A 67-page Dismantling of the Economics of the Centre and Right, and Libertarianism

Why Neoclassical economics is totally bunk and Neoliberalism/Libertarianism/Free-market capitalism/Laissez faire capitalism/Anarcho-capitalism are absurd religions whose tenets are entirely wrong, and also toxic

Our world is dominated by irrationality and stupidity. The one thing that really makes my stomach churn these days is when I think of all the irrationality and stupidity in the world, or encounter it directly. There are so few rational people on this tiny little blue planet of ours. It really does make me sick, particularly when I see it en masse in some thread or forum on the internet. I seriously worry for this species. Worst of all, this irrationality and stupidity is so often spectacularly dangerous. Toxic ideas spread like wildfire. Most people are constitutionally incapable of thinking for themselves, or doing anything other than picking a side and defending it fanatically against all attacks. They form these ridiculous opinions about people they’ve never met and evaluate arguments they’ve never read. Sceptics like David Hume must be one-in-a-million, or maybe rarer than that.[1] And even if they do come about, great minds are never understood by the mortals beneath them. Idiots fundamentally only understand demagogues and zealots. The intellectuals who become popular tend to be people like Sam Harris, who portray themselves as founts of rationality and wisdom as they flout every principle of logic in the book.[2] Even Sam Harris’ big antagonist is a kind of zealot: Sam Harris’ disciples are right to point out that Reza Aslan misrepresents the truth. In fact, the debate between those two is almost entirely empty: I can’t think of any good points they’ve made.

Incidentally, while I’m on the subject of “New Atheists”, I would like to express a desire: I wish that, just once, Richard Dawkins and his merry men would broaden their attack on superstition and irrationality. I know that they never will, since they have a very distorted perspective of the major problems our world faces, but it really would be nice. One of the best targets would be a multi-denominational religion that is far more pernicious for the world we live in than Christianity or even Islam: neoliberalism. The scariest thing about neoliberalism is that it is actually undergirded by the academy. In fact, neoliberalism is essentially the manifestation of the mainstream neoclassical theory of economics. Another scary thing about neoliberalism is that, if Dawkins et al did start criticising it – along with the economic theory on which it is based – then they would very likely lose their platform, haemorrhage fans and be denied any mainstream media coverage. This would, of course, be another reason not to talk about it, even if they did feel any inclination to. The reason this would be so is that a large component of what I have called 'neoliberalism' is an ideology of corporate socialism (the corrupt, undemocratic indulgence of corporate rent-seeking). Large corporations and conglomerates own our mainstream media and inevitably have an effect on the range of views typically expressed in newspapers, on TV or on major websites. As Edward Herman and Noam Chomsky’s famous book Manufacturing Consent documents, with its rigorous empirical analysis, the tendrils of influence that ownership grants major corporations can be traced through a series of “filters”, the effective operation of which is demonstrated by the actual evidence of reporting. I don’t really think this grip that big corporations have on our world really explains the quantity of irrationality and stupidity in it, although I would posit that it has played at least some role in making right-wing libertarianism such a popular ideology, and that it has played a significant role in making working-class people turn against their own interests and towards neoliberalism, jingoism, tribalism and Islamophobia[3].

Of course, I think one of the reasons some people who fancy themselves as quite smart are “libertarians” and support neoliberal policy (which more or less conforms to weak-libertarian theory of the Friedman type (as opposed to Rothbardian anarcho-capitalism)) is because they genuinely think it has the theoretical, mathematical and empirical support. They also seem to agree with it philosophically, believing that “libertarianism” as they conceive of it (the same word does also have a left-wing meaning) is the best system for maximising individual liberty and justice, not just the best system for maximising profit. In this, they basically agree with mainstream academic economists, whose neoclassical theory does indeed lend credence to these ideologies. Neoclassical economists naturally claim that they are not themselves ideological and that their view of the economy is fully scientific and objectively based. In fact, this is not so. Neoclassical economics is entirely unscientific, unempirical, irrational, simplistic and generally inadequate. Steve Keen, the brilliant Australian economist and one true heir to John Maynard Keynes, writes in chapter 8 of his magnum opus Debunking Economics[4] that “economics is a pre-science, rather like astronomy before Copernicus, Brahe and Galileo”. Keen’s own analysis does more than enough to convince the reader of the truth of this proposition. Indeed, let us now extract the main arguments from Debunking Economics, so we can see exactly how unscientific mainstream economics really is.

The Neo-classical Picture of Demand (from chapter 3 of the book, “The Calculus of Hedonism”):

Jeremy Bentham is the main philosophical influence on the economic vision of human behaviour. His philosophy of utilitarianism explained human behaviour as the product of innate drives to seek pleasure and pain. Bentham saw the pursuit of pleasure and the avoidance of pain as the underlying motivations for all human action, including moral action. Importantly, Bentham also thought that the interests of the community could easily be aggregated from this understanding of the interests of the individual. As Keen notes, “Like his Tory disciple Maggie Thatcher some two centuries later, Bentham reduced society to a sum of individuals”. Keen then quotes Bentham: “The community is a fictitious body, composed of the individual persons who are considered as constituting as it were its members. The interests of the community then is, what? – the sum of the interests of the several members who compose it. It is in vain to talk of the interest of the community, without understanding what is in the interest of the individual.” Early economists first tried to apply Bentham’s ideas about psychology to economic theory by inventing a measure of utility, called a “util”, which was meant to show the precise amount of pleasure consumers got out of commodities. A key concept was developed from this innovation: “that a consumer always derives positive utility from consuming something, but that the rate of increase in utility drops as more units of the commodity are consumed”. This then became known as the “law of diminishing marginal utility”.[5] Eventually, economists recognised that “utils” were silly and abandoned the ambition of precisely measuring utility. In the place of numerical measurement of utility came “indifference curves”, which were lines shaped like slippery dips (reflecting the fact that utility starts very high then rapidly drops then basically plateaus). It was thought that a whole lot of such curves stacked on top of each other, combined with a consumer’s income and commodity prices, could be used to derive the consumer’s “demand curve”. This would hopefully show – as Keen puts it – “how demand for a commodity changes as its price changes, while the consumer’s income remains constant”. However, as Keen quickly points out, this “consumer’s income remains constant” condition was highly unrealistic: it is fallacious to think that you could really figure out how demand for a commodity changes as its price changes without examining the question of how income affects behaviour. To do this, as Keen notes, “they have to assume that a change in prices won’t change the consumer’s income”, which is only ok for certain isolated consumers but certainly not for the broader economy. This general impact of prices on the consumer’s income is known as the ‘income effect’. The pure impact of a fall in price for a commodity is known as the ‘substitution effect’. Economists argue that the substitution effect is always negative – i.e. if price falls, consumption rises. They do this not because it is logical but because it is necessary for their theory: it allows them to isolate the so-called ‘Law of Demand’ – that demand always increases when price falls. As Keen writes, “This ‘law’ is an essential element of the neoclassical model of how prices are set which says that in competitive markets, supply will equal demand at the equilibrium price.” In order to argue that the substitution effect is always negative, economists have to ignore the income effect. Naturally enough, they have rationalised this omission. The way they theoretically eliminated the income effect was by ‘holding the consumer’s utility constant’. This involves keeping the consumer to the same indifference curve, and rotating the budget constraint to reflect the new relative price regime, then moving the budget constraint out to restore the consumer’s income to its actual level. This ingenious manoeuvre is known as the ‘Hicksian compensated demand curve’ (named after the English economist John Hicks). This finally establishes the ‘Law of Demand’ for a single, isolated consumer: the demand for a commodity will rise if its price falls.

One problem still remains for this Law of Demand, however: how rising income affects demand.  Demand for a commodity necessarily changes as a function of income. Necessities or ‘inferior goods’ take up a diminishing share of spending as income grows; the consumption of ‘Giffen goods’ (undesirables) decline as income rises; and luxuries or ‘superior goods’ take up an increasing share of income as it increases. According to the neoclassicals themselves, only the consumption of ‘neutral’ or ‘homothetic’ goods remains a constant proportion of income as income rises. In reality, even this one exception doesn’t exist: there are no homothetic goods. Nevertheless, economists have made great use of the word, and call this pattern of consistent consumption through income-level ‘homothetic’. They thus have a word for the type of imaginary person who always spends 10% of his income on pizzas, from poverty to obscene wealth.

Of course, even after all this dodgy jury-rigging of the Law of Demand, the Law still only applies to one single consumer. It is a gigantic leap to turn a law that applies to one person into a law that applies to an entire economy. And the leap does not work. As Keen writes, in characteristic caustic style, “The market demand curve that is produced by summing these now poorly behaved individual demand curves will conflate these wildly varying influences: increasing price will favour the producer (thus increasing demand) while disadvantaging the consumer (thus decreasing his demand); rising income for the luxury-good producer will increase his income while decreasing that of the necessity producer. As the sum of these tendencies, the market demand curve will thus occasionally show demand rising as price falls, but it will also occasionally show demand falling as price falls. It will truly be a curve, because, as the neoclassical economists who first considered this issue proved (Gorman 1953), it can take any shape at all – except one that doubles back on itself.” As Keen writes a paragraph later, “This result – known as the ‘Sonnenschein-Mantel-Debreu [SMD] conditions’ – proves that the ‘Law’ of Demand does not apply to a market demand curve.”

But you know what neoclassicals at the time did with this information? As if to prove their religious devotion to the standard theory, they obscured it with technical language and minimised its importance. Instead of conceding what a mess it made of one of the axioms of neoclassical theory, they declared that it showed merely that the following two conditions were necessary for the Law of Demand to apply to the market demand curve:

a)      That all Engel curves are straight lines; and

b)      That the Engel curves of all consumers are parallel to each other.

The first condition means that all commodities have to be ‘neutral’ or ‘homothetic’. The second condition means all consumers have to have identical tastes. In other words, the way economists aggregated the Law of Demand to the level of the market was by assuming that there was only one consumer. That is to say, they didn’t aggregate it at all. Keen puts it nicely: “That is the real meaning of these two conditions: the Law of Demand will apply if, and only if, there is only one commodity and only one consumer.”

How utterly absurd. And you know what Gorman (the neoclassical analyst) wrote after noting that these were the conditions? That they were “intuitively reasonable”. This complete, cultish insanity allowed this result to be effectively buried, and neoclassicals have been ignoring it ever since. They certainly don’t mention it to undergraduates, and by the time economists have reached the Master’s and PhD level, they’re normally too indoctrinated to see any flaws at all.

This zealotry and its attendant anti-empiricism is a recurring theme of the book. In the preface to the first edition of the book, Keen claims that this is ultimately the product of the entire system of economic education. As he writes, “I came to the conclusion that the reason [mainstream economists] displayed such anti-intellectual, apparently socially destructive, and apparently ideological behaviour lay deeper than any superficial personal pathologies. Instead, the way in which they had been educated had given them the behavioural traits of zealots rather than of dispassionate intellectuals.”

 The Neoclassical Picture of Supply (from chapter 4, “Size does matter”):

Economists attempt to derive the supply curve from their theory of how profit-maximising firms decide how much output to produce. One essential step in this derivation is that firms must produce so that the price they are paid for their output equals the ‘marginal cost of production’ – the additional expense incurred in producing one more unit of output. Unless this condition is met, a supply curve cannot be drawn. That is why neoclassical economists are so hostile towards monopolies. As Keen writes, “It’s not only because they can abuse the power that being a monopoly can confer; it’s also because, according to neoclassical theory, a monopoly will set its price above the marginal cost of production. If monopolies were the rule, then there would be no supply curve, and standard neoclassical microeconomic analysis would be impossible.” If you accept monopolies into your economic theory, the simple mantra that ‘prices are set by supply and demand’ turns into ‘price is set by the demand curve, given the quantity set by marginal cost and marginal revenue’. Neoclassicals cling to the model of the perfectly competitive market because it’s what Keen calls “the embodiment of Smith’s ‘invisible hand’ metaphor about the capacity of market economic to reconcile private interest and public virtue.”[6]

But even if you ignore the fact that, in the real world, “industries have a clear tendency to end up being dominated by a few large firms”, the logic that privileges perfect competition over monopoly is itself flawed.

An essential part of the argument for perfect competition is that each firm is so small that it can’t affect the market price. This enables the supply curve to work and it allows marginal revenue to equal marginal cost, since any self-contained firm that increases its price above the “market equilibrium price” will lose all its customers, while any self-contained firm that decreases its price below the market equilibrium will suddenly be swamped by all customers for that commodity. As a result of this, the demand curve, as perceived by each firm, is effectively horizontal at the market price. The firms are also regarded as being so small that they do not react to any changes in behaviour by other firms. As Keen writes, “These two assumptions are alleged to mean that the slope of the individual firm’s demand curve is zero: both the firm’s price and the market price do not change when a single firm changes its output. However, they also mean that, if a single firm increases its output by one unit, then total industry output should also increase by one unit, since other firms won’t react to the change in output by a single firm.” This latter consequence makes the two assumptions inconsistent. “Since the market demand curve is supposedly downward sloping, and supply has increased – the supply curve has shifted outwards – market price must fall […] The only way market price could not react would be if all other firms reduced their output by as much as the single firm increased it: then the market supply curve would not shift, and the price would remain constant. But the theory assumes that firms don’t react to each other’s behaviour.”

Another massive problem with the model is that, if a competitive industry did result in output being set by the intersection of the demand curve and the supply curve, then at the collective level the competitive industry must actually be producing where marginal cost exceeds marginal revenue, not where they equal each other. Rather than maximising profits, the additional output – that produced past the point where marginal revenue equals marginal cost at the industry level – must be produced at a loss. As Keen writes, “This paradox means that the individual firm and the market level aspects of the model of perfect competition are inconsistent.”

If we drop the invalid assumption that the output of a single firm has no effect on the market price, then this finally leads us to the conclusion that the price and output levels of a competitive industry will be exactly the same as for the monopolist. “To argue otherwise is to argue for either irrational behaviour at the level of the individual firm – so that part of output is produced at a loss – or that, somehow, individually rational behaviour (maximising profit) leads to collectively irrational behaviour – so that profit-maximising behaviour by each individual firm leads to the industry somehow producing part of its output at a loss. However, the essence of neoclassical vision is that individually rational behaviour leads to collectively rational behaviour.”

Another thing that neoclassicals distort, in order to keep the “totem of the micro” alive, is how scale affects production. In the real world, large firms will generally have cost advantages over small ones. But if this is so, then given open competition, the large firms will drive the small ones out of business. This means that “increasing returns to scale mean that the perfectly competitive market is unstable: it will, in time, break down to a situation of either oligopoly (several large firms) or monopoly (one large firm).” The fiction that neoclassicals invented to cope with this is the concept of the “long-run average cost curve”. This curve is ‘u-shaped’, which asserts that there is some ideal scale of output at which the cost of production is minimised. “A competitive industry is supposed to converge to this ideal scale of output over time, in which case its many extremely big firms are safe from the predations of any much larger firm, since such a competitor would necessarily have higher costs.” But though it might sound like a nice idea, this just doesn’t actually apply to reality. If you look at any real industry, you can see that this is just the wrong way of looking at things.

After all this debunking is done, Keen ends the chapter with the following flourish: “Economics has championed the notion that the best guarantee of social welfare is competition, and perfect competition has always been its ideal. The critiques in this chapter show that economic theory has no grounds whatsoever for preferring perfect competition over monopoly. Both fail the economist’s test of welfare, that marginal cost should be equated to price.

Worse, the goal of setting marginal cost equal to price is as elusive and unattainable as the Holy Grail. For this to apply at the market level, part of the output of firms must be produced at a loss. […]

Economics can therefore no longer wave its preferred totem, but must instead only derive supply as a point determined by intersection of the marginal cost and marginal revenue curves.

Worse still, once we integrate this result with the fact that the demand curve can have any shape at all, the entire ‘Totem of the Micro’ has to be discarded. Instead of two simple intersecting lines, we have at least two squiggly lines for the demand side – marginal revenue and price, both of which will be curves – an aggregate marginal cost curve, and lots of lines joining the many intersections of the marginal revenue curve with the marginal cost curve to the price curve. The real Totem of the Micro is not the one shown at the beginning of this chapter, but a couple of strands of noodles wrapped around a chopstick, with lots of toothpicks thrown on top.”

The Neoclassical Picture of Production (from chapter 5, “The Price of Everything and the Value of Nothing” and chapter 6, “To Each According to his Contribution”):

In order for the supply curve to slope upwards, neoclassicals are forced to take the view that productivity falls as output rises and therefore that, to elicit a larger supply of a commodity, a higher price must be offered. As we’ve established, the supply curve doesn’t even exist, but even if we momentarily choose to forget that, this is still wrong. The alternative view is that of the classical school of economics, that price is set by the cost of production, while the level of demand determines output. When this proposition is put in the same static form as economics uses to describe a commodity market, it translates as a horizontal or even a falling supply curve, so that the market price doesn’t change as the quantity produced rises (and it can actually fall).

As Keen’s favourite economist, Piero Sraffa argued, the ‘law of diminishing marginal returns’ will not apply in general in an industrial economy. Instead, the common position will be constant marginal returns, and therefore horizontal (rather than rising) marginal costs. Sraffa had two attacks on this ‘law’. The first is what Keen calls Sraffa’s “broad arrow”:

“If we take the broadest possible definition of an industry – say, agriculture – then it is valid to treat factors[7] it uses heavily (such as land) as fixed. Since additional land can only be obtained by converting land from other uses (such as manufacturing or tourism), it is clearly difficult to increase that factor in the short run. The ‘agriculture industry’ will therefore suffer from diminishing returns, as predicted.

However, such a broadly defined industry is so big that changes in its output must affect other industries. In particular, an attempt to increase agricultural output will affect the price of the chief variable input – labour – as it takes workers away from other industries […]

This might appear to strengthen the case for diminishing returns – since inputs are becoming more expensive as well as less productive. However, it also undermines two other crucial parts of the model: the assumption that demand for and supply of a commodity are independent, and the proposition that one market can be studied in isolation from all other markets.”

Then the “narrow arrow”: “When we use a more realistic, narrow definition of an industry – say, wheat rather than agriculture – Sraffa argues that, in general, diminishing returns are unlikely to exist. This is because the assumption that supply and demand are independent is now reasonable, but the assumption that some factor of production is fixed is not.

While neoclassical theory assumes that production occurs in a period of time during which it is impossible to vary one factor of production, Sraffa argues that in the real world, firms and industries will normally be able to vary al factors of production fairly easily. This is because these additional inputs can be taken from other industries, or garnered from stocks of underutilised resources. […]

This means that, rather than the ratio of variable to ‘fixed’ outputs rising as the level of output rises, all inputs will be variable, the ratio of one input to another will remain constant, and productivity will remain constant as output rises. This results in constant costs as output rises, which means a constant level of productivity. […]

With this cost structure, the main problem facing the firm is reaching its ‘break-even point’, where the difference between the sale price and the constant variable costs of production just equal its fixed costs. From that point on, all sales add to profit. The firm’s objective is thus to get as much of the market for itself as it can. This, of course, is not compatible with the neoclassical model of perfect competition.”

Of course, to a neoclassical, all this criticism would merely raise the question of what does actually constrain a firm’s output, if not increasing costs. But this question poses no dilemma for the critic; in fact, a reply is easy. As Keen puts it, “The output of a single firm is constrained by all those factors that are familiar to ordinary businessmen, but which are abstracted from economic theory. These are, in particular, rising marketing and financing costs, both of which are ultimately a product of the difficulty of encouraging consumers to buy your output rather than a rival’s. These in turn are a product of the fact that, in reality, products are not homogeneous, and consumers do have preferences for one firm’s output over another’s.”

As Keen notes at the end of chapter 5, it is still possible that, in some instances, price will rise as output rises. Some real-world reasons for this include the inflexibility of supply in some markets across some timeframes, firms exploiting high demand to set higher margins, and wage demands rising during periods of high employment. But this doesn’t at all save the neoclassical model.  

Neoclassical economists also have another very bizarre view about the nature of production: that a person’s income is determined by his contribution to it. More precisely, they believe that a person’s income is determined by the marginal productivity of the ‘factor of production’ to which he contributes. The argument for this relies heavily on concepts we have already refuted: that productivity per worker falls as more workers are hired; that demand curves are necessarily downward sloping; that price measures marginal benefit to society; and that individual supply curves slope upwards and can easily be aggregated. But, as Keen writes, “even allowing these invalid assumptions, the economic analysis of the labour market is still flawed.”

The economic theory that a person’s income reflects her contribution to society relies on being able to treat labour as no different from other commodities, so that a higher wage is needed to elicit a higher supply of labour, and reducing the wage will reduce supply. Evidently, this assumption is not right. Firstly, no one actually ‘consumes’ labour: instead, firms hire workers so that they can produce other commodities for sale. Secondly, unlike all other commodities, labour is not produced for profit: there are no ‘labour factories’ turning out workers according to demand, and labour supply certainly can’t be said to be subject to the law of diminishing returns. As Keen writes, “These two peculiarities mean that, in an inversion of the usual situation, the demand for labour is determined by producers, while the supply of labour is determined by consumers.”

