Wednesday, 3 September 2008


on to a new chapter folks, I am slow blogging here cos I have two other blogs and a life! Corporations and fascism are a good starting point....

IBM, primarily through its German subsidiary, made Hitler’s program of Jewish destruction a technological mission the company pursued with chilling success. IBM Germany, using its own staff and equipment, designed, executed, and supplied the indispensable technologic assistance Hitler’s Third Reich needed to accomplish what had never been done before - the automation of human destruction. More than 2,000 such multi-machine sets were dispatched throughout German-dominated Europe. Card sorting operations were established in every major concentration camp. People were moved from place to place, systematically worked to death, and their remains catalogued with icy automation. (Black 2001: 8-9)

To the anti-globalisers, the corporation is a devilish instrument of environmental destruction, class oppression and imperial conquest. But is it also pathologically insane?
That is the provocative conclusion of an award-winning documentary, called ‘The Corporation’, coming soon to a cinema near you. People on both sides of the globalisation debate should pay attention. Unlike much of the soggy thinking peddled by many anti-globalises, ‘The Corporation’ is a surprisingly rational and coherent attack on capitalism’s most important institution.

Like all psychopaths, the firm is singularly self-interested: its purpose is to create wealth for its shareholders. And, like all psychopaths, the firm is irresponsible, because it puts others at risk to satisfy its profit-maximising goal, harming employees and customers, and damaging the environment. The corporation manipulates everything. It is grandiose, always insisting that it is the best, or number one. It has no empathy, refuses to accept responsibility for its actions and feels no remorse. It relates to others only superficially, via make-believe versions of itself manufactured by public-relations consultants and marketing men. In short, if the metaphor of the firm is a valid one, then the corporation is clinically insane. (Economist, 6 May 2004)

An unseasonable day. I have cycled for hours through streets empty of everybody but the police and knots of rather timed protesters, its like a city under siege. May Day 2002, McDonalds, Kings Cross, London. Five thousand anti-capitalists are on the street, bringing traffic to a halt. Home made veggie burgers are handed out to those about to enter the fast food unit. McDonalds is targeted for promoting animal abuse, hostility to unions and a war on high quality food. In the late 1990s the Mclibel trial, the longest libel action in British legal history, took place when the corporation sued a tiny anti-capitalist group for distributing a leaflet entitled ‘What’s wrong with McDonalds’ (Vidal 1997). Jo Bove, in an episode of Roquefort rebellion, demolished a McDonalds in the south of France in protest at US protectionist measures against French cheese (Herman and Kuper 2002: 57). McDonalds, along with Coca Cola and Bill Gates’ Microsoft, has become a convenient hate symbol.

