by Billy Bragg
In advocating government intervention, Keynes rejected the laissez-faire economics that had predominated since the early nineteenth century, instead offering democracy a greater element of regulation over the free market. The 1945 Labour government followed his prescriptions, instituting a social democratic programme that provided free health care and decent housing. Legislation strengthened workers’ rights, improving conditions and bargaining power in the workplace. Labour nationalised the public utilities, along with the mines, railways and docks. Adam Smith’s invisible hand was replaced with the nurturing hand of the welfare state.
These radical policies were not reversed when the Conservatives gained power in 1951, leading commentators to speak of a post-war consensus around the idea of the state providing support for the individual from the cradle to the grave. By 1957, the mixture of Keynesian economics, redistributive taxation and welfare provision had brought about such improvement in the standard of living that Conservative prime minister Harold Macmillan was moved to remark that the British people had ‘never had it so good’.
This post-war prosperity was not confined to the UK. By adopting Keynesian economic policies to varying degrees, the US, France, Italy, Germany and Japan all achieved record growth and low unemployment. The gap between rich and poor began to narrow. There was still poverty to be seen, but the onus was now on the state to provide, rather than on individuals to fend for themselves.
Social democracy had brought capitalism to heel. A mixed economy of private and public ownership, regulated markets and free collective bargaining in the workplace had created an economy that worked for the benefit of the majority.
However, not everybody was happy with this state of affairs.
While none of them wanted to go back to the bad old days of the 1930s, there were many industrialists and financiers who chafed at the restrictions imposed by Keynesian economics. When they couldn’t even rely on their old pals in the Conservative Party to stand up for the idea of free markets, they realised that they could no longer control the economy in the way they had done before universal suffrage, when the rich made laws for their own benefit.
Accountability had shifted the balance of power in favour of the masses. If they hoped to regain their dominance, the rich would have to break the monopoly that democracy held over policymaking.
In 1947, a group of libertarian economists gathered in the Swiss village of Mont Pelerin to discuss how to combat the statist economics that were sweeping Western democracies. The conference was organised by Friedrich Hayek.
For those attending this foundational meeting of the Mont Pelerin Society, the mixed economies of the Western democracies were just as pernicious as the command economies of the totalitarian Marxist states. ‘Over large stretches of the Earth’s surface the essential conditions of human dignity and freedom have already disappeared,’ began their Statement of Aims. ‘In others they are under constant menace from the development of current tendencies of policy.’ For ‘current tendencies’ read social democracy.
Hayek and his confederates pledged to take up the cause of economic freedom, to rekindle the notion of liberty as freedom from regulation, harnessing the power of the free market to liberate the people from the tyranny of state provision. Given the primacy of Keynesian economics, they believed that it would take at least a generation before their ideas gained traction. To that end, the members of the Mont Pelerin Society spread out across the globe to seek rich backers willing to fund free market think tanks.
In the decades that followed, corporate-backed lobbying groups began arguing in favour of deregulation. The Hoover Institution, the American Enterprise Institute and the Heritage Foundation worked closely together, coordinating their campaigns, a strategy underscored by the fact that their respective boards of directors often comprised the same group of individuals. In the UK, the Institute of Economic Affairs was set up and funded by a member of the Mont Pelerin Society, while Margaret Thatcher was among the founders of the Centre for Policy Studies.
Legend holds that, shortly after she became leader of the Conservative Party, Thatcher attended a briefing at which the speaker suggested the Tories should seek a pragmatic middle way with regard to economic policy. Thatcher didn’t wait for him to finish. Reaching into her handbag, she pulled out a copy of The Constitution of Liberty, holding it up for all to see. ‘This,’ she said sternly, ‘is what we believe in,’ and she slammed Hayek’s book down onto the table.
With Thatcher’s election in 1979 and that of Ronald Reagan eighteen months later, Hayek and his followers finally had the opportunity to put their ideas to the test.
Initially, they had no name for their big-business/small-government ideology. Some called it classic liberalism, but the term ‘liberal’ held different meanings on either side of the Atlantic. A few of the think tanks referred to themselves as libertarian, but most saw that as descriptive of a social rather than an economic position. In a book entitled Why I Am Not a Conservative, Hayek himself claimed to be an Old Whig.
For the new breed of financiers who were making fortunes from the Hayekian assault on the post-war consensus, ‘Old Whiggery’ didn’t quite match up to their self-image as buccaneering heroes come to liberate the economy. Over time, they came to be known as neoliberals. They were ‘neo’ because of their significant break with the past: whereas classic liberalism had been founded on trade in goods between nations, the driving force of neoliberalism is finance and globalisation.
Keynes had recognised that the nation state – as the largest functioning democratic entity – was crucial to economic agency, not just as a generator of GDP but also as a pool from which taxes could be levied. While trade was to be encouraged, speculative cross-border finance, which had helped cause the Great Depression, should be tightly regulated. ‘Let goods be homespun whenever it is reasonably and conveniently possible,’ Keynes wrote. ‘Above all, let finance be primarily national.’