If you assume perfect competition and all the nonsense that goes along with it, this fact then leads you to the conclusion that a firm’s demand for labour is the “marginal physical product of labour multiplied by the price of the output”. And from there, “a disaggregated picture of this is used to explain why some workers get much higher wages than others. They – or rather the class of workers to which they belong – have a higher marginal revenue product than more poorly paid workers. Income disparities are the product of differential contributions to society, and though sociologists may bemoan it, both the rich and the poor deserve what they get.” This meritocratic vision of capitalism is also assisted by the assumption that workers ‘choose’ their balance of work to leisure (almost as if leisure is a commodity). According to this view, minimum wage legislation, demand management policies, and any other attempts to interfere with the free working of the market mechanism are futile. “If a government attempts to improve workers’ incomes by legislating a minimum wage, then this will result in unemployment, because it will increase the number of hours workers are willing to work, while reducing the demand from employers because the wage will now exceed the marginal product of labour. The gap between the increased hours offered and the reduced hours demand represents involuntary unemployment at this artificially high wage level.”

Of course, this is all complete nonsense. As Keen argues, there are at least “six serious problems with this meritocratic view of income distribution and employment determination”.

Firstly, the supply curve for labour can ‘slope backwards’, so that a fall in wages can cause an increase in the supply of labour. This is because lower wages will mean some people have to work longer hours or take on more jobs.

Secondly, when workers face organised or very powerful employers, workers won’t get fair wages unless they also organise. If you accept that markets aren’t perfectly competitive, even neoclassical analysis can be shown to favour trade unions. The logic goes as follows. Without trade unions, the labour supply will be competitive, but it will be competing for jobs in non-competitive firms. It will therefore be exploited, because the wage will be less than the price for which the marginal worker’s output can be sold. With a trade union acting as a single seller of labour, however, the price charged for each additional worker will rise as more workers are hired. This is a preferable situation to leaving competitive workers to be exploited by less than perfectly competitive hirers of labour.

Thirdly, Sraffa’s observations about aggregation indicate that it is inappropriate to apply standard supply and demand analysis to the labour market. “If an increase in supply requires an increase in the price of labour – if, in other words, the supply curve for labour is upward sloping – then this is clearly going to alter income distribution, the demand for commodities, and hence their prices. This means that a different ‘demand curve’ for labour will apply at every different point along a labour supply curve.”

Fourthly, the basic vision of workers freely choosing between work and leisure is flawed. If one has no income, one can’t enjoy leisure time, since most leisure activities are active and cost money. “Rather than smoothly choosing between work and leisure, in a completely free market system [the majority] face the choice of either working or starving.”

Fifthly, this analysis excludes one important class from consideration – bankers – and unnecessarily shows the income distribution game between workers and capitalists as a zero-sum game. In reality, there are (at least) three players in the social class game, and it’s possible for capitalists and workers to be on the same side in it against the banks – as they are now during the Great Recession.

Sixthly (and most damningly), to maintain the pretence that market demand curves obey the Law of Demand, neoclassical theory had to assume that income is redistributed by ‘a benevolent central authority’. This means that the entire edifice of reasoning is built on the assumption that society is totally equal. Our society is not totally equal and it is therefore not at all meritocratic.

The Neoclassical Picture of Itself (from chapter 8, “There is Madness in their Method”):

The typical way neoclassical economists defend themselves against the accusation that their theory is based on absurd assumptions is to use Milton Friedman’s famous turn: to say that a theory cannot be judged by its assumptions, but only by the accuracy of its predictions. This is, of course, totally insane.

Early in this chapter, Keen uses a joke to illustrate the anti-scientific insanity of neoclassical epistemology: “Have you heard the joke about the chemist, the physicist and the economist who get wrecked on a desert isle, with a huge supply of canned baked beans as their only food? The chemist says that he can start a fire using neighbouring palm trees, and calculate the temperature at which a can will explode. The physicist says that she can work out the trajectory of each of the baked beans, so that they can be collected and eaten. The economist says, ‘Hang on, guys, you’re doing it the hard way. Let’s assume we have a can opener’.”

Friedman didn’t just argue that assumptions didn’t matter; he actually argued that unrealistic assumptions were the hallmark of good theory. In what Paul Samuelson later christened ‘the F-twist’, Friedman argued that “Truly important and significant hypotheses will be found to have ‘assumptions’ that are wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions (in this sense). The reason is simple. A hypothesis is important if it ‘explains’ much by little, that is, if it abstracts the common and crucial elements from the mass of complex and detailed circumstances surrounded the phenomenon to be explained and permits valid predictions on the basis of them alone. […] the relevant question to ask about the ‘assumptions’ of a theory is not whether they are descriptively ‘realistic’, for they never are, but whether they are sufficiently good approximations for the purpose in hand. And this question can be answered only by seeing whether the theory works, which means whether it yields sufficiently accurate predictions.” To anyone with a working brain, this immediately stands out as appalling philosophy. What type of assumptions? What kind of hypothesis? Isn’t economics about understanding the economy, not just yielding “sufficiently accurate predictions”? Obviously, Friedman was trying to draw a parallel with physics, which has made its great progress ever since Galileo by “idealising” in order to abstract away all the ‘noise’ and witness the basic forces in action. Just as Galileo imagined a ball rolling down a frictionless plane to understand the action of gravity, Friedman believed (presumably) that assuming identical, homothetic, rational consumers and a perfectly competitive market helped one to see the true, underlying mechanics of a market system – without all the unnecessary clutter.

Unfortunately, this is totally obtuse. As Keen demonstrates (drawing on the work of the philosopher Alan Musgrave), the kinds of assumptions economists use are nothing like those of Galileo. Galileo’s assumptions were “negligibility assumptions”. These state that some aspect of reality has little or no effect on the phenomenon under investigation. As Musgrave put it, these assumptions “are not necessarily ‘descriptively false’, for they do not assert that present factors are absent but rather that they are ‘irrelevant for the phenomena to be explained’.” Conversely, the assumptions of neoclassical economists are instead either “domain assumptions” or “heuristic assumptions”. These are very different beasts. Domain assumptions specify the conditions under which a particular theory will apply; if those conditions do not apply, then neither does the theory. Heuristic assumptions are those that are known to be false, but which are made as a first step towards a more general theory.

It is true that negligibility assumptions are not the only type that has been used to make progress in physics; heuristic assumptions have been used too. For example, as Musgrave points out, Newton assumed that the solar system consisted only of the sun and the earth in order to formulate his theory that planets would follow elliptical orbits. However, the fact that heuristic assumptions have proved useful in the history of physics by no means vindicates Friedman, because physics always seeks to discard those heuristic assumptions. As Keen quips, “If we accept Friedman’s methodology, then we would have to argue that Einstein’s theory was poorer than Newton’s because it was more realistic.”

Of course, this is not even to mention the fact that neoclassical economics doesn’t actually make “sufficiently accurate predictions” (and I’ll elaborate on that later).

And, as if to make a performance of their zealotry, when neoclassical economists are examining the work of non-orthodox economists, they temporarily can see the stupidity of the F-turn. Keen knows this from bitter experience:

“As any non-orthodox economist knows, it is almost impossible to have an article accepted into one of the mainstream academic economic journals unless it has the full panoply of economic assumptions: rational behaviour (according to the economic definition of rational!), markets that are always in equilibrium, risk as an acceptable proxy for uncertainty, and so on. When it comes to safeguarding the channels of academic advancement, little else matters apart from preserving the set of assumptions that defines economic orthodoxy.

Similarly, the development of economic theory over time has been propelled by the desire to make every aspect of it conform to the preferred economic model.

Macroeconomics, when it first began, bore little resemblance to microeconomics. Fifty years later, macroeconomics is effectively a branch of microeconomics. As I outline in Chapter 10, a major factor behind this tribal coup was the belief that, regardless of its predictive validity, macroeconomics was unsound because its assumptions did not accord with those of microeconomics. It was therefore extensively revised, especially during the 1970s and 1980s, so that macroeconomic theory was more consistent with microeconomic assumptions. Far from assumptions not mattering to economists, assumptions in fact drove the development of economic theory.”

Quite.

Keen concludes the chapter by talking about the core neoclassical notion of “equilibrium” as an example of the pervasive influence of ideology on economic thought. I particularly like this section, and I think the back-end of it is well worth quoting, so I’ll do that now:

“Today, most economists imperiously dismiss the notion that ideology plays any part in their thinking. The profession has in fact devised the term ‘positive economics’ to signify economic theory without any value judgments, while describing economics with value judgements as ‘normative economics’ – and the positive is exalted far above the normative.

Yet ideology innately lurks within ‘positive economic’ in the form of the core belief in equilibrium. As previous chapters have shown, economic theory has contorted itself to ensure that it reaches the conclusion that a market economy will achieve equilibrium. The defence of this core belief is what has made economics so resistant to change, since virtually every challenge to economic theory has called upon it to abandon the concept of equilibrium. It has refused to do so, and thus each challenge – Sraffa’s critique, the calamity of the Great Depression, Keynes’ challenge, the modern science of complexity – has been repulsed, ignored, or belittled.

This core belief explains why economics tend to be extreme conservatives on major policy debates, while simultaneously believing that they are non-ideological, and motivated by knowledge rather than bias.

If you believe that a free market system will naturally tend towards equilibrium – and also that equilibrium embodies the highest possible welfare for the highest number – then, ipso facto, any system other than a complete free market will produce disequilibrium and reduce welfare. You will therefore oppose minimum wage legislation and social security payments – because they will lead to disequilibrium in the labour market. You will oppose price controls – because they will cause disequilibrium in product markets. You will argue for private provision of services – such as education, health, welfare, perhaps even police – because governments, untrammelled by the discipline of supply and demand, will either under- or oversupply the market (and charge too much or too little for the service).

In fact, the only policies you will support are ones that make the real world conform more closely to your economic model.  Thus you may support anti-monopoly laws – because your theory tells you that monopolies are bad. You may support anti-union laws, because your theory asserts that collective bargaining will distort labour market outcomes.

And you will do this without being ideological.

Really?

Yes, really – in that most economics genuinely believe that their policy positions are informed by scientific knowledge, rather than by personal bias or religious-style dogma. Economists are truly sincere in their belief that their policy recommendations will make the world a better place for everyone in it – so sincere, in fact, that they often act against their own self-interest.

For example, there is little doubt that an effective academic union could increase the wages paid to academic economists. If economists were truly self-motivated – if they behaved like the entirely self-interested rational economic man of their models – they would do well to support academic unions, since the negative impacts they predict unions to have would fall on other individuals (fee-paying students and unemployed academics). But instead, one often finds that economists are the least unionised of academics, and they frequently argue against actions that, according to their theories, could conceivably benefit the minority of academics at the expense of the greater community. However ideological economists may appear to their critics, in their hearts they are sincerely non-partisan – and, ironically, altruistic.

But non-partisan in self-belief does not mean non-partisan in reality. With equilibrium both encapsulating and obscuring so many ideological issues in economics, the slavish devotion to the concept forces economists into politically reactionary and intellectually contradictory positions.”

 The Importance of Equilibrium and Stasis in Neoclassical Theory (from chapter 9, “Time Warp Again”):

In his synopsis of this chapter on time, Keen writes the following: “Neoclassical economic models in general ignore processes which take time to occur, and instead assume that everything occurs in equilibrium. For this to be allowable, the equilibrium of the dynamic processes of a market economy must be stable, yet it has been known for over forty years now that those processes are unstable: that a small divergence from equilibrium will not set up forces which return the system to equilibrium. The dynamic path of the economy therefore cannot be ignored, and yet most economists remain almost criminally unaware of the issues involved in analysing dynamic time-varying systems.”

In the very next section, Keen draws the reader’s direct attention to the perils of ignoring the role of time. “What if the initial market price happens not to be the equilibrium price? Then demand and supply will be out of balance: if price exceeds the equilibrium, demand will be too low and supply too high. For equilibrium to be restored, this disequilibrium must set off dynamic processes in supply and demand which cause them both to converge on the equilibrium price. This dynamic process of adjustment will obviously take time. However, in general, economists simply assume that, after a disturbance, the market will settle down to equilibrium. They ignore the short-term disequilibrium jostling, in the belief that it is just a short-term sideshow to the long-run main game of achieving equilibrium.”

As in previous chapters, Keen sees the failure to recognise this massive flaw in the glass as a product of a kind of indoctrination. He writes that “troubled students are reassured that at higher levels of analysis, this ‘partial equilibrium’ assumption is dropped for the most realistic proposition that all things are interrelated. However, rather than this more general analysis being more realistic, dynamic, and allowing for disequilibrium as well as equilibrium, it is in fact ‘general equilibrium’: a model of how all aspects of an economy can be in equilibrium simultaneously.

Budding economists who object to the assumption of ceteris paribus would walk away in disgust if they were immediately told of the assumptions needed to sustain the concept of general equilibrium. However, their fears assuaged by the promise of more realistic notions to come, they continue up the path of economic inculcation. By the time they confront general equilibrium in graduate education, they treat these assumptions and the analysis which goes with them as challenging intellectual puzzles, rather than as the asinine propositions they truly are.”

A few sentences later, he comes out with one of the pithiest sentences of the book: “General equilibrium is at one and the same time the crowning achievement of economic theory and its greatest failure.”

The French economist Walras was one of three founders of neoclassical school of thought (the other two were the English Jevons and the Austrian Menger). As Keen notes, Walras is now “the most exalted of these, because his model of general equilibrium set the mould by which economics has since been crafted”.

Walras was attracted to equilibrium from the start, but he had a major dilemma: given that a move towards equilibrium in one market could cause some or all others to move away from it, how could a world with many markets be in equilibrium? This might seem a total impasse to any attempt to even use the concept, but Walras had a trick up his sleeve, a heuristic that would later become de rigeur for the field: making a fantastical assumption.

Walras’ assumption was that no trades can take place until equilibrium is achieved in all markets. He envisaged the market as being a huge, and very unusual auction, in which the audience includes all the owners of the goods for sale, who are simultaneously the buyers for all the goods on sale. “The total amount of each commodity is fixed in this auction, but sellers will offer anywhere from none to all of this for sale, depending on the price offered. The quantity offered rises as the price rises, and vice versa, with any amount not sold being taken back home by the seller for his/her own consumption (there are no stocks; everything is either sold or consumed by the producer).” Strangest of all, the auctioneer in this market attempts to sell all goods at once, and rather than treating each commodity independently, refuses to accept any price for a commodity until supply equals demand for all commodities.

Despite it being an extremely simplistic vision of the way markets actually work, it is this vision that became the template from which economics attempted to model the behaviour of real-world markets. In fact, as we’ve uncovered, neoclassical models today are barely different from Walras’ auction.

At the time he was writing, Walras’ auctioneer was a useful heuristic that enabled economists to exploit the well-known and relatively simple techniques for solving simultaneous linear equations. As Keen notes, “The alternative was to describe the dynamics of a multi-commodity economy, in which trades could occur at non-equilibrium prices in anywhere from a minimum of two to potentially all markets. At a technical level, modelling non-equilibrium phenomena would have involved nonlinear difference or differential equations. In the nineteenth century, the methodology for them was much less developed than it is now, and they are inherently more difficult to work with than simultaneous linear equations.” This means that Walras’ auctioneer was arguably a justifiable abstraction at the time.

But, tragically, the economics profession has spent the hundred years since being as static as Walras’ auction. Those neoclassical economists who came after Walras didn’t choose the path of actually trying to make their models realistic by introducing dynamics and the more complex maths needed to simulate the real world. Instead, the whole school stagnated – fixating on the concept of equilibrium. Instead of discarding equilibrium once it past its use-by-date, later economists went to the perverse level of trying to prove that general equilibrium actually existed.

As Keen notes, “The pinnacle of this warping of reality came with the publication in 1959 of Gerard Debreu’s Theory of Value, which the respected historian of economic thought Mark Blaug has described as ‘probably the most arid and pointless book in the entire literature of economics’. Yet this ‘arid and pointless’ tome set the mould for economics for the next forty years – and won for its author the Nobel Prize for economics.”

The core assumptions of Debreu’s model show how little neoclassical economics did change after Walras. Debreu literally assumed the following: that there is a single point in time at which all production and exchange for all time is determined; that there is a set of commodities – including those which will be invented and produced in the distant future – which is known to all consumers; that all producers know all the inputs that will ever be needed to produce their commodities; and that everyone knows the possible states of the future. And even with these “breathtaking dismissal of essential elements of the real world”, Debreu’s model still needs additional restrictive assumptions – the Sonnenschein-Mantel-Debreu conditions that we ridiculed earlier.

It should be stressed, of course, that none of this is the fault of early economists. Jevons, for example, argued that “If we wished to have a complete solution we should have to treat it as a problem of dynamics.” Marshall noted this at greater length, as did J.B Clark.  And when Keynes tried to revolutionise economics, equilibrium was one of his main targets. His oft-quoted but rarely appreciated observation that ‘in the long run we are all dead’ was actually said as part of a criticism of the equilibrium approach to economics – in particular, the way it ignores the transient state of the economy. On another occasion, Keynes said “equilibrium is blither”.

Fortunately, by now, there are many models in economics which have properties akin to those of early meteorology (Keen discusses E.N. Lorenz’s weather model as an example of how chaos can be created by just plugging in a few equations with nonlinear relationships), but very few of them have been developed by neoclassical economists. Most of these models were instead developed by economists who belong to alternative schools – in particular complexity theorists and evolutionary economists. Indeed, one of the best-known such models, Goodwin’s model of cyclical growth, put in mathematical form a model first suggest by Karl Marx. Marx argued that – in a highly simplified economy consisting of just capitalists and workers – there would be cycles in employment and income shares. This cycle is worth outlining, since it applies pretty well to the economy we actually live in. It can be put in the following form:

1.)    The amount of physical capital determines the amount of output

2.)    Output determines employment

3.)    The rate of employment determines the rate of change of wages (a high level of employment encourages workers to demand large wage rises)

4.)    Wages times employment determines the wage bill, and when this is subtracted from output, profit is determined (higher wages reduce profits)

5.)    Profit determines the level of investment (higher wages lead to less investment)

6.)    Investment determines the rate of change of capital (investment eventually restores high growth and higher employment levels) – and this closes the causal loop of the model.

Importantly, this kind of dynamic model does actually capture the way the economy works far more accurately than anything neoclassicals have ever come up with.

The Many Reasons why Neoclassicals couldn’t predict the Great Recession (from chapter 10, “Why they didn’t see it coming”):

Before the Great Recession, a popular topic du jour in the leading macroeconomic journals of the world was explaining ‘The Great Moderation’ – the apparent decline in both the levels and volatility of unemployment and inflation since 1990. As Keen observes, “It was a trend they expected to see continue, and they were largely self-congratulatory as to why it had come about: it was a product of their successful management of the economy.”

One of the most prominent advocates of this view was the Federal Reserve chairman Ben Bernanke. In 2004, while a member of the board of governors of the Reserve, Bernanke gave a speech with the title of ‘The Great Moderation’, in which he exalted “the economic landscape over the past twenty years or so”. The three possible causes he nominated for this phenomenon were “structural change, improved macroeconomic policies, and good luck.” While he conceded that a definitive selection could not be made between the three factors, he argued that “improved monetary policy” deserved more credit than it had received. Robert Lucas, one of the chief architects of modern neoclassical macroeconomics, went even further in his Presidential Address to the American Economic Association in 2003, asserting that “the central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”

A Greek theatrical term comes to mind…

Before the Great Depression and Keynes’ General Theory, mainstream economists of 1928 held similar views, believing that there were no intractable macroeconomic problems. The neoclassicals of this era believed that individual markets might be out of equilibrium at any one time, but the overall economy, the sum of all those individual markets, was bound to be balanced. As Keen explains, “The basis for this confidence was the widespread belief, among economists, in what Keynes termed Say’s Law.” This Law essentially stated that ‘supply creates its own demand’. More precisely, it is defined by Steve Kates (the strongest modern-day proponent of the Law), as the proposition that “the sale of goods and services to the market is the source of the income from which purchases are financed”. (What this actually means, in practical terms, is that slumps can never be caused by an overall deficiency in demand, but are always due to sectoral imbalances.)

Amidst the devastation and misery of the Great Depression, Keynes challenged this principle. Keynes’ critique of Say’s Law was what he himself described as “the essence of the General Theory of Employment”. Although it was a sound critique, there was a problem: it was expressed in such a turgid and opaque fashion that almost no-one understood it.

Keen gives a simplified version which is easy enough to understand:

“Keynes divided all output into two classes: consumption and investment. If the economy was in equilibrium, then Say’s Law would argue that excess demand for consumption goods would be zero, and likewise for investment goods.

Keynes then imagined what would happen if demand for consumption goods fell, so that excess demand for consumption goods was negative (supply exceeded demand). Say’s Law would argue that demand for investment goods would rise to compensate: notional excess demand for investment goods would be positive.

