost all Hayekians to oppose or work to undermine these provisions. The neoliberal movement in essence doubled down on laissez-faire capitalism and expressed pride in its disregard for criticisms by the Left and the labor movement, which in the post-WWII era inspired a number of Communist-led revolutions and coups d’etat. The ideal of capitalism was embraced and doubts about capitalism were dismissed as the emissions of morally corrupt or wrongheaded socialist or communist cadres, slothful workers or the undeserving poor.
The “Austrian” kernel of neoliberalism which influenced the trajectory of the more centrist neoclassical economic synthesis in the 1970’s and after, is the mirror image of the Communism to which it attributed most human evils. Economics and political discourse was polarized between those who attributed all fallibility and human frailty to capitalism and markets, i.e. communists and other anti-capitalists, and those who attributed all fallibility and human frailty to government, the rising new neoliberal Right. In the eyes of neoliberal activist economists, government was treated as the primary cause of all economic and social ills. The welfare state, part of the Keynesian solution to the ills and instabilities of capitalism was rejected as a blockage of the fundamental goods that capitalism could deliver or an entering wedge for communism. The supposedly pure market in the minds of neoliberals could not stand the effects of interaction with government, which would, they thought, inevitably corrupt individual people’s incentives to work and save. It is now a well trodden path in the discourse spawned by neoliberalism that government bureaucrats are stylized as either incompetent or incipient tyrants, miniature Stalins in the making.
Hayek, the founder of neoliberalism, created a little-referenced but telling social-philosophical system which crystallized the polarities of the worldview of the neoliberal Right using jargon derived from the Greek. Hayek marveled at the liberating power of markets which he called self-organizing systems, echoing the work of the Belgian physical chemist Prigogine. Hayek named the self-organizing market dynamic “catallaxy”. The principle behind markets was “cosmos” or natural “spontaneous” evolutionary order. In contrast to “cosmos” was “taxis”, or designed, planned order that very often originating in the state. Hayek decried the “rationalism” of the Enlightenment-influenced state. He then divided law into “nomos” which he called “the law of liberty” and “thesis” “the law of legislation”. Hayek thus codified the politicized reading of Smith favored by the Right into a self-referential system of his own making: markets are “good” and the state is “bad”. Hayek’s writings are interesting for a number of reasons but one of their primary attractions is as a case study in self-delusion, the psychological phenomenon of “splitting”, and social scientific and philosophical propaganda.
To be fair to Hayek and capitalism, during the time that Soviet and Maoist Communism were still economic and political forces, a simplistic cartoon of capitalism’s ills was also readily at hand via Soviet propaganda and the propaganda of Communist Parties still under its influence in which capitalists were stylized as exclusively sinful, greedy creatures, all of whose gains were ill-gotten, essentially stolen from the working class. In the polarization of the political conflicts of the 20th Century, Marx’s occasional appreciation for capitalism’s dynamism and productivity was no longer to be found. The New Left that arose in the 1960’s independently of Soviet and Maoist influence, sometimes adopted anti-capitalist views that were often not much more sophisticated than those of Communist propagandists, only later to revise them with more nuanced views of various Left philosophers in the Western Marxist tradition and via the work of the then obscure Antonio Gramsci. The latter group was for the most part confined to academia and had little political impact after the 1960’s and 70’s. Some New Leftists and the cultural rebels from the 1960’s, as they aged, flipped over to the views of the neoliberal New Right, agitating against the Left with the passion of the converted.
Neoliberals had their first opportunity to try out a program of replacing state institutions with market mechanisms in Chile in the early 1970’s when a coup was engineered with CIA funding to overthrow the Allende regime in Chile. The military dictatorship of Augusto Pinochet, supported by market-obsessed Chicago School economists like Milton Friedman, attempted to fully de-nationalize Chilean industries and to suppress the strong Chilean working class movement by violence. The architects of Pinochet’s economic policy claim that all successes that the Chilean economy has achieved since 1973 are due to these reforms while other economists dispute that they were at all successful from a purely economic standpoint. Another view of Chile’s economic success points to persistent trade surpluses due to the value of exports from the still state-owned copper monopoly.
