In 2007/8 we suffered the financial crisis with the consequent bail outs for the finance industry and restriction/depression for the majority.
In 2020 we suffer the Covid-19 plague.
The response to the first involved the rescue of the finance industry from public funds and the removal of wealth from much of the rest of society. Those responsible suffered no physical or financial hardship as a consequence.
The response to the second has resulted in the deaths among those who are working to protect, care for and support us in the midst of this plague.
The pay or monetary value of those responsible for the first crisis is still remarkably and inefficiently high.
The pay for nurses, porters etc. and for those who keep our society functioning by driving, delivering and collecting remain remarkably low. (Also here)
The hospital, care and delivery people have had their pay kept low, even to the point of starving nurses needing to use food banks. Their situation results from Neo-Liberal Economics theory being enforced by the government, economic and, possibly social weakness and because they care about their fellow humans. The senior financiers, who were responsible directly and/or indirectly for the first crisis, have their pay kept high because they have power, they are protected by government and so many of us believe in or accept Neo-Liberal Economic theory.
Do we thus have a set economic practices which reward in inverse proportion to the worth or benefits of services and goods being marketed? Are our employment compensations, terms and conditions based on power rather than societal value or worth?
Does our reward system work on “Power Based Payments and Profits” rather than “Value Based Payments and Profits”?
In practice do we have inequality as a policy as well as a practice?
Here is an article by Jack Rasmus which looks at Neo-Liberal Economics and compares it with a presentation of the original form of “Classical Liberal Economic Theory.”
It performs three crucial tasks which are essential in any assessment of any economic theory and its associated practices:
- How well do the theory and practice match?
- How beneficial is it to society as a whole?
- How well does it function in comparison with other theories?
In theory, Neo-liberalism proclaims that markets should be free, deregulated and without government involvement. Its practice is to the contrary. This harms society through reductions in competition, innovation and market resilience. A reasonably free market has enough players to provide competition, innovation and resilience so that there is no real or perceived need for government to rescue a “Big Business.”
Neo-liberalism has other society damaging practices including:
- Low wages for an increasing majority and tax avoidance for the wealthy
- Promotion of financialization to the cost of real asset investment based growth
- Infrastructure/social well-being cuts
- Financial injections/subsidies to disguise failures of Neo-liberal policy
- Government backed changes to employment markets, creating low paid insecure jobs and off-shoring of better paid manufacturing occupations and so on.
Mr Rasmus recommends Classic Liberalism as a better alternative on all three criteria. Others might prefer Modern Monetary Theory. Both score better on his assessment criteria.
Perhaps we could do far worse than come to a conclusion about a basic economic theory different from Neo-liberalism?
The person who proves me wrong is my friend.
Socrates
* Steve Trevathan is chairperson of Lyme Regis and Marshwood Vale Liberal Democrats.
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20 Comments
Who invented this term Neo-liberal ? It should be NON- liberal. Was it just a way to distract from Liberal ideals?
@ n hunter,
An early use of the term in English was in 1898 by the French economist Charles Gide to describe the economic beliefs of the Italian economist Maffeo Pantaleoni. Then later on we had Milton Friedman and others using it too. Not usually in a pejorative sense.
So nothing to do with the British Liberals or Lib Dems! Maybe you’d be happier if it had been?
https://en.wikipedia.org/wiki/Neoliberalism#:
Nowt to do with us but to me it implies something ‘semi-liberal not liberal and can misguide people to what Liberalism is.I do think that it has been hi -jacked to show liberalism in a bad way.
Thank you Steve for including the links for references in what is an interesting paper.
I am neither an economist nor have I ever studied economics, but I do think that there is a fundamental mathematical flaw in the classical economic theories I have read about. That is there is an underlying implicit assumption that there is a world that effectively has boundless resources. In fact we need to take into account the fact that the world is very limited, very interrelated and the free market ideas need to be analysed from that point of view.
We must also take into account the evidence provided by research into behavioural economics over recent years. There is an attempt made to find out how real people actually behave when making real decisions.
Finally I draw attention to something in the Observer Food Monthly of June 2020. At the end of the article “How we fed ourselves” is a quote from the global analysis group IHS Markit “With social distancing and food rotting in the fields and poor transport links, the most optimistic estimate is that the supply chain will shrink 70-75% of capaciity.”