However, as Keynes argued extensively throughout the General Theory, demand for investment goods is driven by expectations of profit, and these in turn depend heavily upon expected sales to consumers. A fall in consumer demand now could lead entrepreneurs to expect lower sales in the future – since in an uncertain environment “the facts of the existing situation enter, in a sense disproportionately, into the formation of our long-term expectations, our usual practice being to take the existing situation and to project it into the future.”

Dampened expectations would therefore lead entrepreneurs to reduce their demand for investment goods in response to a reduced demand for consumer goods. Thus a situation of negative excess demand for consumer goods could lead to a state of negative excess demand for investment goods too – a general slump.”

In an earlier draft, Keynes also had another, more straightforward critique of the Law. He seems to have omitted it because it originally came from Marx. This critique is also worth outlining and can be explained in the following way.

Say’s Law begins from the abstraction of an exchange-only economy: an economy in which goods exist at the outset, but where no production takes place. This led economists to believe that if an agent desired to and did accumulate wealth, that would make them a “thief”. However, Marx observed – famously – that production enables agents to accumulate wealth without aspiring to be thieves. Marx formulated this analysis in terms of two ‘circuits’: the ‘Circuit of Commodities’ and the ‘Circuit of Capital’.”

In the Circuit of Commodities, things are as Walras imagined them: people come to market with commodities, which they exchange for money to buy other commodities. Marx stylised this as C – M – C.

In the Circuit of Capital, however, people come to market with money, with the intention of turning this money into more money. “These agents buy commodities – specifically, labour and raw materials – with money, put these to work in a factory to produce other commodities, and then sell these commodities for (hopefully) more money, thus making a profit.” Marx stylised this as M – C – M+

As Keen puts it, “These agents wish to supply more than they demand, and to accumulate the difference as profit which adds to their wealth. Their supply is the commodities they produce for sale. Their demand is the inputs to production they purchase – the labour and raw materials. In Say’s Principle’s terms, the sum of these, their excess demand, is negative. When the two circuits are added together, the sum of all excess demands in a capitalist economy is likewise negative.”

Because Keynes didn’t make the critique he did include sufficiently clear, neoclassicals saw no problem dismissing it, and instead assumed that the Law was still impregnable. Ultimately, this allowed Say’s Law to survive almost unscathed. In fact, the only difference between then and now in the application of this axiom is that it is more commonly called Walras’ Law or Say’s Principle, and is conventionally defined as the proposition that “the sum of all notional excess demands is zero”.

The fact that Say’s Law has survived seems particularly absurd when you consider that my critique of it isn’t even over. We have yet to entertain the biggest reason why the Law is an absurdity in today’s economy, and why discarding it is so crucial to understanding how the Great Depression happened and why the Great Recession happened and why another crisis like them could easily happen again: like neoclassical theory in general, it ignores the role of credit in the economy.

The first economist to expound a fully dynamic, disequilibrium model of the economy (albeit in verbal form) was the relatively unknown American economist Hyman Minsky. In stark contrast to neoclassical models, credit was central to Minsky’s view of the economy. Minsky proved the importance of credit and debt by starting with Marx’s analysis of the two circuits and taking the logic one step further. As Keen puts it, “He pointed out that since there is a buyer for every seller, and since accounting demands that expenditure must equal receipts, and yet growth also occurs over time, then credit and debt must make up the gap.”  It goes without saying that this does actually reflect the world we live in: goods are purchased using both the proceeds of selling other goods and credit, and purchases and sales include existing assets as well as newly produced goods. Yet the obviousness of the idea did not make it trivial. On the contrary. As I intimated just a paragraph ago, accepting this fact about the economy immediately obliterates Say’s Law and has huge consequences for neoclassical theory in general. The most direct implication of it is that changes the formula for aggregate demand: now aggregate demand has to be aggregate supply plus the change in debt while aggregate demand is expended on both commodities and assets (shares and properties).

Of course, Hyman Minsky wasn’t the first economist to recognise the importance of credit. One economist who saw it way back in the 1930s was Joseph Schumpeter. Schumpeter focussed on the role of entrepreneurs in capitalism in order to explain credit’s role. He pointed out a simple but crucial fact: when entrepreneurs borrow money in order to purchase the goods and services needed to put their idea into motion, this borrowed money adds to the demand for existing goods and services generated by the sale of those existing goods and services. This means, as Schumpeter put it, “that in real life total credit must be greater than it could be if there were only fully covered credit.”

Overall, Keen regards Marx, Schumpeter and Minsky as a kind of holy trinity and believes that their perspective “integrates production, exchange and credit as holistic aspects of a capitalist economy, and therefore as essential elements of any theory of capitalism”. This is in contrast to neoclassical economics, which “can only analyse an exchange or simple commodity production economy in which money is simply a means to make barter easier.” Keen’s own monetary model of the economy draws heavily from what he calls the “Marx-Schumpeter-Minksy model of a monetary production economy.” In fact, his main work as an economist has been turning their insights and constructs – particularly Minsky’s – into maths and creating realistic simulations out of it. Ultimately, Keen believes that understanding the role that debt plays in capitalism is the key to understanding economic crises. A good reason to listen to him on this point is that he actually won the Revere Award from the World Economics Review for being “the economist who most cogently warned of the crisis, and whose work is most likely to prevent future crises”.

I will explore Keen’s explanation for why the Great Recession happened in another essay. For now, let’s return to enumerating the weaknesses in the neoclassical edifice that allowed mainstream economists to miss the crisis completely.

Another key concept from Keynes’ General Theory that neoclassicals overlooked (to their great detriment in understanding the Great Recession) is the impact of expectations on investment. In a total shift away from neoclassical assumptions about human rationality and clairvoyance, Keynes argues that investors’ expectations about future economic events are bound to be fragile, since future circumstances are truly uncertain: they almost inevitably turn out to be different from what we expected. This volatility in expectations will mean sudden shifts in investor (and speculator) sentiment, which will suddenly change the values placed on assets, at the expense of anyone whose assets are held in non-liquid form. Because of its instant liquidity, money therefore plays an essential role in a market economy. Moreover, the extent to which we desire to hold our wealth in the form of non-income-earning money, rather than income-earning but illiquid assets, is – as Keynes put it – “a barometer of the degree of our distrust of our own calculations and conventions concerning the future”. This “liquidity preference” then determines the rate of interest: the less we trust our fragile expectations of the future, the higher the rate of interest has to be to entice us to sacrifice unprofitable but safe cash for potentially profitable but volatile assets. It is not hard to see how this analysis – like that of Minsky – helps to explain the nature of crises and depressions.

However, neoclassicals did not even take this part of Keynes on board. Instead of assimilating his new concepts – uncertainty, expectations, liquidity preference determining the rate of interest, and speculative capital asset prices – most neoclassicals ignored The General Theory altogether, usually claiming incomprehension.

One of the specific developments that emboldened neoclassicals to ignore the innovations of The General Theory was a terrible 1937 book review of the work written by the neoclassical economist John Hicks. This review, which would prove enormously influential, included an exposition of a totally bastardised form of Keynes that aimed to reconcile his strange new work with ‘the Classics’. As risible as it sounds, what Hicks essentially did in this ‘exposition’ was create a “totem of the macro”. Instead of ‘S’ and ‘D’ for supply and demand, he appropriated some concepts from the book to create ‘IS’ and ‘LL’. The IS represented “all those combinations of the rate of interest and the level of income which yielded equilibrium in the goods market”, and the LL represented “all those combinations of the rate of interest and the level of income which gave equilibrium in the money market”. Just as price and output are determined at the point of intersection in the totem of the micro, income and the rate of interest were determined at the point of intersection of the curves LL and IS. 

This was a true hatchet job: the economic equivalent of butchering a cow and then using random bits of offal, bones and gobbets to try to sculpt a miniature bovine statue. It is true that certain aspects of Keynes did survive this strange synthesis. For example, Hicks’ model still endorsed fiscal policy, since a higher level of government expenditure could shift the IS curve to the right, thus moving the point of intersection of the IS and LL curves to the right and raising the equilibrium level of output. But most of Keynes was lost.

Oddly enough, in 1980, Hicks himself expressed regret in the non-orthodox Journal of Post-Keynesian Economics that this IS-LM[8] model had become accepted as “a convenient synopsis of Keynesian theory”. Unfortunately, this personal admission hasn’t stopped the model from being – as Keen puts it – “the common fodder served up to undergraduate students as Keynesian economics”.

The most tragic thing about the identification of Hick’s totem of the macro with Keynes’ theory is that it would ultimately facilitate the near-total overthrow of Keynes by Milton Friedman, Robert Lucas and their fellow hard-core neoclassicals. Hick’s IS-LM model was a straw man version of Keynes and neither accorded with neoclassical beliefs nor true Keynesian ones, and this made it a very soft target.

Now that we’re on the subject of Friedman, it’s worth nothing that Friedman’s own neoclassical edifice probably made even less sense than Hicks’ tepid synthesis. Keen goes so far as to claim that “In any sane discipline, Friedman’s starting point for his dismantling of the then Keynesian orthodoxy would have been good enough reason to ignore him completely – if not recommend he see a psychiatrist.” The starting point Keen is referring to here is Friedman’s reassertion of the key neoclassical proposition of ‘money neutrality’ – the belief that the nominal quantity of money has no effect on the real performance on the macroeconomy, apart from causing inflation. Like so many neoclassical axioms, this may sound intuitively plausible, but the conditions required for it to operate in reality are completely absurd. In this case, there is essentially one big condition: that, if the quantity of money in circulation increased by some factor, then all nominal quantities including the level of debts was also increased by the same factor. In other words, the assumption is that, as soon as money is injected into the economy, all “prices of goods and services, and quantities of other assets and liabilities” will immediately go up in exact proportion to the size of the injection. (Assumptions don’t matter!)

With a few more completely unrealistic assumptions about money, plus the most heinous assumption of all – equilibrium – Friedman laid the ground for attacking Keynesian demand-management policies. Friedman argued that the basis of Keynesian demand-management policies – the apparent negative relationship between unemployment and the rate of inflation – was not a long-term one. Though a higher rate of growth of the money supply and a consequent rise in inflation could, in the transition, cause employment to rise, ultimately the economy would return to its equilibrium level of employment, and at a higher rate of inflation. In technical language, the “short-run Phillips Curve” (a graph of real data that seemed to describe the ‘trade-off’ society faced between inflation and unemployment) was “moving outwards” to eventually become the “long-run Phillips curve”, which Friedman claimed would be vertical at the long-run equilibrium level of employment.

At around the same time (the early 1970s), Lucas was making very similar arguments about the “natural rate of employment”. While both Friedman and Lucas initially lacked evidence for their claims, the period of ‘stagflation’ that began soon after appeared to vindicate them. Indeed, stagflation really sounded the death-knell for ‘Keynesian economics’ within the academic profession. Friedman’s vociferous proselytising had won out. A cruel and stupid ideology had taken root. A cancer was beginning to metastasise.

And, lamentably, that wasn’t even the end of it. Neoclassical economics would become even more anti-Keynesian, beginning a process of increasing neoclassical fervour that would eventually culminate in the total evisceration of macroeconomics, with only applied microeconomics in its place (like a flaccid, hulled-out cadaver)[9].

In 1976, Lucas commenced this insidious process by going one step further than Friedman on the matter of money and inflation. Lucas pointed out that, according to neoclassical theory, there should be no relationship between inflation and employment: changes in aggregate demand caused by changes in the money supply should simply alter the price level while leaving supply unchanged. Since Lucas was a faithful servant of the Neoclassical Church and proudly displayed his totem of the micro, this forced him to conclude that the aggregate rate of unemployment couldn’t be altered by monetary means. There was a dilemma, though: in order to conclude that there was a natural rate of employment, he had to assume that expected inflation always equalled actual inflation, which in turn meant assuming that people can accurately predict the future.

This might seem an impossible conundrum to a normal person, but it wasn’t for Lucas. As barking mad as it sounds, he was happy to make this assumption. Lucas simply appealed for authority to an older economist, “Muth” (who had assumed omniscience to develop a critique of a theory of price cycles in agricultural markets known as the ‘Cobweb model’) and that was that. Keen sums up this development rather poetically: “Thus neoclassical macroeconomics began its descent into madness which, thirty-five years later, left it utterly unprepared for the economic collapse of the Great Recession.”

A few pages later, Keen also sums up extremely well the end-result of this descent in one of the funniest passages of the book:

“[The transmogrification of macroeconomics into microeconomics] resulted in a model of the macroeconomy as consisting of a single consumer, who lives for ever, consuming the output of the economy, which is a single good produced in a single firm, which he owns and in which he is the only employee, which pays him profits equivalent to the marginal product of capital and a wage equivalent to the marginal product of labour, to which he decides how much labour to supply by solving a utility function that maximises his utility over an infinite time horizon, which he rationally expects and therefore correctly predicts. The economy would always be in equilibrium except for the impact of unexpected ‘technology shocks’ that change the firm’s productive capabilities (or his consumption preferences) and thus temporarily cause the single capitalist/worker/consumer to alter his working hours. Any reduction in working hours is a voluntary act, so the representative agent is never involuntarily unemployed, he’s just taking more leisure. And there are no banks, no debt, and indeed no money in this model.”

According to Keen, even “saltwater economists” like Paul Krugman and Joseph Stiglitz have a picture of the economy not too different from this. Before the Great Recession, saltwater economists like these were willing to abandon equilibrium (or at least perfectly competitive equilibrium) but still believed they had to reason in a reductionist way. After it, they did become strident critics of standard economic thinking, but they didn’t try to make any radical revisions to the standard model. Instead, they merely embellished the purist model with deviations from microeconomic perfection, and thereby generated a model that can more closely emulate the economy data on which they focus. These models have had more empirical success, but this is hardly surprising given that – as Robert Solow has observed – the imperfections “were chosen by intelligent economists to make the models work better”.  

Freshwater economists were (and are) completely loopy. A good example of this is how, pre-Great Recession, they explained the Great Depression. In a nutshell, the theory was that it was an extended holiday. As Keen stresses, this is barely hyperbole. In fact, the Nobel laureate Edward Prescott expressed almost exactly this view in 1999. Prescott wrote that “the key to defining and explaining the Great Depression is the behaviour of market hours workers per adult”, which changed due to “the unintended consequence of labour market institutions and industrial policies designed to improve the performance of the economy”. In other words, people got lazier because of the government. (What the actual fuck?)

The essential problem with neoclassical theory is that – without including money, debt and banks in their models, and without disavowing equilibrium – they can scarcely think otherwise. Prescott himself proves this in the very same 1999 work by remarking that “The capitalistic economy is stable, and absent some change in technology or the rules of the economic game, the economy converges to a constant growth path with the standard of living doubling every 40 years.” It’s hard to think of a more childish perspective on capitalism. As Keen repeatedly stresses, capitalism is inherently unstable, and this is a fact so obvious it is ludicrous that it has become a radical position.  You certainly don’t have to be anti-capitalist to acknowledge this; Keen isn’t and I am not either. Acknowledging this truism just forces you to recognise is that regulation of financial markets and lending practices is imperative, and that financial crises are inevitable without this.  

Incidentally, it’s views like Prescott’s that make one disposed to conspiracy theories about economics. The Orwellian description of capitalism as inherently stable and meritocratic really does reek of propaganda. It’s no accident I mentioned Manufacturing Consent before. There’s no doubt that these economists are fulfilling the role of Chomsky’s imagined “political class” perfectly. Although he doesn’t take it very far, Steve Keen himself speculates along these lines at the end of chapter 10:

“The extent to which economic theory ignored crucial issues like the distribution of wealth and the role of power in society leads many to extend a conspiracy theory explanation of how economics got into this state. Surely, they argue, economic theory says what the wealthy want to hear?

I instead [tend to] lay the focus on the teleological vision to which economists have been committed ever since Adam Smith first coined the phrase ‘an invisible hand’ as an analogy to the workings of a market economy. This vision of a world so perfectly coordinated that no superior power is needed to direct it, and no individual power sufficient to corrupt it, has seduced the minds of many young students of economics. I should know, because I was one; had the Internet been around when I was a student, someone somewhere would have posted an essay I wrote while in my first year as an undergraduate, calling for the abolition of both unions and monopolies. No corporation paid me a cent to write that paper (though now, if it could be found, I would happily pay a corporation to hide it!).

What enabled me to break away from that delusional analysis was what Australians call ‘a good bullshit detector’. At a certain point, the fact that the assumptions needed to sustain the vision of the Invisible Hand were simply absurd led me to break away, and to become the critic I am today.

However, the corporate largesse interpretation of why neoclassical economics has prospered does come into play in explaining why neoclassical economics became so dominant. Many of the leading lights of academic economics have lived in the revolving door between academia, government and big business, and in particular big finance. The fact that their theories, while effectively orthogonal to the real world, nonetheless provided a smokescreen behind which an unprecedented concentration of wealth and economic power took place, make these theories useful to wealthy financiers, even though they are useless – and in fact outright harmful – to capitalism itself.

The fact that both government and corporate funding has helped the development of these theories, while non-orthodox economists like me have had to labour without research grants to assist them, is one reason why the nonsense that is neoclassical economics is so well developed, while its potential rivals are so grossly underdeveloped.

The corporate dollar may also have played a role in enabling neoclassical economists to continue believing arrant nonsense as they developed their theories. So while I don’t explain neoclassical theory on the basis of it serving the interests of the elite, the fact that it does – even though it is counterproductive for the economy itself – and that the corporate and particularly financial elite fund those who develop it surely has played a role.

On this note, the website LittleSis (http://littlesis.org/) is well worth consulting. It documents the links between business and government figures in the USA, and leading neoclassical economists like Larry Summers feature prominently (see http://blog.littlesis.org/2011/01/10/evidence-of-an-american-plutocracy-the-larry-summers-story/).”

There’s a lot more in Debunking Economics worth discussing, and a lot more to say about the failings of neoclassical economics (for example, the neoclassical view of risk, its view of financial markets, the logic of quantitative easing and the neoclassical ‘theory of value’). But that’s all I really needed to show that neoclassical economics is bunk. My essay on the causes of the Great Recession will explore the rest of these critiques in the course of explaining why the Great Recession happened, why certain remedies worked and others failed, and why we’re still pretty fucked today.

Now that we’ve covered the theoretical and mathematical underpinnings of neoliberalism, I would like to turn to the direct impacts neoliberalism has had on the world. I will not discuss the devastation of the Great Recession directly, because everyone knows that (and I can cover it in my essay on the Great Recession). Instead, I will focus on two other themes: neoliberal globalisation and neoliberal-caused inequality. Joseph Stiglitz will be my main sources for these attacks, even though he is – as Keen has convinced me – still overly attached to the crude way of thinking that helped cause the problems he writes polemics against. Later, I will return to the theoretical underpinnings of libertarianism (/neoliberalism) that aren’t directly derived from neoclassical economics: its Randian philosophy of morality (particularly the idea that self-interest is ‘rational’) and its general ideas about capitalism’s virtues.  

How Neoliberal Globalisation has Fucked the Developing World:

Joseph Stiglitz’s first popular work, Globalisation and its Discontents (2001), is an excellent insider’s account of the self-serving fealty of IMF officials and the US government to a policy of brutal market liberalisation in the late 1990s, and of the devastating consequences it wreaked for the developing world (and continues to wreak to this day).

Until 1993, Stiglitz had a fruitful and impressive career as an academic economist, in which he made several important advances in the “economics of information” (focussing on “asymmetries of information”) and various theories of market imperfection.[10] In that year, he left academia to serve on the Council of Economic Advisers under President Bill Clinton. From there, he moved to the World Bank in 1997, where he served as Chief Economist and Senior vice-President for almost three years, finally leaving in January 2000.  It is the experience of these seven years, particularly his interactions with the IMF, that he draws from to write his scathing account.

From the first page, Stiglitz paints a picture of the IMF as an organisation dominated by neoclassical ideology and rigidly hostile to alternative ways of doing things. As Stiglitz states in the preface, “the IMF’s policies, in part based on the outworn presumption that markets, by themselves, lead to efficient outcomes, failed to allow for desirable government interventions in the market, measures which can guide economic growth and make everyone better off.” One disturbing reason for this was that the IMF was (and is) largely beholden to Western financial and corporate interests. As soon as he entered the international arena, Stiglitz “discovered that neither [good economics nor good politics] dominated the formulation of policy, especially at the International Monetary Fund.” Instead, decisions were made “on the basis of what seemed a curious blend of ideology and bad economics, dogma that sometimes seemed to be thinly veiling special interests.” Not only that, but active censorship was the norm: “Open, frank discussion was discouraged – there was no room for it. Ideology guided policy prescription and countries were expected to follow the IMF guidelines without debate.”

Most disturbingly of all, the sceptics that did exist in the developing countries couldn’t oppose the policies because they feared the cancellation of support – a new form of imperial bondage. As Stiglitz puts it, they were “so afraid they might lose IMF funding, and with it funding from others, that they articulated their doubts most cautiously, if at all, and then only in private.”