By the 1970s, technological advances in communications and transportation were putting a huge strain on this notion. Manufacturers in Western Europe and North America began moving production overseas, where wages were cheaper and unions non-existent. Democratic oversight of the financial sector was also breaking down. One of the first acts of the Thatcher government was to remove the exchange controls that Labour had introduced in 1947 to tightly regulate overseas capital transactions made by British citizens.
It was a move that created a decisive change in the balance of power between labour and capital. The option to move to another country if wage bills were judged to be too high was now an attractive prospect to British businesses. This sudden change in policy also put pressure on the working practices of the City of London. Although the bowler hats had mostly vanished by the late 1970s, the atmosphere of an old boys’ club still permeated the London stock market. The removal of exchange controls made the idea of face-to-face stockbroking an anachronism.
Thatcher’s economic revolution took a great leap forward in 1986, when the City of London was deregulated overnight in what became known as the ‘Big Bang’. These changes severely undermined the ability of the state to intervene in the economy. If a future government sought to introduce Keynesian policies, capital could now flee overseas.
The effects of Thatcher’s decision to deregulate the economy were devastating. During her first term in office, 25 per cent of British manufacturing was lost. Reform of company law gave primacy to the interests of shareholders, leading to a huge shift in the way profits were distributed. Whereas, in the 1970s, companies remitted an average of 10 per cent of their profits to shareholders, by 2010 the figure was over 60 per cent.
Thatcher’s attack on social democracy was mirrored in the US by the policies of President Reagan. Both believed that the free market could solve society’s problems, if only it were unshackled from regulation.
During the long years of the post-war consensus, the nascent neoliberals had little to comfort them in terms of popular culture. No pop
bands were extolling the virtues of monetarism; few students had a poster of Fritz Hayek on their walls. Yet there was one voice willing to imagine a brave new world: Ayn Rand. The Russian-born novelist had emigrated to the US in 1926; her book Atlas Shrugged, published in 1957, is a sci-fi vision of a land governed by naked self-interest.
The plot revolves around a massive sulk by entrepreneurs, who are so upset by red tape that they hide in a valley and refuse to make any new things until the masses are nice to them. The book’s hero, a free market freedom fighter heroically resisting the tyranny of regulation, became a role model for neoliberals.
In 1987, a member of Ayn Rand’s inner circle was given the second-most powerful job in the US. Alan Greenspan had read Atlas Shrugged while it was being written in the 1950s. Thirty years after its publication, Ronald Reagan made him Chair of the Federal Reserve, a post he held until 2006.
Shortly after he left office, Greenspan was asked by a Swiss journalist which candidate he would be supporting in the 2008 presidential elections. His response was revealing. It didn’t much matter how he voted, Greenspan replied, because ‘we are fortunate that, thanks to globalisation, policy decisions in the US have largely been replaced by global market forces. National security aside, it hardly makes any difference who will be the next president. The world is governed by market forces.’
Hayek’s dream was complete. Liberty had been redefined as freedom from economic restraint. Yet no one voted for this outcome. No politician stood for office on the platform of ceding power to the markets. Like the invisible hand that goes about its work unseen and disinterested, globalisation was portrayed as the natural evolution of the laws of supply and demand.
An intangible force working towards the best of all possible outcomes, the global free market took on the characteristics of a deity to those who worshipped at its altar. However, events have shown that capitalism loses all sense of moderation when belief in the power of the markets enters the realm of faith.
The British construction company Carillion offers us a sobering recent example of what can happen when corporations believe that they are simply too big to fail. With 450 UK government contracts to provide services from school dinners to hospital cleaning and prison maintenance, the board of directors felt confident that the government would always bail them out.
This assumption was based partly on the importance of the services that Carillion provided, but there was also a sense that, because the British government was committed to the idea that the private sector always provides better value for money than the public sector, it had a strong ideological imperative to ensure that the company was seen to succeed.
This neoliberal article of faith was shattered when the company collapsed in 2018.
A parliamentary report subsequently found that the directors had prioritised senior executive bonus payouts and shareholder dividends while failing to properly fund the staff pension scheme. Between 2012 and 2016, Carillion paid out £217 million more in dividends than it generated in cash from its operations, suggesting that the company had borrowed money not for investment, but simply to reward shareholders.
The collapse was a complete failure of accountability. The report found that the directors were guilty of ‘recklessness, hubris and greed’; the auditors were described as ‘complicit’ and the regulators as ‘too timid to make effective use of the powers they have’. Successive governments were chastised for seeking to outsource work on the cheap.
This was an indictment of what happens when you replace democratic oversight with the profit motive. Having been promised that privatisation would save them money, taxpayers were left to clear up the mess.
The notion that it is possible to have both low taxation and good public services is another central tenet of neoliberal belief. This counter-intuitive idea is often peddled by politicians as a manifesto promise. Yet everyone knows that taxes pay for public services, so if you reduce one, surely the other will suffer?
Not if you can get someone else to pay.