Friday, 8 August 2008

Vaccinating against anti-capitalism

Soros, Stiglitz and associates provide a penetrating critique of the Washington consensus that is driving globalisation. They show how some of the axioms of conventional market economics are flawed, arguing that such concepts, consciously or otherwise, are used to legitimate increasing wealth and power for a corporate elite. Soros summarises stating, ‘the system is deeply flawed. As long as capitalism remains triumphant, the pursuit of money overrides all other social considerations’ (1998: 102).
Characteristically, looking at the shock therapy that has wrecked Russian attempts to build a stable society, they praise the more cautious and successful Chinese road to capitalism. While Soros has predicted that globalisation may depose the Chinese Communist Party he suggests that capital controls allowed them to escape the 1997 Asian crisis that wrecked the economies of their neighbours. Yet such praise suggests the limitations of their approach. Soros and Stiglitz make little comment on the Tiananmen Square massacre, the occupation of Tibet or the Three Gorges dam project which will flood large areas driving millions of peasants from their land without compensation. Ecological issues are pretty much secondary to them. While advocating transparency they still believe in a world dominated by a wealthy minority who make key decisions, indeed Soros is very keen to use his wealth to increase his own personal political influence. They have no notion that economic growth is unsustainable.
Soros and Stiglitz recognise that market failure is a problem and suggest practical ways of dealing with it. Their vision of an economic alternative to neo-liberalism is neo-liberalism managed a little to make it fairer and more stable; their utopia is Clinton’s America, or a less muscular version of Karl Popper’s free market, or a more stylish and intelligent version of Blairism. Such visions are likely to look more attractive as US hyper-capitalism erodes its own base.
Given their Keynesian roots this approach is hardly surprising. Keynes has been seen as an economic radical because he strenuously criticised many of the assumptions of market based economics. He also showed an awareness of the subjective human costs of a capitalist economic system. There have been suggestions that it is possible to create a ‘green keynesianism’ (Elliott and Atkinson 1998). Indeed Keynes noted:
The love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease. All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard. (Keynes 1972: 329)
He also stated:
For at least another hundred years we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight. (Keynes 1972: 331)
The Economist noted cynically: ‘So prolix was Keynes […] that he is thought to have said everything at least once’ (9 October 2003). Keynes was indeed quite happy to promote luxury and waste as ways of sustaining economic growth. He believed that thrift was dysfunctional but greed was good if it boosted demand and prevented recession:
Keynes celebrated booms in a manner that would do a Texas populist proud. Shakespeare, said Keynes, died rich, and his days were ‘the plamy days of profit – one of the greatest ‘bull’ movements ever known until modern days in the United States…the greater proportion of the world’s greatest writers and artists have flourished in the atmosphere of buouyance […] The Shakespeares of the era of junk finance have yet to be discovered, unless Bret Easton Ellis qualifies. (Henwood 1998: 195)
Keynesianism is an ideology that sanctifies shopping and sees reduced consumption as a sin. The pioneering green economist E.F. Schumacher, author of Small is Beautiful, bitterly complained:
Maybe we do not even have to wait for another sixty years until universal plenty will be attained. In any case, the Keynesian message is clear enough: Beware! Ethical considerations are not merely irrelevant, they are an actual hinderance, ‘for foul is useful and fair is not’. The time for fairness is not yet. The road to heaven is paved with bad intentions. (Schumacher 1978: 22)
Keynes was well aware of Marx’s critique of capitalism, perhaps more surprisingly he was sympathetic to the monetary reformers like Major Douglas and Gesell discussed in chapter five. Yet Keynes sought not to destroy capitalism or to move beyond it but to sustain it. Indeed he explicitly argued that in the class war he was on the side of the bourgeois. He developed, using his insights into macro economic market failure, a theoretical understanding of how capitalism, that appeared so weak in the 1930s, could be strengthened by selective government intervention. Stiglitz and Soros are in this sense neo-Keynesians, while their criticisms of neo-liberal globalisation are telling, like Keynes it is inaccurate to describe them as anti-capitalists.
Stiglitz is a neo-Keynesian, trying in his academic work to shore up Keynesian macroeconomic analysis, which looks at national economies, with firm microeconomic principles that deal with the basic building blocks of an economy such as the behaviour of firms and consumers. Stiglitz is equally Keynesian in his project to create a more stable and faster growing capitalism. Like many other centre ground critics the point is not to halt globalisation but to heal it so it can be sustained and grow. The solutions of such mainstream critics of globalisation such as transparency and the Tobin Tax appear to be modest, realistic and just. These capitalist critics of globalisation fear that if the market is extended too quickly or too completely it will collapse. They do not, despite their lip service to Polanyi and talk of asymmetry and reflexivity, follow their doubts and challenge the market in essence. More radical opponents of neo-liberalism, by contrast, suggest that markets are innately undemocratic, that indefinite economic growth is ecologically unsustainable and that the market-based system is tyrannical because it reduces human life to a narrow pursuit of quantitative advantage. As Bob Dylan observed, money doesn’t talk, it swears.
By attacking the most obviously repellent features of neo-liberal globalisation, Soros, Stiglitz and friends seek to show how capitalism can be maintained and to channel more radical sentiments into support for a supposedly ‘nicer’ form of globalisation. They act as a vaccine against the virus of anti-capitalist protest.

Wednesday, 16 July 2008


Given the insights of market imperfection outlined above Stiglitz has suggested that politicians need to behave ‘more like scholars’ (Stiglitz 2002: x) but observes that ‘the opposite happens too often’. Stiglitz and Soros have increasingly focussed on the fact that economics has been either used to legitimate American interests or simply junked when it gets in the way of self-interested politicians:

They talk a free-market ideology but, if you look at their politics in terms of bailouts and protectionism, it is not a free-market policy; if you look at their procurement agenda and what they did with Bechtel in Iraq, it doesn’t even look like a fair competition agenda. So you have to sort of suspect an element of ideology but more an element of particular groups seizing control. (The Observer, 18 May 2003)