Naturally, it is important to acknowledge, as Stiglitz does in chapter 1, that opening up international trade “has helped many countries grow far more quickly than they otherwise have done”, and “enriched much of Asia and left millions of people there far better off”. Globalisation has also expanded opportunities and knowledge. As Stiglitz writes, globalisation has “reduced the sense of isolation felt in much of the developing world and has given many people in the developing countries access to a knowledge well beyond the reach of even the wealthiest in any country a century ago”. However, that shouldn’t at all take away from the central fact about neoliberal globalisation which Stiglitz spends the rest of the book unmasking: that the crude way in which these successes have been achieved has left a massive toll, and wreaked far more damage than it should have done if the policy had been more “gradualist” and fair.

The continent that Stiglitz focusses on first is Africa. In Africa, Stiglitz notes, “the high aspirations following colonial independence have been largely unfulfilled. Instead, the continent plunges deeper into misery, as incomes fall and standards of living decline.” This has been not only due to the scourge of AIDS, but poverty too. In chapter 2, Stiglitz uses the example of Ethiopia to show how, during his time working parallel to the IMF, he saw the rigidity and dogmatism of that institution further exacerbate these problems in Africa.

In 1997, Stiglitz went to meet the Prime Minister of Ethiopia, Meles Zenawu. Stiglitz soon discovered that, as well as being a man of integrity, Zenawu “showed a deeper understanding of economic principles […] than many of the international economic bureaucrats that I had to deal with in the succeeding three years”. He was not an “old-fashioned autocrat” either, but was “committed to a process of decentralisation, bringing government closer to the people and ensuring that the centre did not lose touch with the separate regions”. More pertinently, under his leadership, Ethiopia’s macroeconomic results were impeccable. Stiglitz mentions the following details:

“There was no inflation; in fact, prices were falling. Output had been growing steadily since he had succeeded in ousting Mengistu [the bloody Marxist dictator with whom Meles had waged a seventeen-year guerrilla war]. Meles showed that, with the right policies in place, even a poor African country could experience sustained economic growth” […] Ethiopia had formulated a rural development strategy, focussing its attention on the poor” […] It had dramatically cut back on military expenditures – remarkable for a government which had come  to power through military means”.

Despite these achievements, when Stiglitz arrived, the IMF had suspended its lending program to Ethiopia. This had not been done because the country didn’t need its assistance anymore; Ethiopia was still in the process of rebuilding after a devastating war and the international support was vital. Instead, it was because the IMF had deemed – bafflingly – that the country had not reached its minimum standards. The tough-love policy of the IMF dictates that any country that does not meet its standards for sound economic management must be de-funded. Any other action would merely encourage bad practice, they claim. Yet such policies are not without major consequences. As it is for all countries who face IMF rescission, this represented a double blow for Ethiopia, since it triggered other donors to withdraw support to the country as well.

For such a grave and momentous decision, you’d expect the IMF’s reasoning to be rigorous and airtight. In truth, they had one main worry: that the foreign assistance that provided much of Ethiopia’s revenues was too unstable, and that its budgetary position could only be judged solid if expenditures were limited to the taxes it collected.

But even this one concern was unsound. It was not only captious; it was economically wrongheaded too. Firstly, it was empirically wrong: international assistance is, statistically, “more stable than tax revenues”. Secondly, it was hypocritical: “if neither taxes nor foreign assistance were to be included in the revenue side of budgets, every country would be considered to be in bad shape”. Thirdly, for the kinds of assistance that constitute so much of Ethiopia’s income, “there is a built-in flexibility; if the country does not receive money to build an additional school, it simply does not build the school.” And finally, the IMF hadn’t highlighted any instability that the Ethiopian government officials hadn’t already seriously canvassed themselves. As Stiglitz writes, “they understood the concern about what might happen if either tax revenues or foreign assistance should fall, and they had designed policies to deal with these contingencies”.

However, this wasn’t even the only nonsensical IMF imposition on Ethiopia. At the same time, the IMF had begun another dispute with Ethiopia over an early loan repayment. Although repaying a loan early is an inherently prudent decision for a country like Ethiopia to make, the IMF still objected because “Ethiopia had undertaken this course without IMF approval”. Stiglitz poses an apposite question: “Why should a sovereign country ask permission of the IMF for every action which it undertakes?” As Stiglitz muses, one can’t help feeling that such authoritarianism “smacked of a new form of colonialism”.

The IMF also had a series of more drastic desires for Ethiopian economic reform that confirmed the utter hypocrisy at the core of their outlook. Indeed, Stiglitz uses Ethiopia’s treatment by the IMF to give us the first taste of this leitmotif of the book: that the policies the West imposes on developing countries would never be acceptable to itself. As if to prove that the neoclassical economics the IMF follows is more a mask for Western financial interests than a serious academic theory, the IMF anti-protectionist agenda towards countries like Ethiopia ends up acting as a pro-protectionist agenda for Western banks and corporations. Stiglitz’s account of the financial liberalisation policies in Ethiopia hammers home this abject hypocrisy:

“The IMF wanted Ethiopia not only to open up its financial markets to Western competition but also to divide its largest bank into several pieces. In a world in which U.S. megafinancial institutions like Citibank and Travelers, or Manufacturers Hanover and Chemical, say they have to merge to compete effectively, a bank the size of North East Bethesda National Bank really has no way to compete against a global giant like Citibank.”

Importantly, this kind of crippling of domestic banks doesn’t just affect the bankers themselves; it has huge knock-on consequences for the rest of the economy, since it attracts depositors away from the local banks towards international banks which are invariably “far more attentive and generous when it comes to making loans to large multinational corporations than they will to providing credit to small business and farmers”. In the specific case of Ethiopia, the recommendation also ignored the fact that the domestic banking system was relatively efficient, with a distance between borrowing and lending rates “far lower than those in other developing countries that had followed the IMF’s advice”.

The liberalisation didn’t even stop there, however. Even though it was “completely out of tune with that country’s state of development”, the IMF wanted to ““strengthen” the financial system by “creating an auction market for Ethiopia’s government Treasury bills”. And despite the fact that the US and Western Europe didn’t do so until after 1970, they wanted Ethiopia to allow interest rates to be freely determined by market forces.[11] Once again, the hypocrisy of these directives is clear. Stiglitz underscores this element with a damning historical insight: when the US was in critical stages of its early development and agriculture was more important, it was actually a protectionist country, with its government taking “a crucial role in providing needed credit”. It seems that as soon as a nation becomes strong, self-serving biases kick in.[12]

Thankfully, the Ethiopian administration was wise enough to see the flaws in these policies. The example of their East African neighbour, Kenya – a country that had suffered fourteen banking failures in 1993 and 1994 after following the IMF’s prescription of financial market liberalisation – thoroughly convinced them that accepting any such policy could be disastrous for their drought-afflicted land. Unfortunately, this defiance on liberalisation had also contributed to the IMF de-funding in 1997.

In the end, the hard work and lobbying of the economists in the World Bank (including an immodest Sitglitz) eventually saw the IMF funding to Ethiopia restored. It took months and much wrangling, but it was a victory nonetheless.

Sadly, it had no lasting legacy at all.

The IMF’s brutal neoliberalism didn’t just fuck countries like Ethiopia; it actually wrought two full-blown catastrophes in one decade: the East-Asia crisis and the Russian disaster. As you might expect, Stiglitz devotes a significant portion of the book explicating these terrible calamities, and the reckless IMF malefactions that both caused and exacerbated them.

First, the East-Asia crisis.

As anyone who has read Steve Keen should expect, not a single neoclassical economist was able to predict the collapse of the Thai baht on July 2 1997, nor the chain-reaction and total meltdown that it triggered. The IMF was caught totally by surprise. Given that their rapid liberalisation policies had played such a large part in creating the Asian debt bubble and the perilous economic conditions, they really ought to have been more alert. Then again, what do you expect of economists who – as Keen has taught us – believe that deregulated capitalism leads to equilibrium and don’t think debt is worthy of inclusion in economic modelling? What can you do?

From the 70s onwards, East Asia had undergone a meteoric economic rise, with industries rising out of nowhere and millions being lifted out of poverty within a matter of a few years. As Stiglitz notes, they had achieved this success not because they had followed most of the dictates of the Washington Consensus, but because they had not. They had saved heavily and invested well, and relied on strong government stewardship. They were – to speak metaphorically – maintaining a strong hand on the wheel as they steered through the jagged rocks in the harbour. Although the big Western oil-tankers, fishing trawlers and cruise liners out in the turbulent ocean wanted them to simply let go of the wheel and allow the currents to take their course (partly because they had forgotten how hard it was to get out of the harbour and partly because it suited them to keep new competitors in the harbour), the autonomous method was working well, and some of the ships were even beginning to emerge from the sheltered waters of the bay.

To abandon the metaphor, I mean by this that the government support allowed these countries to produce export goods like mad, because of government-controlled mechanisms like currency devaluation (used amply by China) and subsidy, and enabled countries like South Korea to channel funds into technological enterprise, which quickly propelled companies like Samsung, Daewoo and Hyundai to global status and (more importantly) raised the country from destitution to prosperity.

Significantly, the high-savings rate of countries in East Asia meant they had no need for additional capital: they were self-sufficient and they were developing their own industries at their own pace.

However, in the late eighties, the IMF and US Treasury began pushing heavily for capital account liberalisation (easing restrictions on capital flows across a country’s borders). This would be fatal. In fact, Stiglitz goes so far as to pronounce that it was “the single most important factor leading to the crisis” (his italics). He says this not rashly or dogmatically, but based on the evidence of “the almost one hundred other economic crises of the last quarter century”.

The first problem with capital market liberalisation is the problem of fickle sentiment. Capital flows are inherently “pro-cyclical”. That means they flow into a country during a boom, exacerbating inflationary pressures, and they flow out of a country during a recession, precisely when the country needs it most. This yokes developing countries to “the rational and the irrational whims of the investor community, to their irrational exuberance and pessimism”. And sure enough, when the crisis hit, this precarious situation immediately had catastrophic consequences for Thailand: Thai bonds went from being some of the safest in the world to some of the most risky, and there was a frenzied outsurge of capital – an amount equivalent to 7.9 percent of their GDP in 1997, 12.3% of GDP in 1998 and 7% of GDP in 1999. In other words, they haemorrhaged capital like that eviscerated, mummy-crying soldier in the Normandy scene of Saving Private Ryan haemorrhaged blood.[13] This utterly destroyed the country. A similar dynamic occurred in several other Asian countries, with similar results.

The second big problem is that capital market liberalisation leads to the kinds of speculative debt bubbles that Steve Keen argues have been central to all major capitalist economic crises ever. Before liberalisation, Thailand was benefitting from the security of strong bank regulation; it had imposed harsh limits on bank lending for speculative real estate and capital was going into the right kind of enterprises. The country wisely recognised that “investing the country’s scarce capital would both create jobs and enhance growth”. But when the IMF opened up the capital flows, that all changed. Suddenly, billions were being invested in commercial real estate – so rapidly, in fact, that many of the buildings were completely empty.[14] Stiglitz laments the degeneration: “While Thailand was desperate for more public investment to strengthen its infrastructure and relatively weak secondary and university education systems, billions were squandered on commercial real estate”. This bubble was like a ticking time bomb. And sooner or later it would have to blow (not that the IMF were taking any notice).

But what is more unforgivable than their causal role in the crisis is the IMF’s response to the crisis. The Fund didn’t abandon its insidious ideology, but instead pressed ahead with more inappropriate measures – ultimately making the situation far worse than it could have been and thrusting millions into poverty, squalor and despair.

As East Asia was sliding rapidly towards recession, do you know what the IMF did? They enforced austerity. You know the single worst thing to do when an economy is going into recession? To impose austerity. Austerity fucking multiplies recessions. Austerity means taking money out of the economy; that’s all it fucking means.[15] The right policy to implement is literally the exact opposite i.e. a stimulus.

These contractionary policies also exacerbated the “contagion” in East Asia, helping spread the downturn from one country to the next. As each country weakened, it reduced its imports from its neighbours, thereby reducing those neighbours’ revenue. Even worse, the IMF’s anti-tariff and anti-trade-deficit policies made it impossible for these newly contracted economies to do anything about their situation. There was only one direction in which to move: deeper into recession.

Of course, austerity wasn’t all bad – for Western fatcats, that is. The one positive outcome that came out of the contractionary fiscal and monetary policies just happened to exclusively benefit Western financiers and big corporate interests. Huge trade surpluses meant the countries had the resources to pay back foreign creditors (i.e. Western capitalists).

That wasn’t the end of the IMF mismanagement, either – not by any stretch of the imagination. After imposing a severe austerity, they then imposed a contractionary monetary policy: stratospheric interest rates. Korea first raised its interest rates to 25%, but was told by IMF bureaucrats that it must go still higher. Indonesia raised its interest rates in a pre-emptive move before the crisis, but was told that that was not good enough.

The reasoning behind this IMF policy was simple: if a country raised interest rates, it would make it more attractive for capital to flow into that country. Unfortunately, as with all their justifications, this was totally asinine. To countries that had just experienced a collapsed debt bubble, such oppressively high interest rates guaranteed mass bankruptcy. As Stiglitz explains, “Highly leveraged companies[16] are particularly sensitive to interest rate increases […] At very high interest rate levels, a highly leveraged company goes bankrupt quickly. Even if it does not go bankrupt, its equity (net worth) is quickly depleted as it is forced to pay huge amounts to creditors.” The problem was, as Steve Keen would have told you, that in the IMF model “bankruptcy plays no role” – as absurd as that sounds.

Unsurprisingly, the consequences of this policy were severe. The number of firms in distress increased, which then increased the number of banks “facing nonperforming loans”, which weakened the banks further, and this exacerbated the downturn that the austerity policies were inducing already. Stiglitz gives a couple of disturbing figures to ram home the devastation: “In Indonesia, an estimated 75% of businesses were put into distress, while in Thailand close to 50% of bank loans became nonperforming.”

In 1997, soon after the crisis began, some of the affected countries decided it might be a good idea to try to set up their own monetary fund, to avoid being enslaved to the destructive IMF whim and to “finance the required stimulative actions”. Japan even offered $100 billion to support it. However, as Stiglitz writes, the US Treasury “did everything it could to squelch the idea” and the IMF joined in soon after. Even though the IMF advocated competition in its own domain, it was not willing to compete itself. Likewise, as the sole IMF shareholder with veto powers, the US felt that the Asian Monetary Fund would pose a threat to their leadership and control. As Stiglitz notes, “The importance of control – including control over the media – was brought home forcefully in the early days of the crisis”.

A particular moment proved particularly illuminative of this theme. When the World Bank Vice President for East Asia Jean Michel Severino pointed out that several countries were going into a deep recession, or even depression, he wasn’t received sympathetically, but instead received “a strong verbal tongue-lashing” from Lawrence Summers, because it was “unacceptable” to use the R or D words (even if they were totally appropriate).

The US and the IMF eventually relented on Japan providing funds to support their fellow Asian countries, but they then tried to prevent anything good coming of it. They had first forced the offer to be scaled down to $30 billion, “but even then the United States argued that the money should be spent not to stimulate the economy through fiscal expansion, but for corporate and financial restricting – effectively, to help bail out American and other foreign banks and creditors”.

The IMF also blundered in how they dealt with the East-Asian crisis after the fallout had occurred. Indeed, their harsh bank “restructuring policies” would essentially seal the fate of a depression in Indonesia. Under this restructuring system, the IMF would shut down weak banks immediately if they failed to meet their “capital adequacy ratio” (ratio of capital to their outstanding loans and other assets). While this might sound a reasonable prospect, the difficulty of raising capital during a crisis meant that those banks on the brink had to dramatically reduce loans instead. This in turn dramatically reduced activity and caused a drastic drop in confidence in the private banking system, which killed yet more banks. The IMF’s corporate restructuring policies were similarly lethal.

Overall, the IMF’s dastardly ‘remedies’ proved themselves about as rational as the Medieval practice of letting blood in order to rebalance the “humours”.  Worse, the catastrophe they had caused would have serious social and political consequences. Riots broke out in Indonesia only a few months after the crisis began, with old ethnic tensions returning. Stiglitz emphasises the IMF’s role in this:

“While the IMF had provided some $23 billion to be used to support the exchange rate and bail out creditors, the far, far smaller sums required to help the poor were not forthcoming. In American parlance, there were billions and billions for corporate welfare, but not the more modest millions for welfare for ordinary citizens. Food and fuel subsidies for the poor in Indonesia were drastically cut back, and riots exploded the next day. As had happened thirty years earlier, the Indonesian businessmen and their families became the victims”.

After the riots in Indonesia, the IMF did restore food subsidies. For many, though, this reversal just raised a question: if they could afford these subsidies, why did they take them away to begin with?

Ironically, the two East-Asian nations that “chose not to have IMF programs” before the crisis – China and Malaysia – were the two countries that came out of it in the best shape. Malaysia’s strong banking regulations kept its banking system afloat, while its radically different monetary policy (freezing the currency and lowering interest rates) and its “risky” imposition of capital controls kept the economy stable and allowed it to recover more quickly, “with a shallower downturn, and with a far smaller legacy of national debt”. Despite the capital controls, foreign investment actually increased in Malaysia, given that – as the IMF fails to realise – “investors are concerned about economic stability”. Meanwhile, when China was faced with an economic downturn, it responded with expansionary monetary policy. This prevented a growth slowdown, with public investment continuing as normal.

The Russian transition of the 90s is a similar story of market fundamentalism and misery. What makes it even more tragic than the East-Asian crisis, however, is its historical importance: it guaranteed that a strong democracy would not emerge in post-Soviet Russia. One can even draw a direct link between the IMF’s mismanagement and the rise of Putin.

In purely economic terms, the Russian disaster of the 90s was so bad that Stiglitz – writing at the beginning of the 20^th Century – was able to declare that “For the majority of those living in the former Soviet Union, economic life under capitalism has been even worse than the old Communist leaders had said it would be”. The word “disaster” is not hyperbole: over the decade, the middle-class was obliterated, a system of crony and mafia capitalism was created, and the democratic freedoms that had weakly taken root at the beginning of it were almost entirely gone. Crucially, “Western advisers” are very largely to blame for this disaster. As Stiglitz puts it, their crime was pushing for “a new religion – market fundamentalism – as a substitute for the old one – Marxism – which had proved so deficient.”   

The main issue with the plan that sought rapid market liberalisation for Russia should have been immediately obvious: institutions are important. As Stiglitz argues, an economy needs strong legal and regulatory frameworks, “to ensure that contracts are enforced, that there is an orderly way of resolving commercial disputes, that when borrowers cannot pay what is owed, there are orderly bankruptcy procedures, that competition is maintained, and that banks that take depositors are in a position to give the monkey back to depositors when they ask.” Unlike Russia, we in the West have built up these legal and regulatory frameworks over a century and a half, “in response to problems encountered in unfettered market capitalism”. For example, we introduced bank regulation after massive bank failures, and securities regulation after major episodes in which unwary shareholders were cheated.

In 1989, Russia did not even have banks that made private loans. In fact, everything in the Soviet Union had to change in order for it to become economically Westernised: the artificially lowered price system had to transition to a market price system; markets had to be created, along with “the institutional infrastructure that underlies [them]”; and all property which had previously belonged to the state had to be privatised.

Tragically, the market reformers gave this problem of institution-building short shrift. Even more tragically, the “shock therapists” (another name for these market reformers) far outnumbered the economists who took the problem seriously – the so-called “gradualists”, like Stiglitz. The US Treasury and the IMF were both strident shock therapists. According to the economic logic of these institutions, all that was necessary to create a burst of economic output was to eliminate the distortions of the heavily regulated and excessively rigid system. After that, the cutback in military spending would provide “even more room for increases in the standard of living”.

In reality, this anarcho-capitalist policy would prove disastrous.

The mistakes in the IMF-led transition started very early on. In 1992, most prices were freed overnight, and this immediately set in motion a process of inflation that wiped out savings and threatened to become “hyper-”. Seeing the risk of inflation spiralling out of control, interest rates were raised. This reduced economic activity.

The only prices that weren’t freed and remained low were those for natural resources. Keeping natural-resource prices low seemed like a good idea at the time, as it acted as an invitation for those seeking a big buck – and investors did indeed take it up. However, since only a handful of people were able to get their hands on this kind of asset, the benefits weren’t shared throughout the wider economy. Instead, a plutocracy quickly arose.

Another IMF blunder at around the same time was to push Russia to rapidly privatise. This policy was terrible. It caused state assets to be sold for a pittance, “and done so before it had put in place an effective tax system”. Within no time at all, this huge sell-off created what Stiglitz describes as “a powerful class of oligarchs and businessmen who paid but a fraction of what they owed in taxes, much less what they would have paid in virtually any other country”.

This IMF incompetence quickly resulted in disaster. As Stiglitz writes, “What had been envisioned as a short transition recession turned into one of a decade or more.” He lays out the consequences with a series of damning statistics: “Gross domestic product in post-1989 Russia fell, year after year […] The devastation – the loss in GDP – was greater than Russia had suffered in World War II. In the period 1940-46 the Soviet Union industrial production fell 24%. In the period 1990-99, Russian industrial production fell by almost 60% -- even greater than the fall in GDP (54%).” Moreover, not only was investment halted, but capital was entirely used up: savings were vaporised by inflation, and the proceeds of privatisation or foreign loans were largely misappropriated. Stiglitz sums up the carnage: “Privatisation, accompanied by the opening of the capital markets, led not to wealth creation but to asset stripping” and “billions poured out of the country”.