There are quotes in the article from those who kept the supermarkets stocked, and the problems for domestic food production. It is pointed out that the warning signs are plain to see.
Se need to plan for a very real food crisis in coming months.
So with widespread unemployment here, and with starvation in the poorer countries, with increasing poverty everywhere, what economic theory are we to use?
Unfortunately we’ll have to put up with neo-liberal nonsense for quite a while yet.
Did anyone notice this in the Guardian?
“Britain came close to effective insolvency at the onset of the coronavirus crisis as financial markets plunged into turmoil, the governor of the Bank of England has said.”
Britain did NOT “nearly go bust in March”. As I’ve probably said before: We cannot as a nation cannot do that. The Government is not a company, a corporation, or a household. The concept does not have any application to a currency-issuing government.
Andrew Bailey seems very keen to present himself as some SuperHero figure who has rescued us all from disaster! But there are no magical powers needed. Just the ability to type some numbers into a spreadsheet.
https://www.theguardian.com/world/2020/jun/22/britain-nearly-went-bust-in-march-says-bank-of-england
@ Nhunter,
Neo means new not semi. So neo-liberalism means the new liberalism in an economic sense.
The problem for LibDems is that liberalism means different things in different contexts and in different geographical regions.
In the USA it tends to be synonymous with left-leaning or social democratic. Whereas in Europe it has more right wing connotation. The liberalism of British Social Liberals is not the liberalism of the German FDP or the Dutch VVD for example. You would be well advised to have nothing to do with them and other right wing European “liberal” groupings.
Thanks to all of you for your contributions!!!
Tom H. – like you I have had no orthodox economics education which seems to both help and hinder the interesting, if disturbing, pursuit of knowledge of economics. You might find “Donut Economics” by Kate Raworth well worth reading! It includes research and possibilities on “finite resource economics.” As so much current economics uses deliberately obscure language to keep power and wealth to the few, my other recommendation is “J is for Junk Economics” by Michael Hudson.
I agree , cannot go bust, what is the difference between going bust and inflation, hyper-inflation ? We have of course had serious inflation over the years, 70 years ago I started work in a bank. pay seemed reasonable, but based on today the amount was all but nil.
I was a good lad, got a special rise of £5 !!! not a day, not a week, not a month,but an increase on my yearly salary. WE can see what happened to countries that had hyper-inflation. such as Germany, are we learning lessons,? are we preparing ourselves ? as we
slide away from the EU? Interesting times to come, my current income, pensions and
annuities, will not keep up with such rising costs, as I hope salaries and wages will.
Not sure that pensioners who vote for Brexit etc, are ready for the flood. !!!
Perhaps, like fire and water, inflation is a good servant and a bad master?
Too little and too much are both harmful.
Perhaps, we are pursuaded that we need to “fight inflation”, instead of understanding and using it for the general good, because it’s being seen generally as all bad, suits the finance industries which benefit from this belief.
The Roman Empire flourished for centuries with a steady, modest rate of Inflation.
” As a cover story for reducing wages, central banks claim that austerity —will save consumers from inflation and restore budget surpluses. — “Fighting inflation” with austerity is counterproductive. Its effect is to shrink markets. The economy is sacrificed to increase the power of financial wealth and the One Percent over labor.That result actually is the objective of monetarist junk economics.” (J is for Junk Economics: Michael Hudson)
That’s neoliberal economics in a nutshell!
Andrew Bailey said “We basically had a pretty near-meltdown of some of the core financial markets” i.e the bond, stock and foreign exchange markets.
The government was struggling to find enough buyers for its debt as happened during the financial crisis https://www.theguardian.com/business/2009/mar/25/uk-economic-rescue-in-crisis “I think we would have a situation where, in the worst element, the government would have struggled to fund itself in the short run.”
When the government cannot find buyers for its debt it must look to the Bank of England to fund its spending. When that happens there is a natural loss of confidence in the government and banks’ commitment to controlling inflation and that in itself means the coupon offered to investors to accept the risk of significant loss of purchasing power and/or exchange losses has to be that much greater. The UK has been reliant on a significant element of foreign funding because it has a long-standing trade deficit.