Bush, they suggest, has dropped the market approach, and is looking now to heavy handed state intervention to benefit the hyper-wealthy of a hyper-power. Indeed Stiglitz and Soros in their recent writings have moved on to attack Bush’s military adventures (Soros 2004; Stiglitz 2003). A number of other voices have echoed the suspicion that globalisation has a specifically American orientation and reflects US corporate and military interests. Will Hutton former head of the Industrial Society and editor of the Observer newspaper, specifically argues that capitalism comes in different varieties and favours Asian or European flavours to those of US capitalism. He suggests that the US system discourages long-term investment and promotes dot com style paper gains over strategically focussed real growth in assets. Slashed public spending on education and health within the US system weakens the fundamentals of the economy such as a healthy work force. Equally the US system breeds systematic and destructive inequality. Despite the rhetoric of pure markets, the Government intervenes with measures ranging from subsidies to corporate interests to huge military spending, and not to help the poor or promote growth but to feed revenue to firms. Hutton argues that the IMF demand for capital liberalisation has made it easier for US financial institutions to grow and made it easier for the US to fund its trade deficit, noting that in 1995 alone ‘foreign central banks bought $70 billion of new US treasury securities’ (Hutton 2001: 191). The writer Noreena Hertz has looked to socially and environmentally friendly entrepreneurs to provide a more Keynesian and humane form of global capitalism (2001).

Hertz along with Hutton, Soros and Stiglitz have increasingly come to see globalisation as an ideological force driven not by market economics but by US demands for hegemony with the economics of the market providing a gloss of legitimacy to the pursuit of naked power. Typically, Stiglitz, notes that for many globalisation appears to be ‘triumphant capitalism, American style’ (Stiglitz 2002: 5).
This said Soros notes that European countries are far from immune when it comes to economic imperialism:

the French government, for instance, has an even stronger tradition of pushing business interests through political means. The president of an Eastern European country I know was shocked when in a meeting with President Jacques Chirac the French president spent most of their time together pushing him to favour a French buyer in a privatization sale. I shall not even mention arms sales.
(Soros 1998: 204)

A genuine consensus for growth and development which advances a true rather than US corporate globalisation has been advocated by Soros and Stiglitz. They believe that the Bretton Woods institutions must be reformed and also support the introduction of the Tobin Tax, named after the economist James Tobin, on capital flows. A percentage tax on capital transactions could raise $1,000,000,000s for development projects and reduce the instability of markets. It is unlikely that universal backing for such a tax would be forthcoming but studies have shown that even if only a minority of currency transactions were covered it would bring benefits. Tobin believes that his tax could also be levied on share transactions and administered by the IMF to make it stick (Henwood 1998: 319). Henwood, a keen Tobinist who like Keynes knows that financial markets are more about gambling or playing ‘snap’ than productivity, argues gleefully:

Few things, aside from the threat of direct appropriation of their property, make Wall Streeters scream more loudly than the assertion that their pursuits are pointless or malignant, and that their activities should be taxed like noxious effluent. Listening to those screams would be another positive benefit of a transactions tax. (Henwood 1998: 319)

Tobin suggested a modest 0.5% tax and the networks campaigning for its introduction call for a levy as low as 0.2% (see chapter five). Soros also advocates the creation of new global credits to finance debt. Stiglitz suggests that the IMF’s structural adjustment to be linked to social inclusive policies. Above all the Washington institutions should act in a transparent way and engage in dialogue.