The influential political leaders, Ronald Reagan and Margaret Thatcher, who won two watershed elections in 1979-1980, began to institutionalize neoliberalism as the preferred paradigm of political elites in the West. Even before the Reagan/Thatcher era, ending the stagflation of the 1970’s, which the existing interpretations of Keynesianism did not seem to be able to address, became the primary goal of macroeconomic policy, pushing down full employment as a goal. While it is disputed whether the high interest rates of the early 1980’s were the ultimate cause of the end of the 1970’s inflation (there is some debate whether lower oil prices did the trick), the inflicting of pain upon ordinary people was considered to have succeeded as economic policy with the reduction in the rate of inflation. Neoliberalism became synonymous with policies that “disciplined” the less fortunate, including the present-day mania for fiscal austerity. Equally important, following the “Austrian” cult of the entrepreneur, business interests and the wealthy were lavished with tax cuts on assets and various capital controls and bank regulations were dismantled as poor economic policy.
The fall of Soviet Communism and the market reform in China led in the early 1990’s to the formation for the time being of a largely capitalist and politically unipolar world, the end of the Cold War. The neoliberal consensus grew politically stronger, seeing in these events a reinforcement of its own probity and the correctness of a policy of maximal deregulation, maximal use of market mechanisms, and privatization of assets. Communism, it was thought, was vanquished by markets or at least political leaders who pledged loyalty and total belief in markets as a panacea. Parties of the nominal Left that had at first resisted the neoliberal push, started to adopt neoliberal ideas, racing to marginalize the role of government in the economy and attempting to maximize the role of markets or private sector entities in most areas of life. Bill Clinton and Tony Blair mixed neoliberal economic policies with social policies associated with the Left, creating both a neoliberalism of the Left to contend with the already established neoliberalism of the Right. An intensified push to excise government from consideration as a positive force in the economy continued in policy circles and in academia, with the formulation of such ideas as the “Efficient Markets Hypothesis” and “Rational Expectations”. In the emerging neoliberal/neoclassical consensus, autonomous markets and autonomous market actors seemingly had no need for government’s supportive, regulatory or leadership role.
The political and academic victory of neoliberalism is a tribute to a number of things but can in certain respects be viewed as the triumph of a fanatical political-economic sect over a disorganized “climate of opinion” (i.e. Keynesianism) that never ultimately transformed the fundamental categories of economic thought. The work of Keynes remains invaluable but also is not a complete basis for an economic philosophy that replaces neoclassical economics. Furthermore those working in the tradition of Keynes continue to contribute valuable analyses and insights.
Progress in Economics
Despite the market triumphalism of neoliberalism and neoclassical economics, there has remained a stream identified most often as Post-Keynesian, that continues to develop Keynes’s views and saw the stabilizing role of government as relevant even during the finance-led economic booms of the 1980’s, 90’s and 2000’s. The most famous post-Keynesian, Hyman Minsky, developed a view that stability in the finance sector in capitalism itself became destabilizing, requiring the periodic intervention of government to dampen the effects of boom and bust cycles and the occasional Great Depression, led by mania-like boom for financial assets like stocks and real estate. Overall the tendency toward disequilibrium in capitalism meant that some other institution was required, most likely government, to stabilize the economy. Another post-Keynesian, Wynne Godley, developed a consistent model of flows between the three great sectors of the economy, the private sector, the public sector and the “rest of the world”. Godley’s accounting method shows the unique role of government in a broader view of the economy, not centered solely on markets involving businesses and households.
Inspired by Minsky, Modern Money Theory (MMT), one current within Post-Keynesianism, has gone into the most detail in describing the role of government in the economy. MMT focuses on the monetary operations of governments and how those operations work to supply currency and liquidity to the economy, as well as the role of government spending in the economy itself. MMT inherits from the work of Abba Lerner a view of government spending as a critical component in the economy rather than an “add-on” in times of crisis. MMT sees the government’s control of its currency, in an era of floating, non-convertible currencies, as a critically important component in insuring economic stability and in the ability of governments to target full employment for their citizens. MMT makes a critical distinction between governments that are currency issuers and those, like the Eurozone countries or regional and state governments that are currency users, not currency issuers. Currency users cannot control the currency they use, narrowing the “fiscal space” they have to maneuver.
While Post-Keynesianism and MMT are an important area within economics, the content of this manifesto should be of interest to all economists, social scientists and the general public who are concerned about the future. The principles below suggest the value of the work of Post-Keynesians and MMT theorists but should be supported by all of those who see the limitations of neoliberalism and its market fundamentalist beliefs.