Andrew Bailey has highlighted the fragility of the UK financial markets. That fragility was underpinned by a recent report from Bank of America analysts that the pound is now an emerging-market currency in all but name https://www.ft.com/content/4fd04fd9-7209-4b7c-97a1-97466f226159
“Traditionally, sterling has been part of the so-called G5 currency group — alongside the dollar, the euro, the Japanese yen and Swiss franc — as one of the most heavily traded and therefore safest currencies in the world. But since the Brexit vote, uncertainties over the relationship between the UK and the EU have made investors less willing to take views on the currency, resulting in a drop in liquidity. That means that the pound can no longer be analysed according to the same framework as other major currencies.”
The UK faces the double whammy of coronavirus and a no-deal Brexit. As Gordon Brown put it during the financial crisis “I’m all in favour of apprenticeships, but let me tell you this is no time for a novice.” Andrew Bailey has served his apprenticeship at the BofE since 1985. He is no novice.
Thanks for the link to Jack Rasmus; I had not come across him before. His summary of the basic ideas of classic liberalism is useful but for the rest he makes heavy weather of it.
Keynesian ideas had come to the fore in the years around WW2 to very good effect becoming one of the foundation stones of the unparalleled post-war prosperity as they were adopted by Labour in the UK and FDR’s New Dealers in the US.
But, inevitably, some on the far right weren’t happy about seeing their wealth and influence under threat or declining as *horror* voters got to have a say in how and for whose benefit the economy was run. So, they started organising a fight back and got lucky in that, as the initial generation of reformers faded away, their replacements increasingly lost the plot.
The right-wing’s fight back was conducted on many fronts – I see neoliberalism is the political one and ‘neoclassical’ economics as the economic theory front.
Their ‘neoclassical’ school of thought was developed from many strands of existing economic thinking and, such was the power of bankers’ and others’ patronage, that its adherents have come to dominate employment in banking, government and much of academia – e.g. it’s very difficult for dissenters to get published in leading economic journals.
‘Neoclassical’ economic theory is shot full of holes and logical inconsistencies but that is irrelevant. For its paymasters its job is to provide a veneer of respectability plus the ability to claim TINA (There Is No Alternative). In short, it is propaganda masquerading as social science and its undeclared purpose is to promote inequality. The snag is that inequality goes with instability, social breakdown, and economic collapse – as we are seeing in real time.
So, when Nick Clegg promised the voters, “We will bring a heart to a Conservative Government and a brain to a Labour one” he was buying into Tory propaganda. Doh!
That matters because a party without its own economic ideas is like an army without air cover – doomed.
For a very good and detailed history, albeit purely on the US side, see Matt Stoller’s Goliath: The 100-year War between Monopoly Power & Democracy, or for a more accessible taste of his work, see his blog.
https://mattstoller.substack.com/
Gordon Brown (who has some experience in these matters) has an article discussing the economic recovery from the Covid-19 crisis https://www.theguardian.com/commentisfree/2020/jun/27/we-are-in-desperate-need-of-a-recovery-plan-but-the-treasury-has-gone-missing
He says “The re-announcement of major infrastructure projects – large promises from Conservative pre-election glory days – remains just that and most are nowhere near shovel-ready.”
“…the imperative to strengthen Britain’s resilience ahead of a possible second wave of Covid-19 – highlights the urgent need for a July budget: its main purpose the support and, if necessary, the recapitalisation of viable British businesses and the prevention of mass unemployment.”
“A July Budget for jobs should include incentives for companies for both retaining and retraining their workforce; tax credits for those for whom only short-time working is available, retraining grants for those forced to move jobs and the rapid implementation of a comprehensive employment, work experience and training guarantee for a new generation of school-leavers and graduates facing a historically unprecedented autumn spike in youth unemployment.”
This looks like good sense. Job guarantees and retraining will be an essential element of avoiding 1980s style long-term unemployment and something our party should be unequivocally supporting.
I feel neoconservative economics is in fact a description closer to the realities of that thinking. For example the destruction of the NHS and welfare state and the preservation of massive inequality.