Thursday, 3 July 2008

1001 uses for a dead Karl Polanyi

Virtually all of the critics of neo-liberal globalisation examined in this text make some use of the ideas of Karl Polanyi outlined in his book The Great Transformation first published in 1944. Typically Soros observes in his acknowledgements his thanks to ‘John Gray [who] made me re-read Karl Polanyi’s Great Transformation’(Soros 1998: v). Also an exiled Hungarian, writing in the 1940s and 50s, Polanyi argues that far from being natural markets are of secondary importance in explaining how goods and services are produced and distributed. He suggests that the role played by markets ’ was insignificant up to recent times’ (Polanyi 1957: 44). Much more important is a notion of human society within which the economy is embedded. He argues that individuals consume luxury goods, not because they directly generate satisfaction and pleasure, but because they confer status. The American economic heretic Thornstein Veblen, famous for his concept of conspicuous consumption echoes Polanyi’s views. He argues that individuals consume luxury goods, not because they directly generate satisfaction and pleasure but because they give individuals status. The native American ‘potlatch’ where individuals gathered to smash expensive and rare goods provides another example of such conspicuous consumption (Veblen 1994). The modern bling bling equivalent sees rock stars and hip hop artists smashing up hotel rooms, pouring a way bottles of crystal champagne and crashing expensive cars.
Social factors that glue communities together make the market and other forms of economic activity possible. Without an array of social, rather than state or market institutions, neither the state nor the market could function. We don’t generally dump our grandfathers on the streets. Parents feed their children but rarely ask for payment and examples can be multiplied. For Polanyi the market is based on an ahistorical myth, it is portrayed as universal and inevitable either for ideological reasons or from a failure of imagination. The market is embedded within a host of complex social institutions and practices. Indeed the move towards a society where the market is dominant, The Great Transformation of Polanyi’s title tends to erode the social institutions that the market depends upon. The ultimate extension of the market threatens the market, destroying the conditions upon which it depends. Childcare and socialisation, household maintenance including cooking and cleaning and a host of other domestic tasks traditionally undertaken by women help to maintain economic activity as do a range of social obligations such as the activities of postal workers or milk delivers who look in on the elderly. Soros utilising Polanyi, argues:
it seems clear that morality is based on a sense of belonging to a community, be it family, friends, tribe, nation, or humanity. But a market economy does not constitute a community, especially when it operates on a global scale; being employed by a corporation is not the same as belonging to a community’ (Soros 1998: 91).
Polanyi’s insights suggest that unlimited marketisation is unsustainable. Gray uses Polanyi to sustain an essentially conservative critique of globalisation in his book False Dawn. The fruits of globalisation for Gray are family breakdown, drug addiction, debt and an epidemic of alcoholism:
The Utopia of the global free market has not incurred a human cost in the way that communism did. Yet over time it may come to rival it in the suffering that it inflicts. Already it has resulted in over a hundred million peasants becoming migrant labourers in China, the exclusion from work and participation in society of tens of millions in the advanced societies, a condition of near-anarchy and rule by organized crime in parts of the post-communist world, and further devastation of the environment. (Gray 1999: 3 )
Communitarian advocates of the third way provide another spin on Polanyi, seeking to balance the market with community building, crusades against social exclusion and various partnership schemes.
Radical use of Polanyi is made by autonomist and ecosocialist critics of globalisation, examined in later chapters, such as Hardt and Negri and Kovel. Polanyi’s approach suggests that the market is merely one way of dealing with the economic problem and in historical terms a minor one – an insight that, if true, scuppers the ideological pretensions of those who advocate extending the market to virtually every area of human society. The rise of globalisation has implied that no alternative to the market is possible. The economist Amartya Sen, usually seen as a radical voice, typically suggests that banning or bypassing the market is analogous to making conversation illegal or refusing to talk to our friends (Sen 1999: 6). Polanyi suggests that economic alternatives to the market are far from absurd whereas the introduction of the market is a violent process in at least two ways. Firstly, it involves a battle between social classes: he notes that new poor laws were introduced in Britain in the 18th century as part of a battle to replace notions of a ‘moral economy’ with those of an extended market. Secondly, such processes are physically violent, with peasants being thrown off the land by processes of enclosure. In this sense the Washington consensus can be seen as a process not of development but violent expropriation whereby communal resources and informal forms of economic activity are privatised. Armies of migrants facing deprivation provide cheap labour to fuel global corporate profit-seeking.
Soros, Stiglitz, along with other and other advocates of a gentler capitalist globalisation use Polanyi’s insights to sustain a less fundamental vision. They note that the imperfections of the market, including the fact that it is by necessity embedded in non-economic institutions and practices, demand that globalisation should be introduced gradually, should remain incomplete and should be cemented with a measure of global Keynesianism. Soros and Stiglitz both suggest that a swift march from state planning to a full market economy is likely to be costly because it wrecks social institutions without providing enough time for alternatives to mature. Stiglitz in particular suggests that the gradualist approach to economic reform in China has been more successful than the shock therapy that has left the Russian economy in chaos. He argues that the IMF:
tried to create a shortcut to capitalism, without creating the underlying institutions[…] the Russian middle class has been devastated, a system of crony and Mafia capitalism has been created, and the one achievement, the creation of democracy and a free press, seem very fragile. (Independent on Sunday, 9 November 2003)