By the time of the East-Asian crisis, the situation in Russia had got so bad that the government was virtually giving away its valuable state assets, and was simultaneously “unable to provide pensions for the elderly or welfare payments for the poor”. It was also borrowing billions from the IMF, becoming increasingly indebted. To make matters worse, at the same time, the oligarchs – who had received such largesse from the government – were taking billions out of the country. As Stiglitz notes, the IMF-encouraged “opening up of capital accounts” had created a “one-way door that facilitated a rush of money out of the country”.

Things only got worse when the East-Asian crisis actually hit. This crisis triggered a dramatic fall in oil prices, thrusting Russia into its own crisis. The artificially high exchange rate at the time meant there was a real risk that Russia’s oil industry “could cease being profitable”.

Of course, the overvaluation of the ruble had been a major issue for a long time. It had meant that imports were constantly flooding in and forced domestic producers to compete against companies from all over the world. This, in turn, played a large role in creating the mass unemployment that plagued the country. At the same time, the overvaluation was a huge boon for the new class of businessmen, as it meant they needed “fewer rubles to buy their Mercedes, their Chanel handbags, and imported Italian gourmet foods”. It was also a huge boon for the oligarchs trying to get their money out of the country since it meant “they could get more dollars for their rubles, as they squirreled away their profits in foreign bank accounts”.

Despite the suffering on the part of the majority of Russians who were not like these oligarchs, the market reformers and their advisers in the IMF feared a devaluation, because they believed that it would set off another round of hyperinflation.[17] Consequently, they strongly resisted any change in the exchange rate and were even “willing to pour billions of dollars into the country to avoid it”. Indeed, just as the ruble was threatening to crash in July 1998, a combined World Bank and IMF rescue package of $22.6 billion was delivered to save the market.

But three weeks after the loan was made, Russia announced “a unilateral suspension of payments and a devaluation of the ruble”. The ruble immediately crashed. Stiglitz notes the consequences thereafter: “By January 1999, the ruble had declined in real effective terms by more than 45% from its July 1998 level.” Undoubtedly, this had something to do with the fact that most of the bailout money had ended up in Cypriot and Swiss bank accounts – almost none of it had actually gone to needy Russians.

In the end, the fallout of the Russian shock therapy was enormous. In 1989, only 2% of Russians were in poverty. By late 1998, the number had soared to 23.8% (using the $2 a day standard). According to a survey conducted by the World Bank around the same time, “more than 40% of the country had less than $4 a day”. Likewise, more than 50% of children lived in impoverished families. Life spans were also reduced markedly – at the same time as the life spans in the rest of the world increased. In Russia, they were over three years shorter than they were in 1989, and in Ukraine almost three years shorter.

There is plenty more rich, important information in Globalisation and its Discontents about the way the IMF’s brutal neoliberalism has destroyed developing countries, including tales from a huge number of nations that I’ve decided it would be too word-consuming to include. Importantly, little has changed to this day: the IMF is not a radically different organisation today from the one it was then, and this rapine of the vulnerable continues more or less unabated.

The neoliberal juggernaut grinds on. It has a simple goal: socialism for the rich, social Darwinism for the poor; welfare for the West, destitution for the developing.

Without donning a tinfoil hat, it’s important to note that it is by no means an accident that IMF policies do favour the West, and in particular the US Treasury, Wall Street and America’s big multinational corporations. In fact, a few reasons one might expect this a priori can be discerned in its structure: many of the IMF’s key personnel come from the global finance industry (particularly Wall Street), its leadership has always been dominated by Westerners, and it has a system of voting whereby the US wields by far the most power and has the sole veto right, with China in the strangely low position of sixth and developing countries almost entirely impotent. The system really is rigged.

I will now discuss a slightly different aspect of neoliberal globalisation: neoliberal “free-trade” agreements.

As Noam Chomsky has often argued, modern “free trade agreements” really ought to be known by the name The Wall Street Journal once gave them – “free investment agreements”. Indeed, the truth about “free-trade agreements” is that they’re not about free-trade at all. They’re either about allowing big multinational corporations from Western countries cannibalise the industries of less developed countries (as in NAFTA); or they’re about granting big multinational corporations obscene privileges and exemptions from the law (as in the TPP). Just like IMF policies, therefore, free-trade agreements are little more than tools for expanding Western corporate power.  

In the essay “A World without War”,[18] Chomsky discusses NAFTA (the North American Free Trade Agreement) in the course of a broader meditation about the state of the world. He argues that NAFTA, like all “free-investment agreements”, has benefitted no-one except big US multinationals. With a typically mordant turn-of-phrase, Chomsky describes the changes NAFTA has wrought in Mexico as ““trade” only by doctrinal decision”. As he is quick to demonstrate, there is ample evidence for this. For example, two studies into the effects of NAFTA – both of which were suppressed by the media – found NAFTA to have been very harmful for the populace. The Human Rights Watch study on post-NAFTA labour rights found that labour rights “were harmed in all three participating countries”. Similarly, the Economic Policy Institute found that NAFTA “is one of the rare agreements that has harmed the majority of the population in all of the participating countries”. As one would expect, however, Mexico has been the hardest hit. Chomsky documents the toll the treaty has had on America’s lowly neighbour:

“Wages had declined sharply with the imposition of neoliberal programs in the 1980s. That continued after NAFTA, with a 24% decline in incomes for salaried workers, and 40% for the self-employed, an effect magnified by the rapid increase in unsalaried workers. Though foreign investment grew, total investment declined, as the economy was transferred to the hands of foreign multinationals. The minimum wage lost 50% of its purchasing power. Manufacturing declined, and development stagnated or may have reversed. A small sector became extremely wealthy, and foreign investors prospered.”

Although the Mexican economy did grow rapidly in the late 1990s after a sharp post-NAFTA decline, consumers simultaneously suffered a “40% drop in purchasing power”. Moreover, the number of people living in extreme poverty grew twice as fast as the population, and even those working in foreign-owned assembly plants lost purchasing power. And, as the Latin American section of the Woodrow Wilson Center discovered, soon after NAFTA had been introduced, small Mexican companies could no longer obtain financing, traditional farming was shedding workers, and labour-intensive sectors (agriculture, light industry) were finding themselves unable to compete with “highly subsidised U.S. agribusiness”.

NAFTA was also responsible for a massive increase in Mexican border-crossing attempts,. Before it was ratified, critics of NAFTA predicted that it would trigger a sharp increase in the urban-rural ratio, “as hundreds of thousands of peasants were driven off the land”. Instead, something even worse happened: conditions deteriorated so badly in the cities that there was both a huge rural and urban flight to the United States. Chomsky sums up the tragedy of this migration: “Those who survive the crossing – many do not – work for very low wages, with no benefits, under awful conditions”.

In the same piece, Chomsky also makes a much more general critique of global trade policy. Just as Stiglitz indicts the IMF in order to critique the hypocrisy of the global economic system, Chomsky indicts the WTO for the same purpose:

“If the American colonies had been compelled to accept the WTO regime two hundred years ago, New England would be pursuing its comparative advantage in exporting fish, surely not producing textiles, which survived only by exorbitant tariffs to bar British products (mirroring Britain’s treatment of India). The same was true of steel and other industries, right to the present, particularly in the highly protectionist Reagan years – even putting aside the state sector of the economy. […]

As everyone here is aware, the rules of the game are likely to enhance the deleterious effects for the poor. The rules of the WTO bar the mechanisms used by every rich country to reach its current state of development, while also providing unprecedented levels of protectionism for the rich, including a patent regime that bars innovation and growth in novel ways, and allows corporate entities too amass huge profits by monopolistic pricing of products often developed with substantial public contribution.”

The Trans-Pacific Partnership is another agreement that Chomsky has condemned, and to which he has compared NAFTA. As both he and Joe Stiglitz have both pointed out, the TPP is identical to NAFTA in the sense that it is not really a “free-trade agreement”. Rather, it is an extreme corporate protectionist agreement, guaranteeing unprecedented investor rights and effectively forging a non-competitive, undemocratic corporate oligopoly over much of the world.

What little we know of the TPP is extremely disturbing: it will provide even greater drug patent protection for massive pharmaceutical corporations, shutting out new firms; it will extend copyright terms, which are, as Michael Geist noted, “a windfall for record companies, which little benefit to artists and the public”; and most Orwellianly, it will enable Investor-state Dispute Settlement (ISDA), a NAFTA-inherited feature that puts corporations on the same level as states, allowing corporations to sue states merely for introducing regulatory policies they don’t like (including on environmental protection).

And that’s not even to mention the most heinous thing about the TPP: the fact that it is being kept entirely secret from the people. It is a perfect example of the fraud of contemporary democracy.

How Neoliberal Policies have Increased Inequality in the West and Damaged our Democracy:

Everyone’s tale of growing inequality within the West starts with the same two names: Ronald Reagan and Margaret Thatcher. Incidentally, the history of neoliberalism as an important political movement also begins with these two names.

As most people know, Reagan and Thatcher were both very interesting characters. Reagan was a former movie star who had found, when in Hollywood, that progressive taxation gave him a disincentive to work. Not just that, but it would eventually ruin him! (or so he claimed). As the English journalist Nicholas Wapshott writes in Keynes Hayek, “When the fashion in Hollywood leading men switched after World War II from the clean-cut, soft-hearted type like Reagan to hard-bitten heroes like William Holden, Reagan found he was no longer in demand, yet he owed an enormous tax bill from the years he had been earning big money. Facing financial ruin, he concluded that tax was not so much an evil necessity as an outright evil and bolstered a rotten system of waste and dependence.” Though by no means an intellectual, Reagan was an avid reader, with a preference for the two Austrian school titans: Ludwig von Mises and Friedrich Hayek. Both of these men were strong advocates of the free-market and would also inspire Thatcher, as we will see.

While obviously a political radical in some ways, Reagan was, of course, very much in tune with the boosterish, super-materialistic, super-superficial, super-‘positive’ zeitgeist of the 1980s – truly at home on morning television shows or when giving inspirational self-help lectures, always looking highly ‘successful’ with his perfect white-toothed smile and his tanned gym physique. As befitted the culture at the time, he also passionately subscribed to a doctrine that still largely pervades America today: that the wealthiest are the smartest and most talented, and that everyone deserves their place in the Great Chain of Capitalism. This was really the core of his life philosophy, and I suspect it was this inhume instinct that caused a selection bias in the economic theorists he read (it was not that Austrian school economics actually gave him the life philosophy).

In short, therefore, Reagan held conventional libertarian views. He described government as “like a baby” – “An alimentary canal with a big appetite at one end and no responsibility at the other” – and claimed that the most terrifying words in the English language were “I’m from the government and I’m here to help.” Correspondingly, he was a strident critic of the welfare state, and once remarked, “Welfare’s purpose should be to eliminate, as far as possible, the need for its own existence”.

Margaret Thatcher is perhaps best described as the English equivalent of Ronald Reagan. Much less sunny, much more stern, stiff-lipped, starchy, more pale, more grim, more formal, more serious, a little more intellectual and a lot less charismatic – but in worldview almost identical. As (the brilliant finance writer) Satyajit Das observes in Extreme Money, “Thatcher believed in personal responsibility, thrift and probity. She was christened ‘Milk snatcher’ for stopping free milk for children at school. She earned the nickname TINA – ‘There is no alternative’.” As I intimated before, Thatcher was also a big admirer of Friedrich Hayek – not only his economics but his political views too, which were very libertarian (and therefore went hand in hand with the economics).[19] Soon after assuming the Conservative leadership, when meeting the party’s left-leaning research department, she reached into her bag and slammed a copy of Hayek’s The Constitution of Liberty on the table. “This is what we believe!” she cried. (Clearly she took little notice of the anti-conservative and anti-nationalist arguments in this book.) All in all, she was a lovely person.

In office, Reagan and Thatcher became very close friends and confidents, and apparently got on like a house on fire. They were almost perfectly united on policy matters, including Cold War strategy. Their only falling out was over Reagan’s unannounced October 1983 invasion of Grenada, and even then the hostility didn’t last.

Although Reagan and Thatcher both read the economics of the Austrian school, their policies concurred just as much, if not more, with the mainstream neoclassical economics of the Chicago School, whose leading lights I lambasted back when I was debunking their theories. The Chicago School was highly influenced by the Austrian school, but did not take seriously its message of epistemic uncertainty and its nihilistic claim that actually trying to understand the economy was futile. This made it perfect as a basis for a political movement. Indeed, Milton Friedman himself was as much a political figure as he was an economist.[20] Friedman ended up being an advisor to both Thatcher and Reagan, and had an official role with the latter. Thatcher even invited Friedman to dine with her cabinet in 1980, when those in her own party were still sceptical of her economic policies. More importantly, after Reagan trounced Jimmy Carter in the same year, Friedman was invited to join the president’s new Economic Policy Advisory Board, or EPAB, with George Schultz at its head. The choice of chairman of Reagan’s Federal Reserve, Paul Volcker, also added to Friedman’s power, as Volcker was an avowed monetary Friedmanite.

While Friedman may have initially grumbled that government and central banks (especially the British) were applying his ideas incorrectly, it’s fair to say that much of Thatchernomics and Reaganomics did fit the template of Chicago School economics. In general, neoliberalism is little more than a real-world implementation of Chicago School economics, as I’ve been saying since the beginning of this essay. Not that that should be construed as a victory for the pointy-heads, of course. As we’ve learned, Chicago School economics (/mainstream neoclassical economics/Freshwater economics) is not really a rigorous academic theory. It’s essentially nothing more than a radical, right-wing political dogma put into crude, mathematical form. It verges on propaganda – a systematic effort to convince people that what seems like social Darwinism is, in fact, social utopia. As John Kenneth Galbraith drolly observed, this is a theory that states, “The poor do not work because they have too much income; the rich do not work because they do not have enough income.” It is total nonsense. Taking the reins off big corporations and banks does not increase social welfare. 2 + 2 does not equal 5.

It should be stressed, of course, that the actual governmental implementation of economic theories is never quite as pure as the theories themselves, and it was the same with Friedman. As we have seen already, though neoliberalism is largely undergirded by his style of neoclassical economics, there’s also a tremendous amount of Western hypocrisy about market liberalisation and dropping trade barriers that would not be tolerated by the theories (if you take them literally). Indeed, hypocrisy on the matter of free-market worship is a theme we have seen again and again.

On the other hand, one could argue that neoliberalism actually represents the subtext of neoclassical economics in this way: it often seems that the exact details of Chicago School theory were never relevant, just the impression it seems to give of exculpating corporate tyranny, predatory lending and unaccountable greed. I honestly think this makes sense of a lot of things. After all, Friedman and his fellow theoretical economists were not even themselves hung-up about the inconsistencies or Western hypocrisies of neoliberalism. They have never expressed concern over the mendacity of the phrase “free-trade deals” or condemned the IMF double-standards, or spoken out against the American corporate protectionism even going on today. On the contrary, mainstream neoclassical economists have been instrumental since the 80s in making the policies that appeared to distort the purity of their theories, in order to benefit the superwealthy of Wall St at the expense of the rest. That’s why it’s not too melodramatic to say – as Chomsky has done – that most of them are more propagandists than serious academics.

But enough with this philosophical distraction. Let us now delineate the specific policies of Reagan and Thatcher.

Both Reagan and Thatcher cut personal income and company taxes. In America the top personal tax rate was slashed from 70% to 28%, and in the UK the top personal tax rate was sheared from 98% to 40%. Reagan gave his radical tax policies an air of economic seriousness by the invocation of the “Laffer curve” and the idea of “supply-side economics” (as opposed to Keynesian demand-side economics, which involved public spending). Thatcher mostly just gave the public stern looks.

Reagan ended the price controls on domestic oil that had exacerbated the 1970s energy crisis. In order to ‘increase flexibility’ and ‘remove barriers to competition’, he deregulated banking, telecommunications, airlines, electricity, gas, water and transport. Thatcher privatised £29 billion worth of British state-owned companies, reversing decades of nationalisation and government ownership over just about everything, and sold £18 billion worth of council housing, leaving huge numbers homeless.

They both attacked workers, deregulating the labour markets and dramatically weakening the unions. Although Reagan may once have been the president of the Screen Actors Guild, he no longer felt any sympathy for unions once president of the United States. Famously, in 1981, he responded to a strike by federal air traffic controllers by declaring an emergency, then firing over 11,000 of those striking. This effectively broke the air union, and left other unions demoralised. In The Price of Inequality, Stiglitz writes that this brutal move “represented a critical juncture in the breaking of the strength of unions”. In the UK, Thatcher and “her trusted enforcer Norman Tebbit” (Das) waged a long and savage war of attrition with the National Union of Mineworkers, eventually prevailing – though at the expense of cementing her reputation as a psychopathic villain among much of the British population.

Reagan also cut spending, but not sufficiently to offset the reduction in tax revenue. He reduced non-military spending such as food stamps, federal education and environmental programmes. Only the politically sensitive entitlement programmes, such as social security and medicare, were maintained. Even so, large budget deficits remained, because of huge military spending. In order to cover these deficits, America began to borrow heavily domestically and abroad. National debt increased from $700 billion to $3 trillion. (Thatcher did manage to balance the books on account of her massive selling campaign.)

Reagan’s monetary policy was initially very harsh. In a fairly extreme attempt to lower inflation, Paul Volcker drastically reduced the money supply at the start of 1981, leading to a deep recession that lasted sixteen months in 1981-82. Fortunately, this tough measure did begin to pay off, as inflation soon fell precipitously – from 11.8% through 1981 to 3.7% in 1983. However, it wasn’t without a cost: unemployment. Unemployment in fact rose to its highest level since the Great Depression. In 1980, Reagan inherited an already high jobless rate of 7.1%; by 1983 it had reached 9.7% and remained near that level in 1984.

Eventually, however, the whole Reaganomics program seemed to be vindicated. While between 1978 and 1982, the economy grew at 0.9% in real terms, between 1983 and 1986 it soared to 4.8%. This growth then translated into jobs, and by the time Reagan left office in January 1989 the jobless figure was at 5.3%. Despite huge budget deficits, Friedman therefore felt confident enough to boast about Reagan’s successes, claiming the president had “unleashed the basic constructive forces of the free market” and that the post-1983 prosperity was a product of this liberalisation.

Thatcher had an extremely similar early trajectory to Reagan economically. Inflation had reached the dizzying heights of over 25% in the mid-1970s in Britain, and Thatcher’s sharply raised interest rates and spending cuts did bring it down – but at the cost of a recession and a sizeable upsurge in unemployment. The employment did slowly start to come down with a boom in 1983, and after that, the results were mixed.

Thatcher’s tenure was also generally characterised by social unrest, which is reflected in how depressed Morrissey and The Joy Division sound, and how disturbing The Young Ones is.

Although mainstream neoclassical economists still claim the Reagan years as some sort of victory, one can make a very good case that his successes have virtually nothing to do with Chicago School theory. To begin with, Reagan didn’t really abandon public spending. One fact that Friedman didn’t like to mention was that, at the same time as Reagan was slashing spending for education and the like, he was pumping gigantic amounts of money into defence. In fact, this spending alone was channelling taxpayers’ money into the economy at an unprecedented rate. In the years 1980-1988, military spending soared from $267 billion to $393 billion (in constant dollars). This spending is one of the major reasons why public debt grew from a third of GDP in 1980 to more than half of GDP by the end of 1988 (from $900 billion to $2.8 trillion), a process that transformed America from the world’s largest creditor to the world’s largest debtor. Importantly, this spending – along with a few other Reagan policies – actually follows a Keynesian principle. According to the Nobel Prize-winning MIT economist Robert Solow, “The boom that lasted from 1982 to 1990 was engineered by the Reagan administration in a straightforward Keynesian way by rising spending and lowered taxes, a classic case of an expansionary budget deficit.” Along the same vein, Galbraith called Reaganomics “involuntary anonymous Keynesianism”.

Of course, Reaganomics was mostly not at all Keynesian. What it was instead was a violent, plutocratic coup d’état that ravaged the country and is a significant reason for both our current economic travails and our bleak future prospects. I would go so far as to rank Reagan up with Pol Pot as one of the greatest villains of the second half of the 20^th Century. I would put Thatcher below Reagan only because of her less significant effect on geo-politics and global economic development. Friedman is surely in the top 50. Incidentally, all three of these characters were supportive of Pinochet and his murderous dictatorship.  

What makes this entire historical movement of the 80s seem yet more absurd is that it didn’t even reduce the size of government. Satyajit Das makes a very interesting point about the perverse overall effect of Reagan and Thatcher’s deregulation: “Governments actually became larger. Deregulating industries concentrated market power and reduced competition, necessitating renewed state intervention. Technological innovation, encouraged by free markets, rapidly reshaped industries, creating non-competitive monopolies requiring regulation. The neoliberal programme encountered an old problem recognised by Keynes: “Capitalism is the stounding belief that the most wickedest of men will do the most wickedest of things for the greater good of everyone”.”

