The Global Economy 1944-2000: the limits of ideology
Scott Newton
London: Arnold, 2004, £40 (h/b) £14.99 (p/b )
In classical economic theory, the more perfect a market, the less influence any single producer or consumer has within that market. The same rule applies to distribution within a market. If neo-liberal theories are correct, we are approaching ever closer to this state of economic bliss, followed inevitably by a parallel state of political bliss. Given the contemporary global economic and political situation, either the economic theory is wrong or we have an imperfect global market.
Scott Newton’s history is a useful guide as to how we got from Bretton Woods to now. As he notes, the available guides to the history of the world economy since 1945 tend to be inadequate on either the political and historical background or overly specialist and technical with respect to economics. He hasn’t written an all-inclusive account of the post-war global economy but rather an account of ‘how politics, ideology and economic institutions interacted over time to create a global market…’.
Newton has rehearsed some of this material in previous Lobsters, particularly his accounts of how Keynes’ original plans for the post-war economic order, embodied in institutions like the IMF, were in part hijacked and changed by the US for its own national purposes and interests.
The account divides into two parts, the period up to the oil crisis of the seventies, when the Keynesian order was still in place, and the period following this when Keynesianism first began to be explicitly repudiated in favour of an emerging neo-liberalism. (8) From the economic viewpoint, his narrative is that of a passage from a world order at least partly regulated for the purposes of a general prosperity to one where the deregulation of restrictions on trade and capital flows has become dominant.
This has not lead to an increase in general prosperity. Africa gets poorer by the year; an unevenly distributed US prosperity is funded by an ever increasing trade deficit, mainly with China; Japan has been locked in a deflationary liquidity trap for a decade; and Russia and the Asian ‘Tiger’ economies suffered near meltdown in the late nineties. The very institutions devised to stabilise the world economy seem to have been prime movers in undermining that stability. This was most obviously the case in Argentina, when after tying its currency to the dollar at the wrong time, its economy collapsed under pressure from the IMF to balance its budget. The country was caught in a classic trap. By increasing its interest rates so as to prevent capital flight and a collapse of the currency, it crushed growth and forced massive increases in unemployment, while at the same time being required to cut government expenditure.
This return to the thirties, originated in the inflation of the seventies. From his perspective, Newton rightly doesn’t argue the various economic theories regarding the causes of inflation; but he does provide plenty of empirical evidence that neo-liberalism isn’t working. It is still argued by neo-liberals that in adopting Keynesian policies with the New Deal, Roosevelt deepened and prolonged the Depression. This piece of flim-flam is advanced more to promote the neo-liberal belief that the US fell from an economic state of grace with the invention of the Federal Reserve and its ‘license to print money’.
The main problem with Keynes is not the difficulty of his theories but the obscurity of his writing. The General Theory is much the worse written of his works, and generally accessible only to professional economists. The reasons for this lie with the fact that Keynes was riding two horses at once in the writing of the book. Most major economists describe the theory they are attempting to displace and then put forward their own theory. When Keynes was writing, there was no general theory of employment. He had to extract the classical theory from various sources before he could attempt to refute it and replace it with his own. This simultaneous construction and demolition lead to serious confusions of presentation.
A simpler argument is available to today’s neo-Keynesians: that derived from the Swedish experience of the thirties. The principles of Keynesianism were discovered and applied independently in Sweden. They worked. Sweden had entered the Depression with the rest of the Western world but had cured it by 1934. Unfortunately, Sweden had neither the economic and political prestige nor the academic prestige to promulgate the theory internationally. No doubt this goes some way to explaining the deep hatred in which Sweden is held in neo-liberal circles to this day.
Concluding The Global Economy, Newton sees the immediate future as offering three choices: more neo-liberalism, a return to thirties protectionism, or an international economic order structured towards the needs of a more just global economy: one where the Third World can apply the economic remedies that the US applies only to itself; and where the Third World can gain access to Western markets for its agricultural produce instead of being excluded from them by US subsidies to farmers and the EU’s Common Agricultural Policy. One where they can accept foreign investment without the fear of capital flight at the first sign of a downturn in their economies. One of the reasons that China has been able to control its economic growth over the last decade had been that it accepts foreign investment capital only if it can exercise some control over it. India is in a similar position. But they have both developed enough political clout to do this.
The lesson is clear. Neither countries nor their peoples are constrained to be towed in the wake of international capital. They have political choices.
Notes
8 Ironically, this was the time when Richard Nixon declared, ‘We are all Keynesians, now’.