Saturday, 28 June 2008

More from Stiglitz and Soros: Asymetric information and reflexivity

The argument of Adam Smith [1776], the
founder of modern economics, that free markets led to efficient outcomes,
“as if by an invisible hand” has played a central role in these debates: it suggested
that we could, by and large, rely on markets without government intervention.
There was, at best, a limited role for government. The set of ideas that
I will present here undermined Smith’s theory and the view of government
that rested on it. They have suggested that the reason that the hand may be
invisible is that it is simply not there – or at least that if is there, it is palsied.

While a number of critics wish to maintain a reformed capitalism Soros and Stiglitz are particularly interesting because they challenge not just the excesses of global neo-liberalism but also some of the foundations of economics. Economists, even many Keynesians, assume that markets generally work, with the actions of consumers and producers leading to efficient outcomes at a micro level. Stiglitz and Soros accept the principle of a market-based society but doubt that the market automatically delivers efficiency. Their critique based on notions of reflexivity and asymmetric information is similar to that of Keynes.
Economists since Alfred Marshall, in the nineteenth century, have argued that human beings are ‘rational’ in that they seek to maximise their personal benefits and minimise the costs of any transaction. Consumers aim to maximise ‘utility’ and producers profit. Both groups calculate the best course of action during millions of transactions. The actions of millions of producers and consumers functions as an invisible hand creating choice, prosperity and even justice. The liberalisation suggested by the Washington consensus is founded on Marshall and Smith’s assumptions of rationality, calculation and maximising behaviour. Given these foundations it is safe to assume that the market should be extended as far as possible because it generates efficient outcomes.
Typically we might argue that if a country removes capital controls, its entry into a global money market will bring benefits. If a country has sound economic policies, money will flow in as investors ‘buy’ its currency so as to make gains. If a country is running a trade deficit, demand for its currency will fall, because foreigners will demand less of it to buy the country’s goods and services. Because demand falls the value of the currency will fall, in turn its exports will become cheaper and its imports more expensive. As more of its exports are sold and fewer imports are bought the deficit will be magicked away. The market is a structural device, a mechanism, for restoring ‘equilibrium’ or balance.
Yet, as Soros and Stiglitz argue, this notion of the market bears little resemblance to the conditions and complexities of modern economic reality. The money traded for goods is a tiny percentage of speculative currency flows, meaning that currencies are little affected by trade balances and therefore unlikely to float downwards to restore imbalance. With capital liberalisation billions of dollars’ worth of currencies flow in and out of economies in seconds. Such flows create waves of chaos rather than restoring equilibrium.
Shares, it is assumed, are bought for profit, so potentially profitable, well-managed companies will enjoy increased demand followed by rising share values. Rising share values will make it easier for such companies to expand. In reality share values can reach mountainous heights before crashing back, as the dot com bubble of the 1990s illustrated. Share values are often unrelated to company performance. Soros, who has made a billion dollar fortune from such movements, particularly currency movements, argues that the market is shaped by reflexivity. Economic rationality increasingly depends on our ability to successfully guess the behaviour of other economic actors. Such reflexivity, where individuals reflect on what they think will happen in markets and change their behaviour in response, leads to an increasingly abstract and exaggerated economic system. If share holders think others are likely to sell their stocks, shareholders sell anticipating that prices will fall, such action leads to a stampede to sell and market instability. Even if dot coms have little value the belief that others will buy pushes up share values into a bubble of inflated stock market value. Soros’s appreciation of the potentially negative consequences of a market based not on rationality but predictions of mass and often hysterical behaviour is profound:
The prevailing doctrine on how financial markets operate has not changed. It is assumed that with perfect information markets can take care of themselves; therefore the main task is to make the necessary information available and to avoid any interference with the market mechanism. Imposing market discipline remains the goal.