Deregulation would also have consequences that no neoclassicals could foresee. Indeed, perhaps the biggest evil of Reagan’s presidency was to set in train the process of financial deregulation, which in turn began the financialisation of the economy. Subsequent presidents took Reagan’s development in this direction so far that just before the Great Recession hit, the financial sector made up 40% of US GDP! As most people now realise, the deregulation itself was the major political cause of the Great Recession, since it both helped create debt bubble in housing (and before it in the internet), and encouraged the kind of financial risk-taking, malpractice and reckless speculation that directly precipitated it. Moreover, the excessive financialisation of the economy amplified the impact of the crisis when it happened.

Financialising the economy also allowed Reagan and successive presidents to increasingly neglect manufacturing jobs in America. Instead of supporting American industry, they lowered capital controls so that US corporations could move offshore and exploit cheap labour in the developing world. This not only encouraged the destructive globalisation that Stiglitz documents in Globalisation and its Discontents, but it is also one of the major reasons for the increasing inequality that now plagues America. Manufacturing jobs in companies like General Motors used to employ huge swathes of America’s uneducated, giving them strong and stable incomes, and enough money to buy a home, support their family and retire. Because of these industries, uneducated men coming out of school used to believe that, if they worked hard, they really could achieve the American Dream. In cities like Detroit, these manufacturing jobs were the lifeblood of the community, providing almost the sole basis for their prosperity. But neoliberal globalisation, combined with automation, has eviscerated cities like Detroit. Crime rates in these cities climbed massively in the late 80s and early 90s and are now on the rise again, and the communities in these towns have been shattered, with infrastructure in decay and institutions in ruin. For young black men in Detroit, the prison-industrial complex has essentially replaced manufacturing – especially since Clinton’s Violent Crime Control and Law Enforcement Act of 1994 changed the nature of policing. There are now 2.3 million Americans in prison. As most people know, the US incarceration rate is the world’s highest and some nine to ten times that of many European countries. Almost 1 in 100 American adults is behind bars. As Stiglitz observes in The Price of Inequality, “Some US states spend as much on their prisons as they do on their universities.”

For older men, particularly white men, long-term unemployment has been the result of the change. Unskilled workers have simply not been able to find any jobs to replace their old ones. The unskilled jobs that now exist in America pay a pittance, provide no retirement schemes and tend to be occupied by desperate immigrants who have no other options. This trend largely explains the poor white-male disaffection that has, most recently, assisted the rise of Donald Trump, and before it gave rise to The Tea Party. These frustrated folk don’t realise, of course, that Trump is a corporate fatcat who doesn’t give a shit about the poor, ^[21] or that “small government” will hurt them more.

Thatcher also financialised the British economy, with similarly dramatic consequences. Inequality in Britain was just average for the advanced industrial countries in the early 80s; now it is second only to the US. Moreover, the rise of the English Defence League and the UKIP party is probably partly attributable to the economic developments that Thatcher began in England.

I will now draw from The Price of Inequality in order to paint a broader picture of how neoliberalism has increased inequality in the West (particularly the US) since Reagan and Thatcher, and how it has simultaneously damaged our democracies and societies. I’ll start by unleashing a bombardment of Stiglitz’s stats on inequality today.

In America, the share of national income going to the top 0.1% (some 16,000 families) has risen from just over 1% in 1980 to almost 5% now – an even bigger slice than the top 0.1% got in the Gilded Age at the end of the 19^th Century. The 400 wealthiest Americans took home an hourly “wage” of $97,000 in 2009 – a rate that has more than doubled since 1992. The taxes on forms of income received disproportionately by the rich (capital gains, more than half of which are earned by the top 0.1%) are now at 15%, having been lowered under Clinton to 20% in 1997 and to their current level under Bush. Interest on municipal bonds, another favourite of the rich, is not even taxed. The result is that the top 400 income earners in the United States paid an average tax rate of just 19.9% in 2009.

After a slight dip in 2007, the ratio of CEO annual compensation to that of the typical worker by 2010 was back to what it had been before the crisis – a mammoth 243 to 1. In Japan, the corresponding ratio is 16 to 1. Twenty five years ago, the US ratio was 30 to 1. Some thirty years ago, the top 1% of income earners received only 12% of the nation’s income. By 2007, the average after-tax income of the top 1% had reached $1.3 million, but that of the bottom 20% had reached only $17,800. The top 1% get in one week 40% more than the bottom fifth receive in a year; the top 0.1% received in a day and a half about what the bottom 90% received in a year; and the richest 20% of income earners earn in total after tax more than the bottom 80% combined. Even after the wealthy lost some of their wealth as stock prices declined in the Great Recession, the wealthiest 1% of households had 225 times the wealth of the typical American, almost double the ratio in 1962 or 1983. The Walton family, the six heirs to the Wal-Mart empire, command wealth of $69.7 billion, which is equivalent to the wealth of the entire bottom 30% of US society.

In the first post-recession years of the new millennium (2002 to 2007), the top 1% seized more than 65% of the gain in total national income. Most Americans were growing worse-off in this time.

In the period of recession, from 2007 to 2010, median wealth fell by almost 40%, back to levels last seen in the early 1900s. As Stiglitz points out, “If the bottom had shared equally in America’s increase in wealth, its wealth over the past two decades would have gone up by some 75%.” Before the crisis, the average wealth of the bottom fourth was a negative $2,300. After the crisis, it had fallen sixfold, to a negative $12,800. Real wages have declined during the slump, by nearly 1% for men and more than 3% for women from 2010 to 2011 alone. Incomes have also. Adjusted for inflation, median household income in 2011 was $50,054, lower than it was in 1996 ($50,661).

The gains of the “recovery” since the recession have accrued overwhelmingly to the wealthiest Americans: the top 1% of Americans gained 93% of the additional income created in the country in 2010, as compared with 2009. Before the Recession, the poor and middle had most of their wealth in housing. As average house prices fell more than a third between the second quarter of 2006 and the end of 2011, a large proportion of Americans – those with large mortgages – saw their wealth essentially wiped out.

For three decades, the incomes of America’s middle-class have barely budged. The income of a typical full-time male worker has stagnated for well over a third of a century. Young men (aged twenty-five to thirty-four) who have only graduated from high school have seen their real incomes decline by more than a quarter in the last twenty-five years. Even households of individuals with a bachelor’s degree or higher have not done well – their median income (adjusted for inflation) fell by a tenth from 2000 to 2010. Over the last three decades, those with low wages (in the bottom 90%) have seen a growth of only around 15% in their wages, while those in the top 1% have seen an increase of almost 150% and the top 0.1% of more than 300%.

At the same time as median incomes have dwindled, tuition and fees in public colleges and universities have increased, on average, by a sixth between 2005 and 2010. This ridiculous state of affairs is leaving millions of young Americans in a parlous situation, crippled by debt and yet heading into a flat job market. Uni fees have also risen faster than income in other countries, like Australia.

The Gini coefficient is a number that encapsulates a country’s inequality. Sweden, Norway and Germany have Gini coefficients of 0.3 or below. In 1980, the Gini coefficient of America was just touching 0.4; now it’s 0.48. According to UN data, that makes America slightly more unequal than Iran and Turkey.

This obscene level of inequality in America is having drastic effects on health, education and community cohesion.

As medical care has improved, life expectancy has increased – on average, in the United States, by some two years between 1990 and 2000. But for the poorest group of Americans there has been no progress, and for poor women life expectancy has actually been declining. Women in the US, on average, have the lowest life expectancy of women in any of the advanced countries. Non-Hispanic white women with a college degree have a life expectancy that is some ten years greater than the life expectation of black or white women without a high school diploma. Non-Hispanic white women without a high school diploma lost about five years of life expectancy between 1990 and 2008. White males without a high school diploma have seen a three-year decline in life expectancy over the same period. Stiglitz notes that one of the main factors is “the growing lack of access to health insurance among the groups at the bottom of the population”.

Some fifty million Americans lack health insurance, meaning an illness can push the entire family close to the precipice. Recent research has shown that by far the largest fraction of personal bankruptcies involve the illness of a family member.

In general, life expectancy in the United States is 78 years, lower than Japan’s 83 years, or Australia’s and Israel’s 82 years. According to the World Bank, in 2009 the United States ranked fortieth overall, just below Cuba. America’s poor have a life expectancy that is almost 10% lower than those at the top.

Full-time employment declined by 8.7 million from November 2007 to November 2011. American unemployment insurance extends for only six months. Almost half of the jobless are long-term unemployed. A poll by the New York Times late in 2011 revealed that only 38% of the unemployed were then receiving unemployment benefits, and some 44% had never received any. Of those receiving assistance, 70% thought that it was very or somewhat likely that the benefits would run out before they got a job. For three-quarters of those on assistance, the benefits fell far short of their previous income. More than half of the unemployed had experienced emotional or health problems as a result of being jobless but could not get treatment, since more than half of the unemployed had no health insurance coverage.

An increasing fraction of young adults are living with their parents: some 19% of men between twenty-five and thirty-four, up from 14% as recently as 2005. For women in this age group, the increase was from 8% to 10%.

The fraction of those in poverty was 15% in 2011, up from 12.5% in 2007. By 2011, the number of American families in extreme poverty – living at least one month of the year on two dollars a day per person or less, the measure of poverty used by the World Bank for developing countries – had doubled since 1996, to 1.5 million. The “poverty gap”, which is the percentage by which the mean income of a country’s poor falls below the official poverty line, is at 37% for the United States, making it one of the worst-ranking countries in the OECD, in the same league as Mexico (38.5%). The fraction of Americans depending on government to meet their basic food needs is 1 in 7. Large numbers of Americans go to bed at least once a month hungry because they can’t afford food. Almost a quarter of all American children live in poverty.

According to the Economic Mobility Project, “there is a stronger link between parental education and children’s economic, educational and socio-emotional outcomes” in the US than in any other country investigated, including those of “old Europe” (the UK, France, Germany and Italy), other English-speaking countries (Canada and Australia), and the Nordic countries Sweden, Finland, and Denmark. A variety of other studies have corroborated these findings. In Denmark, there is almost perfect equality of opportunity: only 25% of those in the bottom fifth see their children end up in the bottom fifth. Britain does only a little worse at 30%. However, in America, 42% of those in the bottom fifth stay there. Almost two-thirds of those in the bottom 20% have children who are in the bottom 40%. A collaboration of the Economic Mobility Project and the Economic Policy Institute found that poor kids who succeed academically are less likely to graduate from college than richer kids who do worse in school, and that – even if they graduate from college – the children of the poor are still worse-off than low-achieving children of the rich. Only around 9% of students in America’s highly selective colleges come from the bottom half of the population, while 74% come from the top quarter. Part of the reason for this is that poor people are more likely to suffer poor nutrition and be exposed to environmental pollutants that can have lifelong effects.

Sean Reardon of Stanford has found that the “gap in test scores between rich and poor American children is roughly 30-40% wider than it was 25 years ago.”

Minorities are disproportionately affected by the inequality. Between 2005 and 2009, the typical black household has lost 53% of its wealth – putting its assets at a mere 5% of the average white American’s, and the average Hispanic household has lost 66% of its wealth.

We have now finished the bombardment. Now onto the analysis.

It is worth stressing that not a single bit of this wretched inequality can be justified by any economic argument. In fact, there is substantial evidence showing that growth in the US has been strongest in periods of higher equality – when everyone was growing together. This can be seen not only in the decades after World War II but, even in more recent times, in the 1990s.

Furthermore, for what should be obvious reasons, progressive taxation is almost always going to be better for the economy as a whole than regressive taxation. Extracting a fair amount from the rich helps fill government coffers, encouraging investments in education, technology and infrastructure. This boosts aggregate demand and prepares the economy for the future. It is no accident that the Golden Age of capitalism was an era of progressive taxation. We can also see evidence for the benefits of high taxes in more recent times – for example, in countries like Sweden. From 2000 to 2010, high-taxing Sweden grew far faster than the United States: 2.31% versus 1.85%.

In his explanations for America’s abject state of inequality, Stiglitz – like me – identifies Reagan’s presidency as the turning point, and sees Reaganomics and Chicago School economics as the main culprits for all the factors that have led to the current state of affairs: the financialisation of the economy, the emergence of an oligopoly of massive banks, the increase in corporate and financial “rent-seeking” of all kinds (lower corporate tax, “regulatory capture”, government munificence, higher CEO pay, LIBOR), the greater monopolisation of big industries (allowed by the repeal of Roosevelt’s monopoly-breaking laws), neoliberal globalisation, the flagrant tax inequalities, and weakened social security and healthcare. As Stiglitz documents, this hasn’t just been a Republican movement, but a general economic shift since the 80s. Indeed, neoliberalism has taken over both major parties in America, and as the Democrats have got more right-wing, this has pushed Republicans to a laissez-faire extreme.[22] Bill Clinton’s government, for example, was utterly neoliberal. Guided by its widely lauded Chairman of the Federal Reserve, Alan Greenspan,[23] Clinton’s government actually prosecuted Chicago School economics as fervently as Reagan did, if not more. Clinton not only accepted Greenspan’s low-interest rate monetary policy (even as it helped to create the explosive dot-com bubble); he also oversaw a flurry of deregulatory ‘reforms’. Most damnably, Clinton was instrumental in repealing the famous Glass-Steagall Act of 1933 – the most direct political cause of the Great Recession.

Away from America, Stiglitz argues that the (neoliberal) structure of the Eurozone has created tremendous problems for the struggling countries within it. During the decade before the crisis, Spain was one of the countries to buck global trends – wage inequality actually fell. But Spain has been devastated by the global slump. Unemployment at one point exceeded 25% and youth unemployment 50%. The great tragedy of unemployment at such levels is that it creates a vicious cycle of government debt. Stiglitz puts it in the following way: “as unemployment increases, wages (adjusted for inflation) decrease. As GDP decreases and unemployment increases, tax revenues fall, and expenditures on social programmes rise. The deficit increases.” What this cycle means is that there’s no way of repairing the massive budget deficits (the main preoccupation of Eurozone countries) without reducing unemployment, and yet the government is not willing to spend any money on creating new jobs. It’s a perfect Catch-22 situation. Ordinarily, countries could lower their exchange rate and interest rates to make their economy more competitive; the resulting increase in exports would help boost the economy. But Spain gave up these important tools when it joined the Eurozone, and – remarkably – the Eurozone didn’t offer new policy instruments to take the place of these traditional adjustment mechanisms.

Another issue was that the diagnosis of the European leaders focussed on fiscal profligacy – completely ignoring the fact that two of the crisis countries, Spain and Ireland, had been running surpluses before the crisis.[24] This meant that the EU prescription was austerity, even though – as Stiglitz notes – no country has ever recovered from a crisis through austerity. Unless export growth can compensate for contracting government expenditures, austerity will inevitably lead to higher unemployment. But the crisis countries couldn’t adjust their exchange rate, and amid a global slowdown, expansion of exports would have been difficult anyway. Ultimately, as Stiglitz writes, “The countries that have followed austerity – whether voluntarily, as in the case of the UK, or involuntarily, as in the case of most of the other Eurozone countries – went into deeper downturns, and as the downturns deepened, the hoped-for improvements in the fiscal position were disappointing.”

Yet another flaw in the Eurozone that exacerbated the crisis was the lack of regulations on capital flows. In Spain, in the aftermath of the bursting of its property bubble and the adoption of austerity programs, confidence in the country’s banking system started to erode, as one would expect. But because there were no contingencies in place to stop money leaving the country, this caused many to take their money out of Spanish banks and transfer them into stabler, stronger German institutions. This, in turn, weakened the Spanish banks, causing them to lend less and tightening the credit squeeze. In the end, the combined effects of austerity and the credit squeeze amplified the downturn.

A final problem is the ease of human (rather than capital) movements within Europe, which affects the ability of European governments to raise revenue through taxes on high-income earners. When France began discussions about raising taxes on its highest-income individuals in late 2012, Bernard Arnault, the country’s richest man, decided to seek Belgian citizenship. With movements within Europe so easy, and with no tax harmonisation, it is relatively easy for rich individuals to relocate to low-tax jurisdictions. As Stiglitz keenly observes, “Free mobility of labour without tax harmonisation is an invitation to a race to the bottom – for jurisdictions to compete to attract high-income individuals and profitable corporations by offering them lower taxes. Tax competition thus weakens the ability to engage in progressive tax policies, and limits the ability to “correct” an increasingly unequal market distribution.”

The flaws in the Eurozone model are, of course, best revealed by Greece – the country hardest hit by the crisis. In Greece, the forced austerity imposed by the European Central Bank, and their privileging of banks above the Greek people, has led to a total catastrophe. It had already led to a total catastrophe when Stiglitz was writing in late-2012. In the preface to the paperback edition of The Price of Inequality, he writes that there is a shortage of life-saving medicines in the country, “a condition that one encounters only in the poorest of developing countries”. He writes that unemployment is so bad in Greece that those who can get work take any job offered, “even if it is not what they trained for and aspired to”. And he notes that many of those who can’t get a job, especially among the young, “are emigrating” – a process that is tearing families apart, and hollowing the country out of its most talented people. Tragically, this dire state of affairs hasn’t changed since. Although the far-left party Syriza promised to throw off the shackles of austerity when they were elected in January 2015, their leaders resiled from their convictions only a few months later – accepting in August a third bailout package with impossible austerity conditions attached. This deal was the “surrender document” that caused their Finance Minister Yanis Varoufakis to resign, and the same one that he has been bemoaning in his impassioned public talks ever since.

Perhaps the most important argument Stiglitz makes in The Price of Inequality is on the impact of inequality on democracy. Influenced by Thomas Ferguson’s Investment Theory of Party Competition, Stiglitz shows how capitalist democracies have an inherent tendency towards plutocracy, and how that tendency is further exacerbated by inequality.   

The influence of wealth on ‘democracy’ works at all levels of the process. For average Janes and Joes, voting in an election provides little benefit and often involves a hefty cost. Researching the candidates and their policies is time-consuming and difficult; registration can be a burden; voting (in the US) takes place on a workday, making it hard for those who need to work to survive; and getting to polling stations may be challenging, especially for people with limited mobility. All this gets easier the wealthier you are – thus reducing the cost.

Wealth insinuates itself into the process in quite subtle ways, too. It is more likely for those with greater education to be politically engaged, and to trust in the democratic process. The highly educated also tend to be wealthier, and their extensive education means they are likely to be thoroughly indoctrinated in state myths. Conversely, it is more likely for the disillusioned, distrustful and radical to abandon voting at all. All these factors guarantee that those who do vote will tend to have views fitting neatly within the conventional doctrinal system; dissidents and radicals will be filtered out.

Then there are the direct influences. For the very wealthy, the democratic process is fundamentally different, because they don’t just vote; they also participate financially. Participating in the system in this way turns the process of engagement from a burden into a potential boon. By putting their money into the political process, wealthy people are essentially making an investment – one that may be paid off handsomely if the outcome is a government passing policies more favourable to them and their fortune. Since our Western political system is very open to money flows and money equals power in our economic system, being wealthy does give one significant power to shape the process in our society. In the US, the corruptibility of their system was increased only recently by the 2010 decision in the case of Citizens United vs Federal Election Commission. As Stiglitz describes it, this ruling “essentially approved unbridled corporate campaign spending” by allowing “corporations and unions to exercise “free speech” in supporting candidates and causes in elections to the same degree as individual human beings” (my emphasis). It is not hard to see why such loosening of regulations is poisonous to democracy: “Since corporations have many millions of times the resources of the vast majority of individual Americans, the decision has the potential to create a class of super-wealth political campaigners with a one-dimensional political interest: enhancing their profits”.

Even without regressive laws like these, the wealthy have a number of channels of influence: personal donations, standard corporate donations, and – if they’re mega-wealthy – through their own personal lobbying organisations. As Stiglitz observes, one of the ironies of this system is that the wealthy have a strong incentive to make common people disillusioned with the political process, and – at the same time – common people are often disillusioned with the political process because of the impression it is rigged. The wealthy have this incentive because they knew that if people are sufficiently disgusted with the process to stop voting, a higher proportion of the votes will favour the corporate and financial puppets instead. As David Foster Wallace informed the readers of Rolling Stone Magazine in his worst essay, “Up, Simba”, “If you are bored and disgusted by politics and don't bother to vote, you are in effect voting for the entrenched Establishments of the two major parties, who please rest assured are not dumb, and who are keenly aware that it is in their interests to keep you disgusted and bored and cynical and to give you every possible reason to stay at home doing one-hitters and watching MTV on primary day. By all means stay home if you want, but don't bullshit yourself that you're not voting. In reality, there is no such thing as not voting: you either vote by voting, or you vote by staying home and tacitly doubling the value of some Diehard's vote.”