Private finance initiative (PFI) contracts, whereby private companies fund the building and maintenance of national infrastructure, with the government undertaking to pay them back over twenty-five to thirty years, are a sleight of hand designed to give the taxpayer the impression of value for money.
Labour and Conservative governments were attracted to PFI schemes because these made it possible to build new schools and hospitals without having to raise the money up front. PFIs remove public borrowing from the books, reducing the amount of debt the country appears to have. They also have the attraction of making someone else accountable when projects are not delivered on time.
However, these short-term arguments are undermined when interest payments and other incentives are taken into account. By 2019, the private sector had spent an estimated £59.1 billion creating over 700 PFI schemes in the UK, yet, under the current deals, taxpayers will end up paying more than £300 billion for them.
‘Trickle-down economics’ became a popular slogan around the time of the Reagan presidency. Rather than relying on state intervention to create a fair society, neoliberals argue that taxes on big corporations and the wealthy should be reduced so as to encourage investment, which in turn will lead to more jobs for more people, causing wealth to ‘trickle down’ throughout society.
This is based on the misconception that only entrepreneurs can create growth. Reward them, and their generosity and acumen will benefit everyone – so the argument goes. However, in terms of value to the real economy, the spending habits of the opulent few are far outweighed by those of the many regular consumers. The individual actions of millions of ordinary people, buying a massive volume of goods and services every day, keeps the economy turning over.
If neoliberals really wanted to encourage growth, they should be calling for the things that would boost consumer confidence: job security, affordable housing and free health care, to name a few.
By 1992, the social democratic policies that were designed to deliver just such resources had been superseded by politicians espousing Third Way politics that they hoped would appeal to voters of both left and right. As a way of justifying his focus on the economy rather than on the social policies of previous Democratic candidates, Bill Clinton’s election campaign came up with the slogan ‘It’s the economy, stupid.’ Their rationale encapsulated neoliberal doctrine: whatever you might feel about social issues, people vote with their wallets and therefore economic policy must take priority.
This thinking underpinned both the failed presidential campaign of Hillary Clinton in 2016 and Britain’s referendum on membership of the European Union. In both cases, centrists were shocked to discover that, for a majority of people, the smooth running of an economy that has excluded them and rewarded others is not their highest priority.
Of the key tenets of neoliberal ideology, by far the most pernicious is ‘TINA’. It was Margaret Thatcher who popularised this term, sternly telling critics of her economic reforms that There Is No Alternative to globalised free market capitalism. It is this intransigent attitude that has driven voters to support populism.
Although it took root in the early 1980s, TINA gained even greater credence following the end of the Cold War. The swift demise of the Eastern Bloc, collapsing in the face of people power, was a happy ending that no one had predicted, so it is perhaps unsurprising that a fairy tale was woven by triumphant neoliberals to explain how we would all live happily ever after.
History, it was claimed, had come to an end. Communism had withered due to its internal contradictions, leaving the West victorious in the battle of ideas. Free markets, not tanks and troops, had liberated the subject peoples of Eastern Europe from totalitarian rule. Surely this was proof that Western liberal democracy was the final phase of human development?
However, in the decade that followed the fall of the Berlin Wall, oligarchs, corporations and other carpetbaggers were too busy bringing neoliberalism to the former Eastern Bloc to notice
the rise of another economic system, one that was neither Western nor liberal and definitely not democratic. Twenty years after the fall of the Berlin Wall, China became the second-largest economy in the world and now has greater purchasing power than any other country.
Since 1945, the US and its European allies have promoted liberal democracy and free markets hand in hand as the best method for creating growth among emerging economies. The stimulus for this was the existence of an alternative economic model promoted by the Soviet Union. No matter how badly Western economies performed, they maintained the upper hand in this struggle, due to the fact that the Soviet economy was unable to successfully compete with the West. In China, however, the West has encountered an alternative economic model capable of beating neoliberal capitalism at its own game.
While maintaining a veneer of Maoist ideology, the Chinese Communist Party has developed a command economy geared towards consumerism. In the late 1980s, its stated aim was to make China a semi-industrialised country by the centenary of the People’s Republic of China in 2049. Now it claims China will be a fully developed nation by that date, and all the evidence points towards the realisation of that goal. China already outstrips the world in terms of manufacturing and exports and is expected to overtake the US to become the world’s largest economy in the next decade.
Observers estimate that, by 2020, there will be over 400 million consumers in China with a household income of between $16,000 and $32,000, a middle class larger than the entire population of the US. This economic success has been achieved under a one-party system which keeps tight control over freedom of expression, assembly, association and religion. In 2018, President Xi Jinping, the general secretary of the Communist Party of China, scrapped presidential term limits, making himself president for life.
In the past, the West used the promise of trade to encourage emerging economies to introduce democratic reforms: we will give you access to our goods and markets in return for the introduction of free and fair multi-party elections. Now Xi Jinping can offer a different model, one that does not require the implementation of pluralist democracy in order to trade with the world’s most successful economy.