We need to broaden the debate. It is time to recognize that financial markets are inherently unstable. Imposing market discipline means imposing instability, and how much instability can society take? (Soros 1998: 175-176)

To understand such instability Soros uses the concept of reflexivity which he traces from Greek drama to the introduction of intersubjectivity into sociology by Alfred Schutz:

The concept of reflexivity is so basic that it would be hard to believe that I was the first to discover it. The fact is, I am not. Reflexivity is merely a new label for the two-way interaction between thinking and reality that is deeply ingrained in our common sense. (Soros 1998: 10)

Keynes was one of the few academic economists to make large amounts of money from commodity markets! The fact that he, like Soros, had a sharp understanding of reflexivity should be instructive to those who seek to play the markets. Keynes put the concept at the centre of his theoretical system:

[economics] deals with motives, expectations, psychological uncertainties. One has to be constantly on one’s guard against treating the material as constant and homogeneous. It is as though the fall of the apple to the ground depended on the apple’s motives, on whether it is worthwhile falling to the ground, and whether the ground wants the apple to fall, and on mistaken calculations on the part of the apple as to how far it was from the centre of the earth. (quoted in Moggridge 1976: 27)

Keynes feared the effect of capital liberalisation as a means of shifting investment from productive activity to a form of gambling:
The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is ‘to beat the gun’, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow. (Keynes 1960: 155)
Keynes while no anti-capitalist believed that extending the market meant extending uncertainties to new areas of human existence with destabilising and potentially damaging consequences. In the third millenium see-sawing currency and share values mean that jobs may be swept away with one spin of the economic roulette wheel.
Stiglitz specifically examines asymmetric information as a form of market failure. He suggests that in the real world information is always imperfect to a lesser or greater extent. Such asymmetry means that markets may not work efficiently and if some actors have access to greater information than others there is potential for injustice. Assumptions of reflexivity and asymmetric information, ignored by the Washington consensus, powerfully shape the operation of real markets and have important consequences.

Against Washington

Why the Washington Consensus does not work.

In the same way that revolutionary socialists argue that Stalin betrayed Lenin or Marx, moderate advocates of capitalism like Soros and Stiglitz argue that the IMF et al have abandoned Keynes’ original vision. It isn’t that capitalism doesn’t work; it is more the case that it hasn’t been tried. According to Stiglitz:

In its original conception, the IMF was based on a recognition that markets often did not work well – that they could result in massive unemployment and might fail to make needed funds available to countries to help restore their economies. The IMF was based on the belief that there was a need for collective action at the global level for economic stability[…]Keynes would be rolling over in his grave if he could see what has happened to his child. (Independent on Sunday, 9 November 2003)

Since the 1980s the IMF, WTO and World Bank have advocated the so-called ‘Washington Consensus’ of fiscal austerity (government spending cuts), privatisation and market liberalisation. Swept along by the neo-liberal counter-revolution against Keynesian economics the consensus argues that for development to occur barriers to the market should be swept away. The policies that failed in 1930s Europe have been exported to almost the entire globe. The Washington consensus argues that the poorest countries in the world should cut government spending and increase taxes to reduce indebtedness. The tax burden should, of course, fall on ordinary citizens; taxes on profits would discourage investment and enterprise. State assets should be privatised as thoroughly as possible, while barriers to free trade should be swept away. Export led growth is also advocated along with the removal of controls on capital. Multinationals are to be welcomed and government regulation slashed to the minimum.

While Soros and Stiglitz are by no means naturally hostile to the US, given their close links with previous American governments, they believe that the Washington consensus, rather than being based purely on market ideology, is also inspired by the interests of an essentially US corporate elite. The Bretton Woods institutions have massive power to impose their free market medicine because if they refuse to give a country a clean bill of health, foreign capital floods out, leading to economic chaos. If a country rejects free market approaches, money floods out, forcing a rethink. By insisting that barriers to the movement of financial capital are removed the Bretton Woods institutions make it difficult for countries to act independently and they become more closely tied to the whims of global financial markets. Indebted countries that reject the consensus are refused financial stabilization deals by the IMF and aid from the World Bank. Even countries that are independent of IMF financial aid are influenced by the institution’s prescriptions. Typically, British Chancellors of the Exchequer and Japanese finance ministers take close interest in the IMF’s annual report of their countries’ financial health.