The height of the absurdity comes in the fact that, because the fatcats know the spectre of the bought-election is one of the things that causes common people to become disillusioned and disenfranchised, some of them may have an incentive to advertise their corrosion of democracy. Of course, is not at all in the best interests of the politicians to display the donations they receive from the wealthy, as they still want average people voting for them, and that will best be achieved under the pretence that they are authentic, sincere and committed to the common good. On the other hand, the fact that the politicians are not really sincere and not really committed to the common good – and are instead perfidious, venal and megalomaniacal crooks – may also increase disgust and disillusionment, thus reinforcing the plutocratic trend.

The most important arm of plutocratic control is, of course, the media – as Edward Herman and Noam Chomsky demonstrate in Manufacturing Consent.

Herman and Chomsky’s “Propaganda Model” includes five “filters” of information that function to exclude more radical, dissident or anti-establishment views, or to discourage critical thinking and sophisticated analysis, thus setting the parameters for the doctrinal system. As they themselves put it, “[The filters] fix the premises of discourse and interpretation, and the definition of what is newsworthy in the first place, and they explain the basis and operations of what amount to propaganda campaigns”. These filters are as follows:

“(1) the size, concentrated ownership, owner wealth, and profit orientation of the dominant mass-media firms; (2) advertising as the primary income source of the mass media; (3) the reliance of the media on information provided by government, business, and "experts" funded and approved by these primary sources and agents of power; (4) "flak" as a means of disciplining the media; and (5) "anticommunism" as a national religion and control mechanism.”

Wikipedia offers an excellent explanation of the action of these five filters:

Ownership[edit]

Main article: Concentration of media ownership

The size and profit-seeking imperative of dominant media corporations create a bias. The authors point to how in the early nineteenth century, a radical British press had emerged which addressed the concerns of workers but excessive stamp duties, designed to restrict newspaper ownership to the 'respectable' wealthy, began to change the face of the press. Nevertheless, there remained a degree of diversity. In postwar Britain, radical or worker-friendly newspapers such as the Daily Herald, News Chronicle, Sunday Citizen (all since failed or absorbed into other publications) and the Daily Mirror (at least until the late 1970s) regularly published articles questioning the capitalist system. The authors posit that these earlier radical papers were not constrained by corporate ownership and were therefore free to criticize the capitalist system.

Herman and Chomsky argue that since mainstream media outlets are currently either large corporations or part of conglomerates (e.g. Westinghouse or General Electric), the information presented to the public will be biased with respect to these interests. Such conglomerates frequently extend beyond traditional media fields and thus have extensive financial interests that may be endangered when certain information is publicized. According to this reasoning, news items that most endanger the corporate financial interests of those who own the media will face the greatest bias and censorship.

It then follows that if to maximize profit means sacrificing news objectivity, then the news sources that ultimately survive must be fundamentally biased, with regard to news in which they have a conflict of interest.

Advertising[edit]

The second filter of the propaganda model is funding generated through advertising. Most newspapers have to attract advertising in order to cover the costs of production; without it, they would have to increase the price of their newspaper. There is fierce competition throughout the media to attract advertisers; a newspaper which gets less advertising than its competitors is at a serious disadvantage. Lack of success in raising advertising revenue was another factor in the demise of the 'people's newspapers' of the nineteenth and twentieth centuries.

The product is composed of the affluent readers who buy the newspaper — who also comprise the educated decision-making sector of the population — while the actual clientele served by the newspaper includes the businesses that pay to advertise their goods. According to this filter, the news is "filler" to get privileged readers to see the advertisements which makes up the content and will thus take whatever form is most conducive to attracting educated decision-makers. Stories that conflict with their "buying mood", it is argued, will tend to be marginalized or excluded, along with information that presents a picture of the world that collides with advertisers' interests. The theory argues that the people buying the newspaper are the product which is sold to the businesses that buy advertising space; the news has only a marginal role as the product.

Sourcing[edit]

The third of Herman and Chomsky's five filters relates to the sourcing of mass media news: "The mass media are drawn into a symbiotic relationship with powerful sources of information by economic necessity and reciprocity of interest." Even large media corporations such as the BBC cannot afford to place reporters everywhere. They concentrate their resources where news stories are likely to happen: the White House, the Pentagon, 10 Downing Street and other central news "terminals". Although British newspapers may occasionally complain about the "spin-doctoring" of New Labour, for example, they are dependent upon the pronouncements of "the Prime Minister's personal spokesperson" for government news. Business corporations and trade organizations are also trusted sources of stories considered newsworthy. Editors and journalists who offend these powerful news sources, perhaps by questioning the veracity or bias of the furnished material, can be threatened with the denial of access to their media life-blood - fresh news.^[3] Thus, the media become reluctant to run articles that will harm corporate interests that provide them with the resources that the media depend upon.

This relationship also gives rise to a "moral division of labor", in which "officials have and give the facts" and "reporters merely get them". Journalists are then supposed to adopt an uncritical attitude that makes it possible for them to accept corporate values without experiencing cognitive dissonance.

Flak[edit]

The fourth filter is 'flak', described by Herman and Chomsky as 'negative responses to a media statement or [TV or radio] program. It may take the form of letters, telegrams, phone calls, petitions, lawsuits, speeches and Bills before Congress and other modes of complaint, threat and punitive action'. Business organizations regularly come together to form flak machines. An example is the US-based Global Climate Coalition (GCC) - comprising fossil fuel and automobile companies such as Exxon, Texaco and Ford. The GCC was started up by Burson-Marsteller, one of the world's largest public relations companies, to attack the credibility of climate scientists and 'scare stories' about global warming.^{[citation needed]}

For Chomsky and Herman "flak" refers to negative responses to a media statement or program. The term "flak" has been used to describe what Chomsky and Herman see as efforts to discredit organizations or individuals who disagree with or cast doubt on the prevailing assumptions which Chomsky and Herman view as favorable to established power (e.g., "The Establishment"). Unlike the first three "filtering" mechanisms — which are derived from analysis of market mechanisms — flak is characterized by concerted efforts to manage public information.

Anti-Communism and fear[edit]

“	So I think when we talked about the "fifth filter" we should have brought in all this stuff -- the way artificial fears are created with a dual purpose... partly to get rid of people you don't like but partly to frighten the rest. Because if people are frightened, they will accept authority.	”
— Noam Chomsky[4]

The fifth and final news filter that Herman and Chomsky identified was 'anti-communism'. Manufacturing Consent was written during the Cold War. Chomsky updated the model as "fear", often as 'the enemy' or an 'evil dictator' such as Colonel Gaddafi, Saddam Hussein or Slobodan Milosevic. This is exemplified in British tabloid headlines of 'Smash Saddam!' and 'Clobba Slobba!'.^[5] The same is said to extend to mainstream reporting of environmentalistsas 'eco-terrorists'. The Sunday Times ran a series of articles in 1999 accusing activists from the non-violent direct action group Reclaim The Streets of stocking up on CS gas and stun guns.^[5]

Anti-ideologies exploit public fear and hatred of groups that pose a potential threat, either real, exaggerated or imagined. Communism once posed the primary threat according to the model. Communism and socialism were portrayed by their detractors as endangering freedoms of speech, movement, the press and so forth. They argue that such a portrayal was often used as a means to silence voices critical of elite interests. Chomsky argues that since the end of the Cold War (1991), anticommunism was replaced by the "War on Terror", as the major social control mechanism. //

Chomsky also emphasises the importance of the journalists themselves in maintaining the conformity and narrowness of the media. Chomsky has argued that intellectuals, as a class, tend to fit within a narrow doctrinal system, having been inculcated into certain commitments by their extensive education, including a general servility to power and a belief in the righteousness of the establishment.

 In later editions of Manufacturing Consent, Herman and Chomsky have also considered the question of whether the internet has substantially changed the media landscape, and therefore invalidated the model. This is what they conclude:

“Although the Internet has been a valuable addition to the communications arsenal of dissidents and protesters, it has limitations as a critical tool. For one thing, those whose information needs are most acute are not well served by the Internet-many lack access, its databases are not designed to meet their needs, and the use of databases (and effective use of the Internet in general) presupposes knowledge and organization. The Internet is not an instrument of mass communication for those lacking brand names, an already existing large audience, and/or large resources. Only sizable commercial organizations have been able to make large numbers aware of the existence of their Internet offerings. The privatization of the Internet's hardware, the rapid commercialization and concentration of Internet portals and servers and their integration into non-Internet conglomerates – the AOL-Time Warner merger was a giant step in that direction – and the private and concentrated control of the new broadband technology, together threaten to limit any future prospects of the Internet as a democratic media vehicle. The past few years have witnessed a rapid penetration of the Internet by the leading newspapers and media conglomerates, all fearful of being outflanked by small pioneer users of the new technology, and willing (and able) to accept losses for years while testing out these new waters. Anxious to reduce these losses, however, and with advertisers leery of the value of spending in a medium characterized by excessive audience control and rapid surfing, the large media entrants into the Internet have gravitated to making familiar compromises-more attention to selling goods, cutting back on news, and providing features immediately attractive to audiences and advertisers. The Boston Globe (a subsidiary of the New York Times) and the Washington Post are offering e-commerce goods and services; and Ledbetter notes that "it's troubling that none of the newspaper portals feels that quality journalism is at the center of its strategy ... because journalism doesn't help you sell things." Former New York Times editor Max Frankel says that the more newspapers pursue Internet audiences, "the more will sex, sports, violence, and comedy appear on their menus, slighting, if not altogether ignoring, the news of foreign wars or welfare reform." New technologies are mainly introduced to meet corporate needs, and those of recent years have permitted media firms to shrink staff even as they achieve greater outputs, and they have made possible global distribution systems that reduce the number of media entities. The audience "interaction" facilitated by advancing interactive capabilities mainly help audience members to shop, but they also allow media firms to collect detailed information on their audiences, and thus to fine-tune program features and ads to individual characteristics as well as to sell by a click during programs. Along with reducing privacy, this should intensify commercialization.”

The hyper-infantilised, utterly nugatory nature of the most popular new-media site, Buzzfeed, would seem to confirm this analysis, as would the generally trivial and superficial news articles produced by slightly more ‘serious’ websites like HuffPost, Salon and Junkee. This analysis is also consonant with the precipitous decline in quality of traditional news outlets like the Sydney Morning Herald as they’ve started following an internet-advertising revenue model that is wholly reliant on ‘traffic’ and ‘clicks’. Clickbait of all kinds – generic celebrity stories, inane discussions of celebrity behaviour, reposting of viral videos with superfluous synopses, commentary on episodes of TV shows or important moments within them, lewd pictures of celebrities, sensationalised grotesquery (you-won’t-believe-what-she-did-next or a-grandma-has-been-butchered-and-eaten-by-her-grandson), and highly personal, utterly vacuous op-eds – is now de rigeur for almost all formerly ‘serious’ news outlets, not just the Murdoch tabloids. The advertising model is also strongly encouraging the use of ‘integrated advertising’ – ads disguised as serious, impartial news articles – which represents a fairly Orwellian trend towards the total commercialisation of information.

It is true that one can find all sorts of very radical, very incisive and very cogent news sources on the internet, and that one can – for example – easily access the collected essays of Noam Chomsky, as well as literally hundreds of his speeches on Youtube. The internet has also enabled dissident communities to spring up, and it allows activists from all over the world to network and organise much more efficiently than they could in the past. Nevertheless, the propaganda model still survives, since the inherent corporatism of all popular news outlets has not changed. To be a popular website one must rely on advertising and a massive volume of clicks. It is very difficult for rigorous, righteous and honest journalism to meet these requirements.

To return to the general argument about money’s influence on democracy, it’s worth pointing out that there is considerable empirical evidence for all this abstract speculation about the nature of Western ‘democracy’ (but particularly US democracy). Stiglitz mentions in the preface to the second edition that $2 billion was spent in the 2011-2012 US election campaign by people in the 1%. As he then points out, inequality didn’t come up as a topic of debate in that campaign once – not even from Obama’s mouth. Another fact that would seem to explain the bank-welfare policies that have dominated Washington since Reagan (including the bail-outs after the crisis and the total lack of criminal action on reckless bankers) is that there are an estimated “2.5 banking lobbyists for every US representative”.

One study that Chomsky often likes to refer to when discussing the plutocratic nature of American society is a paper called Affluence and Influence: Economic Inequality and Political Power in America by the Princeton scholar Martin Gilens. Gilens found that the majority of the US population is effectively disenfranchised. Based on surveys of their opinions, he found that about 70 percent of the population, at the lower end of the wealth/income scale, has no influence on policy. Moving up the scale, by contrast, influence slowly increases. Finally, at the very top are those who – in Chomsky’s words – “pretty much determine policy”. Stiglitz highlights a similar kind of study published in Perspectives on Psychological Science. This found that, in most people’s ideal distribution, the top 40% had less wealth than the top 20% currently holds. Moreover, as he notes, “when asked to choose between two distributions (shown on a pie chart), participants overwhelmingly chose one that reflected the distribution in Sweden over that in the United States (92% to 8%)”.

The evidence from these studies proves that the Republicans should not be getting any votes from the downtrodden and unemployed. The fact that they do is therefore a testament to the power of the propaganda system in America. By the same token, even the fact that the Democrats get so many votes from the downtrodden and poor is a testament to the power of the propaganda system in America.

Some more evidence for the propaganda model can be found in the almost complete failure of the mainstream media to ever mention the plutocracy in America and the preference of the Democratic-establishment media (such as The New Yorker and New York Times) for Clinton over Sanders, typically facilitated by their refusal to mention the money-problem.[25]

The Libertarian Theory of Morality, as Expounded by Ayn Rand

As far as I can tell, Ayn Rand was an incompetent moral philosopher. She was a strange kind of moral realist who believed that rationality was the one true value, and that non-hedonistic (high-minded) self-interest was the most rational attitude towards life. The essence of her Objectivist ethics is summarised by the oath of her heroic Atlas Shrugged protagonist John Galt: "I swear—by my life and my love of it—that I will never live for the sake of another man, nor ask another man to live for mine."^[26] In her novels, The Fountainhead and Atlas Shrugged, she also emphasises the central importance of productive work, romantic love and art to human happiness, and dramatises the ethical character of their pursuit. As odd as it may sound, she really did believe that all these activities were “rational”; since she espoused non-hedonistic self-interest, she preserved classic values of heroes, like intelligence, creativity, talent, courage, resolve and passion.

I think Rand genuinely believed that she had easily o’erleapt Hume’s is-ought gap using her exceptional powers of reason, being herself a Great Man (even though she was a woman). Rand did have a fairly elaborate philosophical argument for this belief, expressed indirectly in her highly didactic novels and directly in The Virtue of Selfishness. I will evaluate this argument now, using quotes from The Virtue of Selfishness.

Rand’s ethical philosophy starts, more or less, with the following, truistic metaphysical claim: “There is only one fundamental alternative in the universe: existence or non-existence – and it pertains to a single class of entities: to living organisms.” The same gist is also expressed in a slightly different form: “The existence of inanimate matter is unconditional, the existence of life is not: it depends on a specific course of action.” These two propositions then seem to lead us to the following proposition: “life” is a choice we make, and it is the central choice of reality. As she puts it, “It is only a living organism that faces a constant alternative: the issue of life or death". Evidently, at this point, her theory is just the expression of truisms about reality in a way that imbues them with great metaphysical significance and poetic vigour. You might be wondering, where is this leading? Like all Continental philosophers (and I would regard Rand as one), she doesn’t try to specify the connotations of her words or phrases, but leaves them open, allowing them to resonate with an apparent significance that more concrete statements about the world could not. If she started instead with the claim, “Because they are not inanimate objects, humans have a choice whether to exist or not”, that would take her nowhere. As it is, however, I think this vagueness and grand phraseology allows her to do something subtle with the word “life”. Basically, the trick seems to be that she tacitly identifies “life” with “survival”. This then explains why she is able to follow up her initial metaphysical pronouncements with a strangely simple solution to Hume’s insoluble problem: "the fact that a living entity is, determines what it ought to do."

If you try to put this argument in the terms of analytical philosophy – if you try to express it directly and simply, using a lexicon that avoids mysticism and vagueness – then it just falls apart completely. In fact, as soon as you try to do that, it leads you to the conclusion that there’s no argument here at all – just some word-games (like most philosophy). Even describing what the argument purports to achieve in simple terms makes it seems absurd. Consider this description of the argument: “Rand has surmounted the is-ought gap by proving that existence itself – or “living” – is what we ought to do”. Huh? So Rand has proven that we ought to do the only thing we can do apart from committing suicide? Admittedly, if you substitute the word “living” with “surviving” (as Rand seem to do tacitly), then it makes slightly more sense, because now the argument is more eliminative: now people who make a weak effort to keep themselves healthy and strong – eg lazy people, or people reliant on others – are morally odious. But even so, it’s clear that there’s no way of expunging the sophistry from this argument without destroying it completely.

On the other hand, if you don’t go try to dissect the words or retranslate them into a more concrete form, then the argument does have force. Like a lot of casuistic philosophical arguments, if you just go with the flow – if you submit to the philosopher, reading her words as you would read the words of a poem – a deep and irrefutable truth emerges. There’s no doubting that this argument works as a piece of philosophical rhetoric. It has this power because of its structure: we go from a metaphysical claim that is obviously true and simultaneously sounds really deep, then she performs a few prestidigitations and voila: the words we started with have suddenly gone from descriptive to normative, and without any formal logical errors along the way.

Not that that makes her reasoning sound, of course.

Her argumentation from this point to the end-goal of Objectivism is much the same stylistically. I really can’t be bothered to lay this reasoning out properly, and I don’t need to, because all I need to do to refute Objectivism is refute its final claims. But it is worth including the thrust of this argumentation.

Although she puts it in way more obscure and poetic terms, Rand’s main argument in this second stage of reasoning seems to be founded on an Aristotelian teleological view of human beings: she argues that, because “man” is the only living entity with the ability to choose whether “to think or not to think”, (and because she’s already established that “the fact that a living entity is, determines what it ought to do”), therefore man ought to exercise his free will in this way, by striving to be maximally rational. Another argument that she seems to propound simultaneously (in a very indirect way, in gnomic statements) is that, because man needs to use his powers of reason to achieve anything, and to survive (and because she’s already half-established that surviving is what we ought to do), then he ought to strive to be maximally rational, and to use this rationality for his own ends. As far as I can tell, these are the only discrete arguments she makes.

I don’t really think much of these arguments, but I won’t bother attacking them directly. Instead, I will mount my attack on the conclusions they lead her to.

As I said at the start, Objectivist ethics can ultimately be reduced to two propositions: that rationality is the highest virtue, and that non-hedonistic (high-minded) self-interest is the most rational attitude to life. Obviously, these are intertwined, since the second proposition is effectively a definition of what ‘rationality’ means in the first proposition. This overlap is important, because it means that all I have to do to refute both of these propositions is show that non-hedonistic self-interest is not “rational” in any objective sense. Fortunately, this is easy enough to do. In fact, one sentence is almost enough to do it:

When it comes to ethics, rationality means just about anything you want it to mean.

Although many have tried, no philosopher has ever managed to formulate a decisive argument in favour of one view of intrinsic rationality (as opposed to instrumental rationality). Even worse, of the views that do have currency in moral philosophy, none is like Rand’s. The most common view of those who take a stance is that “hedonistic self-interest” is the most rational attitude to life – meaning that the most rational way of living is to always do those things that give you the most happiness or satisfaction (including altruistic actions, if helping others makes you happiest).^[27] One conception of intrinsic rationality that is slightly closer to Rand’s is that of Derek Parfit, who has tried to argue that we have reasons to do things that aren’t directly related to our own emotions (telic reasons, or “object-given” reasons). For example, Parfit argues that being indifferent about pain on only Tuesdays is irrational. However, for Parfit, this picture of rationality ultimately serves a moral realism that is the total antithesis of Rand’s. Parfit thinks we have reasons to be self-sacrificing towards others, and that one’s own suffering has only a little more weight than anyone else’s.

Of course, a Randian could easily respond to this line of argument. They could say, What other philosophers think is irrelevant, because Rand’s own arguments prove the ethics of Objectivism to be true – they prove that rationality is the highest virtue and that being like John Galt is the way to be rational. But the truth is that Rand’s arguments are shit. Her reasoning is just sophistry. I could argue in the same way as Rand and come to the conclusion that it’s rational to walk around naked, grunt constantly and try to fondle people. It doesn’t mean I’ve refuted Hume.

So no, there’s no objective ethical basis for laissez-faire capitalism.

Robert Nozick also wrote a refutation of Randian ethics back in 1971 that can be found here: https://zakslayback.files.wordpress.com/2014/01/on-the-randian-argument.pdf. I didn’t read this before I wrote my own. Nozick’s is a proper attempt to turn Rand’s disquisitions into deductive arguments and then refute them, and it encounters the same problems I found: as soon as you try to make her arguments coherent, it turns out there are no arguments. It is a very boring paper, though, and it overcomplicates things massively.

Capitalism and Innovation:

Innovation, dynamism and technological progress are often cited as the main strengths of capitalism. I wouldn’t necessarily dispute this. What I would strongly dispute, however, is the libertarian notion that the state is harmful to these natural attributes of a free-market capitalist system. In fact, the evidence indicates the opposite is true: we couldn’t have made the technological leaps and bounds of our recent history without a strong public sector. So the reality is that state capitalism is best for innovation and technological advancement.

