John Buell

The Taming of Economic Liberalism

The breakdown of the international economic order created in the wake of World War II was something its authors had not anticipated. How was the US to move from being the world’s greatest creditor to its biggest balance of trade debtor? We are still grappling with the consequences of this transformation. Getting to a new world where capital would flow into the US markets was difficult and stressful. Post Keynesian economist Nicholas Kaldor pointed out: “The end of Bretton Woods (the post-WWII international monetary system) was momentous: inflation expectations and instability on financial and commodity markets resulted, as well as a rise in commodity speculation as a hedge against inflation. This contributed to the cost-push inflation that was being felt in many countries after 1971. This could have been averted had the United States not dismantled its commodity buffer stock in the 1960s.”

It could also have been mitigated had automatic cost of living escalators not been built into many standard labor contracts, thus making inflation self-sustaining. Kaldor points out that “From 1968 to 1971 there were the beginnings of inflationary pressures, in both wages and prices in many industrialized nations. There is of course an eternal struggle in modern capitalism between labour and capital over distribution of income, and sometimes this can get out of control. Post Keynesians recognise the need for some kind of [government mandated incomes policy] in modern capitalism, when wage gains become excessive …” I would add that such struggles can become especially intense as compensation for workers’ lack of control over their own work process. An incomes policy that included profit sharing and participation in management could blunt wage price spirals without disadvantaging labor.

In the seventies, however, not only did inflationary surges coupled with job insecurity cause real harm, they also contravened the expectations of the architects of the grand compromise. Keynes himself saw a need for international and domestic institutions to regulate speculative finance and to compensate for and provide buffers against unpredictable bouts of underconsumption and overproduction. These would serve as employer of last resort with whatever it took.

American economists like Paul Samuelson had watered Keynes’s insights down to a more conservative, market-oriented approach. Samuelson had assumed that except in dire circumstances capitalist economies could be managed via the Fed’s adjustment of the interest rate to provide a stable tradeoff between inflation and unemployment.

It was just these predictable tradeoffs that stagflation contradicted. The ability of large corporations to administer prices, of speculators to drive commodity prices higher, and of unions to gain wage increases in lieu of other privileges and satisfactions denied by the grand compromise undermined broader public faith in government. It thereby encouraged a retreat to Friedrich von Hayek’s pre-Keynesian libertarian economic orthodoxy. Thus enter Paul Volker in the late ’70s and a new economic agenda that as summarized by Varoufakis, meant that: “To attract wave upon wave of capital from Europe, Japan and the oil producing nations, the US had to ensure that the returns to capital moving to New York were superior to capital moving into Frankfurt, Paris or Tokyo. This required a few prerequisites: A lower US inflation rate, lower US price volatility, relatively lower US energy costs and lower remuneration for American workers.”

The ’70s were a time of economic uncertainty and doubt. Right wing think tanks pounced on the failures of American Keynesianism. They articulated a libertarian celebration of the market in order to blunt demands of labor and the left. Nonetheless, in practice they were not above support or at least toleration of a series of bailouts of investment banks and special subsidies and privileges to well placed corporate enterprise, such as military and pharmaceutical giants.

Even the organized Left, both in the US and much of Western Europe, played its role in this transformation. Varoufakis argues that Left and Labor parties “saw the rivers of privately minted money that the financial sector was printing (while labour was squeezed and real estate prices soared) and thought they could harness some of it in order to pursue social democratic policies! …Let finance free to do as it pleased and then tap into some of its proceeds to fund the welfare state. That was their game and, at the time, it seemed to them a better idea, more fathomable, than having to be constantly in conflict with industrialists, seeking to tax them in order to redistribute. In contrast, bankers were quite easy going. As long as the leftist politicians let them do as they pleased. … Alas, to be allowed that small portion [t]hey had to shed their distrust for unfettered financial, labour and real estate markets And so, when in 2008 the tsunamis of capital produced by Wall Street, the City and Frankfurt crashed and burnt, Europe’s Social Democratic side of politics did not have the mental tools, or moral values, with which to subject the collapsing system to critical scrutiny.”

This transformation relied on more than economic discourse. Brown University political economist Mark Blyth has argued in The Great Transformations, “In moments of crises when agents are uncertain about their interests they resort to repertoires of action that resonate with their core identities.” Johns Hopkins political theorist William Connolly has described these repertoires in Capitalism and Christianity, American Style. They were rooted in various strains of nationalism and fundamentalist theology. Those were strengthened by attacks on liberalism for its purported support of the racial and life style minorities in the ’60s and ’70s. In subsequent years immigration has emerged as a hot button issue that encouraged vilification of another minority and thereby defused potential radical economic currents.

However discouraging this journey may seem, it does point up several zones of vulnerability in the current order. Progress is being made on the social issues. Immigration has added to the political resources progressives might be able to mobilize. Occupy Wall Street has raised issues of corporate power, capital mobility, and finance regulation in ways that might resonate with a majority. The collapse of manufacturing firms, traumatic as it is, also gives opportunities for direct forms of worker control and ownership, especially in a climate where bailout of financial institutions has become common.

Other religious currents have raised issues of social justice, and dissenting currents within fundamentalist theologies have expressed concerns about the future of God’s Creation. The philosophical and theological grounds on which future coalitions may grow are shifting, but respectful debate among those committed to a more egalitarian and sustainable future can strengthen the resolve.

Along these lines, paradoxically the environmental crisis may offer some hope on the political economy front. The inability of unregulated markets to handle these complex issues is becoming apparent to more of us along with the need for a government planned and financed green agenda. There are ample resources and causes with and for which to organize. Perhaps Hayek’s greatest contribution is the lesson of perseverance even in dark times.

John Buell lives in Southwest Harbor, Maine, and writes regularly on labor and environmental issues. Email

From The Progressive Populist, March 15, 2013

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