Stiglitz believes that the emphasis on fighting inflation and reducing debt advocated by the IMF can be appropriate in some circumstances. He suggests that some Latin American countries during the 1980s attempted to print money to spend their way of crisis with predictable results in terms of high inflation, ‘Countries cannot persistently run large deficits; and sustained growth is not possible with hyperinflation. Some level of fiscal discipline is required’. Neither does he reject all privitisation, ‘Most countries would be better off with governments focussing on providing essential public services rather than running enterprises that would arguably perform better in the private sector, and so privitization often make sense’ . Equally, ‘When trade liberalization – the lowering of tariffs and elimination of other protectionist measures – is done in the right way’, so that inefficient sectors of the economy are removed and replaced with more competitive ones, there can be ‘significant efficiency gains’ (Stiglitz 2002: 53). Soros argues that in an ‘ideal world’ the complete removal of capital controls would be beneficial, noting that restrictions to prevent money moving across national borders creates ‘evasion, corruption and the abuse of power’ (Soros 1998: 192). Suggesting that the collapse of the Soviet economy demanded significant change including major privatisation, Soros notes ‘The fact that radical reforms are often radically misconceived does not obviate the need for radical reforms’ (1998: 226).

However both he and Stiglitz argue that these radical market-based policies have been applied in an inflexible and inappropriate way. Stiglitz argues that the Washington Consensus’s obsession with reducing inflation is particularly damaging because it means that some of the poorest countries in the world have to cut spending to prevent prices rising when problems of joblessness and low growth are likely to be far more damaging. In Indonesia, to pick just one example, Stiglitz notes how IMF-inspired cuts to food and fuel subsidies for the poor led to rioting (Independent on Sunday, 9 November 2003).

Privatisation breeds corruption when assets are sold off. Even when clean it often enriches an elite of corporate fat cats. Privatisation during a debt crisis when an economy is in chaos can mean that assets are sold at knock-down prices, which may simply mean that they can be bought up by US corporations who become stronger at the expense of developing countries. In Russia, according to Stiglitz, the swift privatisation of state assets led to their purchase by a criminal class who thereby gained massive political power. Capital liberalisation has reinforced the tendency for democratic decision making to become subordinated to the demands of financial markets. Soros notes that tax burdens have been shifted from firms and financial operators to citizens increasing inequality:

Interestingly, the state’s share of GNP has not declined perceptibly. What has happened instead is that the taxes on capital and employment have come down while other forms of taxation particularly on consumption have kept increasing. In other words, the burden of taxation has shifted from capital to citizens. That is not exactly what had been promised, but one cannot even speak of unintended consequences because the outcome was exactly as the free-marketers intended. (Soros 1998: 112)

A country implementing policies that the financial markets find distasteful may find that they take their hot money and emerging share market portfolio funds elsewhere, causing slump and currency collapse. As well as tying developing countries to the free market agenda of the Washington consensus, capital liberalisation means that such states are more susceptible to movements in global currency markets that can cause sudden shocks to fragile economies:

It has become an article of faith that capital controls should be abolished and the financial markets of individual countries, including banking, opened up to international competition. The IMF has even proposed amending its charter to make these goals more explicit. Yet the experience of the Asian crisis ought to make us pause. The countries that kept their financial markets closed weathered the storm better than those that were open. India was less affected than the Southeast Asian countries; China was better insulated than Korea. (Soros 1998: 192)

Free trade is theoretically beneficial, but opening up an underdeveloped economy to trade has several major drawbacks. It may force down the price of commodities such as sugar or coffee, wrecking the livelihoods of peasant farmers who have little possibility of alternative employment. It can also destroy ‘infant industries’, new industries that have yet to mature and become efficient and will be killed by unprotected exposure to foreign competition. Stiglitz notes that to achieve growth the successful Asian economies such as Hong Kong, Japan and South Korea initially used selective protectionism to allow their industries to take off.

Soros and Stiglitz feel that the advocates of the Washington consensus are remote from the problems of the developing world, act arrogantly and are consistently biased to the needs of the rich.

[M]odern high-tech warfare is designed to remove physical contact: dropping bombs from 50,000 feet ensures that one does not ‘feel’ what one does. Modern economic management is similar: from one’s luxury hotel, one can callously impose policies about which one would think twice if one knew the people whose lives one was destroying. (Stiglitz 2002: 24)

The institutions promoting the Washington consensus act as if they continue to bear the ‘[w]hite man’s burden’ persisting according to Stiglitz with the notion that they always know what is best (2002: 25). Stiglitz and Soros argue that the arrogance of the Washington institutions means that developing countries have little say in their own economic development and policies are imposed from above. Such arrogance inevitably breeds discontent and even where globalisation has the potential to bring benefits; the Washington consensus has fuelled a hostile counter movement. Discontent is met by repression: rubber bullets against starving rioters. As Stiglitz observes:

A common characteristic is: We know best, and the developing countries should do what we tell them to […]They really see themselves as a harsh doctor, giving them the cod liver oil they need, even if they don’t want it. The problem, of course, is that quite often the medicine […] kills the patient. (Independent on Sunday, 9 November 2003)
It is difficult to think of a single example of a country that has gained from the IMF model of structural adjustment. Botswana is often mentioned but commentators but despite enjoying one of the globe’s fastest economic growth rates the Washington consensus has not delivered sustainable prosperity:
The richest twenty per cent of the population earned more than twenty-five times as much as the poorest twenty per cent.[…] Botswana, at twenty-two per cent, has the world’s sixth highest unemployment rate […] One of the few products of Botswana’s increased economic activity which has been widely shared by its poorer inhabitants is AIDS. Women driven into prostitution by poverty are purchased by the truck drivers delivering goods to the elite. (Monbiot 2003: 214)

Argentina, the Washington consensus exemplar from South America, plunged into severe recession after following the model rigorously, with resulting mass unemployment, poverty and chaos.

The nice cartoon is from the Global Policy Forumwho have lots of material on the Washington Consensus worth a click

Wednesday, 25 June 2008

From Keynes to Bretton Woods

Soros, Stiglitz and other establishment critics of neo-liberalism draw upon the work of John Maynard Keynes, who believed in the necessity of managing capitalism, both to provide a fair society and to maintain a capitalist system. During the 1930s Europe and North America were plunged into recession. Economies shrank and unemployment figures mushroomed to millions. The resulting turmoil fuelled the political chaos that lead to World War Two. The conventional ‘liberal’ or ‘classical’ free market economists believed that the economy worked best without government controls and tended to automatically correct any disequilibria. If demand for goods fell, prices would fall too and eventually shoppers would increase demand as they snapped up bargains. If individuals were unwilling to borrow money, interest rates (the price of money) would fall, and if rates fell low enough demand for loans would pick up rescuing the economy. Furthermore if workers became unemployed they could cut their wages until firms found them cheap enough to employ. These market advocates believed that apparently humane attempts to deal with poverty and unemployment such as state welfare benefits would simply make the recession deeper by discouraging wage-setting. Even socialist politicians such as Hilferding in Germany and Snowdon in Britain accepted this orthodoxy. As the years went by and liberal policies of non-intervention were accompanied by deeper recession, conventional economics became increasingly discredited. The only economies that seemed to work were to be found in Hitler’s Germany and Stalin’s Russia.

By the late 1930s the western economies were slowly pulling out of slump and demand rose with employment as war led to large factory orders for guns, planes and assorted military paraphernalia. Nonetheless by the 1940s and 1950s the economic orthodoxy was largely abandoned for Keynesianism. Keynes suggested that economics has a psychological element that means if confidence is low, so too is consumption and growth. Prices, wages and interest rates may be ‘sticky’, by which Keynes meant they would not fall easily, because firms, banks and workers may be reluctant to lower them if they feel that they will still suffer when demand is low. Keynes argued that if people think bad economic news is on the horizon they spend less and the bad economic news becomes a recessionary reality. Businessmen and even women are particularly edgy and suffer from a herd mentality, cutting investment when they fear bad economic news. Like deranged beasts they stampede towards slump. The answer is for governments to inject spending in the economy when recession looks likely. In turn if excessive spending threatens the economy, governments can control it by raising taxes and cutting expenditure.

In July 1944 Keynes acted as the British government’s representative to the Bretton Woods Conference in New Hampshire, USA. Bretton Woods aimed to create a new financial architecture and new global institutions to restore economic stability and remove the threat of world recession, after the war had been won. It called for the creation of three key institutions. During the 1940s the General Agreement on Trade and Tariffs (GATT), now known as the WTO, was established to sweep away barriers to trade so as to promote faster economic growth. The International Bank for Reconstruction and Development, commonly known as the World Bank, was set up to lend money to countries, initially for restoration of infrastructures decayed during recession and smashed by war. Its role has increasingly shifted towards funding development projects in the south of the globe. Finally the IMF was created to help countries faced with severe debt problems or balance of payments deficits. Stiglitz sees all three institutions as essentially Keynesian, examples of government intervention, aimed at making the market work and capitalism expand.