Although few people realise it, the main engine of the big leaps in technology that revolutionise industry – the really important innovations and really important technological advances – are not big corporations, but state-funded scientific institutions and universities. Once the scientists make these breakthroughs, the technology can then be injected into the dynamic economy, and it often takes on a new and interesting form once there – yet there’s no denying the state’s role as the progenitor. As Chomsky likes to point out, without state-funded scientific institutions and universities, we wouldn’t have space exploration, GPS, the computer, the laser, transistors, the internet, the iPhone – in fact, the Information Age could never have occurred.

The iPhone is a particularly good example to focus on, because of the way it’s exalted in our culture. The iPhone is generally held up as the epitome of capitalist innovation, but in fact all of its central components originally came from the US state sector, funded by the Pentagon. GPS was developed by the US Navy, as part of the Navistar program; microelectronics, software and hardware were all developed over decades in the state sector, with Pentagon funding; and the internet was almost singlehandedly developed by a man named Tim Berners-Lee, who made his idea available freely (and has thus never appeared on the Forbes rich list). As Chomsky notes, the taxpayers are investing in this innovation (although they think they’re investing in their own national security), and when something finally comes of it, the new technology is sold to the private sector. It’s a pretty unfair system. Anyway, the important point is that our great technological progress has most definitively not come from the free-market – and nor will it in the future.

There is actually a fundamental reason why free markets are never going to be able to produce really major innovations on their own: the problem of incentive. In centres for pure research and not-for-profit technological development, workers have incentives to create, investigate and innovate for knowledge’s sake, or to improve the world. But in corporations, people only ever have incentives to create, investigate and innovate to make money. If you were to transform a public institution into a private one (i.e. a corporation), you can guarantee that two big things would rapidly change: the urgency to produce would increase, at the expense of assiduity in development and production; and the need for profitability would encourage the cutting of corners and the use of dodgy materials, hurting quality.

Another issue that the private sector faces in creating genuine innovation is that of scale. Only the very biggest companies have the capital and the secure market position necessary to hire scientists and engineers for the purpose of creating new technologies. Apple, Tesla, Microsoft, Sony and other technology companies fit in this category, as do car companies like BMW – but any corporation less moneyed than these really cannot hope to innovate in the same way. Even in these massive multinationals, there is still no scope for the kind of specialised research that doesn’t immediately promise results. Instead, research of this kind, pure research, must be left to non-corporatised universities, or other government institutions like NASA.

People often seem to forget that corporations aren’t working for the common good. When people earnestly criticise Big Pharma for this or that failing, for example, they themselves fail to recognise that all corporations are amoral – incapable of giving a damn about improving humanity, by design. If you think about it, this is obvious. Imagine if a CEO of a big pharmaceutical corporation said to his board one day, “The Ebola crisis going on in West Africa right now is so terrible. It’s affecting me so badly. Why don’t we just forget about the profits for a while and direct all our resources into finding a cure?” If a CEO really did this, it’s not as if his board would start applauding, shout bravo and vow to take action to alleviate the misery and the suffering. On the contrary, the board would probably think he’d gone mad. They might briefly consider the PR value of such a move, but ultimately they just could not follow through on it. The reason is simple: any decision the board makes would have to account for the company’s stock position, the interests of the major shareholders and the bottom line.

As much as they might like to tell you otherwise, the truth about corporations is that they are money-making machines and nothing more. The number of parties with a stake in the success of a corporation, as well as the pressure of competing with other corporations, guarantees this truth. If an individual within a corporation does genuinely deviate from the goal of maximum profits, the large number of people her deviation affects will make her immediately susceptible to being pulled in line, or gotten rid of. That is why a corporation can be described as a machine; although it is composed of many different parts, they all work together towards one goal. If one part is faulty, it can easily be replaced.

Importantly, this truism about the institutional structure of corporations explains why scientists working for big pharmaceutical corporations are inevitably going to be very different from biochemists in universities. Unlike a young person in a university lab, who can work for the sole purpose of finding a drug that will benefit humanity, a scientist in a pharmaceutical company must do whatever their boss tells her to do, and whatever their boss tells her to do is going to be determined by one consideration only: profit.

This also explains why Big Pharma produce not only medicine that has been proven to work, but also all kinds of junk medicine with no clinically proven benefit, like homeopathic and “natural” medicines, and pointless vitamins. It also explains why Big Pharma have been so slow on developing new antibiotics; and it explains why, if we do come close to running out of antibiotics completely, Big Pharma will suddenly speed up. Profits are the only telos of corporations, not happiness, not justice, not goodness – just profits. None of the useful medicines that Big Pharma sell would even exist if it weren’t for the public sector.

For all these reasons, I think it’s clear that, if we did actually privatise all our public research institutions, the results would be disastrous. As soon as it happened, these institutions would go from caring about finding that vaccine or improving the rocket boosters on their new spaceship or creating the world’s first synthetic heart or learning more about the language faculty to caring about one very different thing: how to make money out of their research. As soon as this transition happened, staff would be encouraged to cut corners, apparently pointless personnel would be slashed, apparently fruitless projects would be abandoned and facilities would be ‘streamlined’. Once these institutions had been fully corporatised in this way, they would no longer have any ability to make groundbreaking innovations. Without the wholehearted, uncompromised support of esoteric and strange endeavours, or the indulgence of pure scientific curiosity, or the pursuit of goals that have no direct commercial application (like space exploration), real innovation – dramatic innovation – is not possible. What you get instead is small alteration of existing products. Humanity loses.

Of course, as I said at the start, I don’t dispute that one of capitalism’s strengths as an economic system is dynamism and fertility for innovation. In a state socialist economy, where there are only a few massive enterprises and consumers have no choice and no ability to create businesses of their own, it seems likely that the Soviet or Maoist experience would be inevitable – thing would stagnate, and little technological or even cultural change would occur. Perhaps in a decentralised socialist economic system, where there are many enterprises but all are controlled by the workers themselves (there are no real managers and definitely no CEOs, with all corporations looking something like https://en.wikipedia.org/wiki/Mondragon_Corporation), you could achieve the same dynamism as our own capitalist economy, with far less concentration of capital and inequality.[28] However, as it is, there’s no doubting that the rapid changes that have happened to our world since Industrial Revolution – including sudden changes in fashion, music, art, as well as changes in technology – have been enabled by capitalism.

So capitalism is good for innovation. And the best form of capitalism for human progress and great leaps forward is not anarcho-capitalism, but state capitalism.

My Concluding Remarks: Libertarianism and Freedom

Even if neoclassical economics is entirely wrong and strong regulation is necessary for capitalism to avoid devastating busts, to maintain equality and to protect democracy, and even if Rand’s ethics are totally silly, and even if the state sector is needed for us to progress as a species in any serious way, I’m sure diehard libertarians would still argue that there’s a philosophical basis for favouring their ideology. After all, in a fully deregulated economic system, we have maximum freedom, right? That’s why it’s called libertarianism. It must be true!

But there really is no argument for this. To think that unfettered capitalism actually makes us freer than regulated, welfare state capitalism is so embarrassingly obtuse I don’t even know where to begin. The only people who have freedom in such a social Darwinist society are the capitalists, fatcats, managers, movie stars, pop stars and sports stars. The rest of us are in chains, subject to the private tyrannies that are corporations – unaccountable, untameable, pitiless. As Chomsky points out, neoliberalism doesn’t strengthen individual rights at all. What it does is shift decisions “from governments to other hands, but not “the people”: rather, the management of collectivist legal entities, largely unaccountable to the public, and effectively totalitarian in internal structure”.

Think of all the options that would be constrained for those not wealthy already – for all the non-capitalists – if our societies continued much further along this neoliberal path. There would be no freedom to move up in society; no freedom to go to school (all schools and universities would be expensive profit machines); no freedom to go to the doctor (all medical centres and hospitals would be expensive profit machines); no freedom to go on holiday (worker’s rights would surely atrophy pretty quickly); and no freedom to carry out pure research, make art or write (no scholarships or state assistance, no non-corporate institutions). For all citizens, there’d be no freedom to catch a cheap train (public transport isn’t profitable for private enterprises); no freedom to go to a public park; no freedom to play sport for a club on well-maintained public ovals (amateur sport is surely not profitable for a company); and no freedom to visit national parks and see sites of spectacular natural beauty (maintaining national parks is not profitable for private companies and all the ‘red-tape’ would be gone, allowing industries to colonise every bit of useful land). Most disturbingly of all, there’d also be no freedom from advertising; no freedom from data-collection, targeted advertising and surveillance; no media freedom (there’d be no non-corporate media stations); and no freedom from economic instability.

In short, there’d be NO FREEDOM FROM CORPORATE TYRANNY. In fact, it is one of the least free societies one can conceive of. My own contention is that it’s probably as bad as feudalism on the freedom stakes.

And all this is not even to mention the way such a system would corrupt our basic values – poisoning art, culture, science and even human relationships. In a libertarian society, nothing would escape commodification. No person would escape becoming a ‘brand’. All value would become monetary value. All education would become corporate P.R. There’d be no such thing as independent research, since all knowledge would have to be sponsored to be published at all. All critiques of the economic system would be silenced, because nobody would fund them. All praise of the current economic system would be lavishly supported. All schools and universities would have to be fully corporatised, with profits – not education – their goal. All art would become corporate P.R., too. One couldn’t survive without being sponsored.

In short, everyone would become a prostitute, and the world would become a brothel – our bodies and our identities products, advertised, marketed, bought, sold, bartered over, waiting to be consumed.

And this is just talking about the relatively short-term. In the long-term, it seems highly probable that removing the fetters from industry completely would result in something close to an apocalypse – perhaps the total extinction of humankind. Widespread exploitation of people would lead to disease, squalor, poverty and illiteracy; devastation of environments would lead to a hideous, sterile, barren world, unable to support any serious population, and would seriously exacerbate climate change. Millions of plant and animal species would go extinct within a matter of decades, with large mammals and apes the first to go, and precious rainforest ecosystems close behind. The Earth would become more and more polluted, ravaged, degraded, overcrowded, unequal, ugly, grey and dangerous. It would become increasingly beset by tempests and dominated by a violently fluctuating climate.

In the end, therefore, the Earth would become a colossal slum built on landfill with a few resplendent palaces scatted here and there. A new feudalism. A new serfdom. The NeoDark Ages. Superstition and mysticism would once again become dominant. Reason and science would fade into nothing. An increasingly unstable weather system would take us all to hell.

Here’s the thing. If there is no perfect competition (and there can’t be), and if price doesn’t reflect marginal benefit to society (and it doesn’t), and if wages don’t reflect contribution to society (and they don’t), and if the unemployed don’t choose to be unemployed (and they don’t), and if public services usually end up being cheaper and higher-quality than private ones (and they do), and if building train-lines and serious infrastructure is only possible under government stewardship (and they are), and if concentration of capital destroys democracy (and it does), and if capitalism is inherently unstable (and it is), then libertarianism really truly does mean social Darwinist corporate totalitarianism. What the fuck kind of lunatic wants that society? ARE YOU FUCKING INSANE YOU FUCKING PSYCHOPATHS? CAN YOU THINK? CAN YOU REASON?

IF YOU SERIOUSLY ARE THAT DUMB OR EVIL, I WANT TO KILL MYSELF RIGHT NOW.

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[1] And even Hume wasn’t much of a political sceptic. In fact, he often expressed pretty reactionary views. In fact, the scepticism he was good at has nothing to do with the kind of scepticism I’m talking about. I don’t expect everybody to doubt the reality of causation or induction; I just expect them to think for themselves and seek out the evidence with a maximally disinterested perspective.

[2] http://mondoweiss.net/2012/06/sam-harris-uncovered

https://newrepublic.com/article/78546/the-facts-fetish-morality-science

https://evolution-institute.org/article/here-he-goes-again-sam-harriss-falsehoods/

[3] Some philosophical geniuses on the internet who greatly admire Sam Harris (perhaps because they were repeatedly dropped on their heads as babies and then spent their childhood and adolescence sniffing paint stripper and getting knocked out in games of head-jousting) argue that Islamophobia doesn’t exist because Islam is a religion not a race. What a fucking masterclass of reasoning that is! Bertrand Russell would be blown away by that syllogism. I wonder if the following ideas has ever occurred to these brilliant intellectuals:

1.       Religions don’t exist in a vacuum. No-one really hates the Islamic doctrine simpliciter. The proof for that is simple: if nobody practised the teachings of the Qu’uran, there’d be nothing to talk about. If nobody cared about the Qu’uran or took it seriously, there’d be no “Islam” to hate. Therefore, flesh-and-blood human beings are inevitably bound up in any criticisms of Islam. If you say you “hate Islam”, the only way to make sense of that sentence is to assume you hate at least some Muslims (which is understandable for ISIS, of course, but I’m just laying the ground at the moment).

2.       It is possible for someone to have an excessive, irrational, fanatical hatred of a religion. Religions may themselves be largely based on unreason, but that doesn’t mean criticisms of them can’t be as well. People may, for example, generalise about the religion in a factually incorrect way, or essentialise all members of the religion (just like Jews were essentialised during the Holocaust, becoming all “covetous”, “greedy”, “serpentine”, “duplicitous”).

3.       Just like Judaism, Islam is heavily associated with a certain people and a certain ‘race’. This facilitates essentialising for lunatics. The fact that the most virulent Islamophobes support Middle Eastern Christians does not prove that race has nothing to do with their hatred. Given the incredible complexity of human psychology and the diversity of human beings, any generalisations about ‘a people’ suggest a racist foundation, or at least an irrational “othering” (not all Christians are like the Westboro Baptists and nobody thinks they are). Islam may possibly be more of a “motherlode of bad ideas” than the Bible, but one has to look to the world to see if Muslims are disproportionately evil. Neither the historical nor the current evidence supports any generalisation of this extreme kind. During the Islamic Golden Age, Islam would have seemed a far more tolerant and peaceful religion than Christianity (in fact, the opposite debate might have been had), and in today’s world, the existence of millions of moderate Muslims shows that personal psychology and socio-cultural, geo-political context are more powerful than pure ideology in shaping behaviour (which is certainly not to deny the force of ideology completely).

4.       I am aware that there are some self-professed left-wing people who insist that “Islam is a religion of peace” and I agree that that is a fairly asinine statement. However, as far as I know, no-one on the left thinks that the mere act of criticising Islam is Islamophobia. It would indeed be unreasonable to think that, and it would be inconsistent, since nobody has a problem with criticising Christianity (except maybe Christians). Instead, left-wing people think that excessive, unreasonable criticism of the religion and flagrant generalisations about Muslims is Islamophobia. They think that Islamophobia is countenancing the idea of a nuclear first strike on the Islamic world, or trying to ban Muslims from entering a country, or beating up Muslims on the street.  

[4] The extended second edition, that is.

[5] Marginal is a key word in neoclassical economic theory, so it’s good to define the economic usage now. It basically means “additional”. When economists say “marginal x”, they mean the amount of x that is being added each time there is a new measurement. So, here, “diminishing marginal utility” means that the amount of new pleasure being elicited from commodities is diminishing with every commodity consumed.

[6] Of course, as Keen himself points out, Smith never used the ‘invisible hand’ metaphor to refer to the social welfare-maximising function of the market. In fact, the neoclassical use of Smith is pretty much a fraud. 

[7] In economics, “factors” means ‘tools’ of production, either land, labour or machines. Land and machines are “fixed factors” and labour is a “variable factor”.

[8] LL was renamed LM.

[9] None of the violent metaphors are taken from Keen, by the way.

[10] In other words, he questioned the insanity of equilibrium, omniscience, perfect competition etc.

[11] This policy was probably a mistake in the West even when it happened. Of course, Stiglitz doesn’t mention this.

[12] Incidentally, this point about Western economic hypocrisy is one that Chomsky often makes. Protectionism was key to American development in its early years, and it is key to any developing country that seeks to create its own major industries, have a strong workforce and be self-sufficient. It is utterly criminal to ban tariffs and subsidies in developing countries, allow foreign corporations to enter freely and colonise their industries and workforce, and then turn around and blame them for their economic misfortunes and instability.

[13] Of course, strictly speaking, haemorrhaged should be an intransitive verb. After all, “Haemo” means blood. You should just be able to say “He haemorrhaged”.

[14] And the same thing happened in America before the Great Recession and the same thing happened in China and the same thing…. FUCKING HELL

[15] Because of the way people like Joe Hockey talk, we tend to think of our governments as “like households”. In fact, that is a totally inappropriate metaphor. If a household cuts down on spending and puts more into savings, it does indeed benefit in the long-run. When a government cuts down on spending and slashes funding for healthcare, education and all the rest of it, that just slows down the economy, contracts the economy, reduces growth, increases unemployment (because of reduced growth and activity) and ultimately means the government will make less from taxes in the future and will have to pay more social security. If you have to use the household metaphor, it’s better to say that austerity is like your household accountant skimming the top off everyone’s income and, instead of investing it, putting it into an unlockable safe, never to be seen again.

On a related note, if the government is in surplus, what that essentially means is that they’ve taken more money out of the economy than they’ve put in. This means that surpluses are actually not desirable, even in a boom period. Instead, Keynes was right: it is best to run a booming economy in some debt, because that way you can maintain growth. Keen has some data that shows surpluses are bad in the long-term also.

[16] Leveraged means indebted because of heavy borrowing.

[17] This is the classic worry of both neoclassical economists and Austrian-school economists, and they constantly use it justify opposition to public spending and direct stimuli, and a total hostility to ideas like “People’s QE”. But unless there’s a massive, economy-wide deficit in supply, with industries failing and so on (as there was in both Weimar Germany and in Zimbabwe), this worry is unfounded. Furthermore, it is dangerous, since it encourages the fiscal inaction that prolongs recessions and increases inequality.

[18] Which is really a transcript of a speech he made to the World Social Forum in January 2002 in Porto Alegre, Brazil.

[19] In his surprise run-away success The Road to Serfdom, Hayek argued – as you might expect – that liberating the market is the best way of avoiding serfdom (the two evils in the book are socialism and fascism) and that a more Keynesian system (though he barely mentions Keynes) is worse both economically and in terms of individual liberty than an Austrian school society would be.

Though the book is clearly some kind of libertarian manifesto, it’s worth nothing that extreme right libertarians did not like this book at the time, seeing it as too much of a ‘compromise’. Rand, for example, hated it and even scribbled abusive comments in the margins of her copy, calling Hayek a “God damn fool”, an “abysmal fool”, an “ass”, and a “total, complete, vicious bastard”.

Hayek’s less popular but more academically serious work, The Constitution of Liberty, probably would have come a lot closer to pleasing Rand (I don’t know if she read it). In this, he espouses the virtues of Western democracy and capitalism, drawing on Locke, but then dismisses Locke’s empiricism about the mind and points out that, because of genetics, all men are not born equal (how d’ya like them apples?). He then uses this to argue for the extremely reactionary, social Darwinist view that even quite significant levels of inequality are morally permissible, because people more or less deserve their place.

Although many of his admirers were conservative, Hayek actually condemns conservatism in The Constitution of Liberty, deriding “this nationalistic bias which frequently provides the bridge from conservatism to collectivism” and pointing out the stupidity of the phrase “un-American” – quite radical for someone writing in the shadow of the McCarthy trials. This criticism of conservatism is probably one reason why the book was not that well-received.

[20] His economics are uncomplicated by ambiguity and subtleties, which makes them perfect as a launching pad for activism.

[21] Although he is trying to lower corporate tax in order to keep jobs here (not that that’s really an altruistic move).

[22] In a more muted form, the same dynamic has happened across the West since the 80s. For example, in Australia, the social progressive Prime Minister Paul Keating implemented Chicago School economic policies, and in England, Tony Blair was a full-blown neoliberal who took advice from Thatcher.

[23] Who is – incidentally – an Objectivist, and was once a member of Ayn Rand’s inner circle.

[24] And ignoring the fact that it’s totally stupid anyway.

[25] Which is not to say that their analysis is always wrong. Krugman, for example, is by no means entirely wrong when he talks about Bernie having unrealistic policy goals.

[26] Incidentally, I find it strange that such a strong, self-willed, domineering woman always wrote male heroes and invariably used “Man” as the universal gender signifier. I hope she didn’t begrudge her womanhood; she almost seems like a sexist.

[27] That is, if you accept the usage of “altruism” that incorporates non-Kantian, emotional altruism. 

[28] Of course, such a society – which would go by the name of a ‘libertarian socialist’ or ‘anarcho-syndicalist’ society – might be little more than a utopian fantasy. One can sort of imagine the first stage of the transition: the unions of our current society getting stronger and stronger and stronger, and thereby putting more and more pressure on corporations to restructure from within. But it’s really impossible to vividly picture what the society would be like beyond the stage where CEOs and managers drastically reduced their wages to bring themselves closer to the level of entry-level workers. If the fundamental structure of private enterprises changed, that would have dramatic knock-on consequences for the rest of the society. God knows how it would actually turn out from there.