@ Philip Moss,
“I agree , cannot go bust, what is the difference between going bust and inflation, hyper-inflation ? ”
The difference is that the creditors won’t move in to auction off whatever assets we own.
Inflation is always a potential problem. At the moment it is 0.5% pa which is 1.5% below target. So there’s no need to worry too much just yet!
People often say things like that the price of bread was 6d per loaf in 1920 or whatever. But then workers would only be earning 6d per hour. Now the price is £1.50 or £2.00 but workers are earning slightly more than that even on minimum wages so things aren’t all bad!
And for anyone who thinks we might be likely to suffer an inflation problem again there is always the option of buying gold or gold certificates. Or even euros, bitcoins or whatever else anyone thinks is a better store of value.
The BofE is mandated to keep inflation low and stable and to stabilize the business cycle to the best of its ability. The Bank fulfills its dual mandate primarily by open market sales and purchases of (mainly government) securities. If the Bank wants to lower interest rates, it creates money and uses it to purchase gilts. If the Bank wants to raise interest rates, it destroys the money collected through sales of gilts. Consequently, there is a sense in which the Bank is “monetizing” and “demonetizing” government debt over the course of the typical business cycle.
What is usually meant by “monetizing the debt,” however, is the use of money creation as a permanent source of financing for government spending. Thus we have to know what the Bank intends to do with its portfolio of assets over time.
If the recent rapid accumulation of government debt on the Bank’s balance sheet constitutes a permanent acquisition, then the corresponding supply of new money would be expected to remain in the economy (as either cash in circulation or bank reserves) permanently as well. As the interest earned on securities held by the Bank is remitted to the Treasury, the government essentially can borrow and spend this money for free. If, on the other hand, the recent increase in Bank gilt holdings is only temporary (an unusually large acquisition in response to an unusually large recession), then the public must expect that the monetary base at some point will return to a more normal level (through sales of securities or by letting the securities mature without replacing them). Under this latter scenario, the Bank is not monetizing government debt—it is simply managing the supply of the monetary base in accordance with the goals set by its dual mandate. Some means other than money creation will be needed to finance the debt returned to the public through open market sales.
Andrew Bailey has set out this latter view https://uk.reuters.com/article/uk-britain-boe-bailey/bank-of-englands-bailey-says-qe-bond-sales-should-precede-rate-rises-idUKKBN23T0OS. The credibility of BofE policy is arguably reflected in the time path of inflation and inflation expectations. Recent inflation has averaged less than the Bank’s long-run inflation target of 2 percent and market-based measures of inflation expectations remain well-anchored So it seems that to this point, at least, the Bank’s credibility is passing the market test. Of course, the claim that Bank policy is exerting downward pressure on interest rates, especially at the short end of the yield curve, has some merit. The quantitative impact of Bank policy on longer rates, however, is debatable. The reason for this is because during this recession an elevated worldwide demand for good quality sovereign bonds is keeping yields low independently of Bank policy. Forces outside the Bank can have a large impact on yields particularly UK debt held by overseas investors or parked by investors seeking a safe haven in the short-term. This is the concern that Andrew Bailey is alluding to in his remarks.
@ JoeB,
“The BofE is mandated to keep inflation low and stable and to stabilize the business cycle…”
If there is a business cycle, it is not one that the central bank has the ability to control with monetary policy alone.
If there were it would simply be a matter of having lower rates, ie looser monetary policy, in the troughs and higher rates, ie tighter monetary policy, during the peaks. And that’s the theory of what should happen according to the mainstream.
Instead, we observe that we start off with relatively high rates which are lowered as the next trough arrives then they are kept about the same , maybe just some very small rise, as the next peak comes along, then they are lowered for the next trough and they are kept about the same…
Do you see the problem? You’re always going to end up where we are now with interest rates close to zero.
So, we might expect that mainstream economists, as hopefully rational people, might notice that their theory doesn’t describe what we observe. Therefore, they might consider that there must be something wrong it. That’s what scientists do after all. Some do, but many press on regardless and want to let interest rates go highly negative and abolish cash! How stupid can you get?
https://www.project-syndicate.org/commentary/advanced-economies-need-deeply-negative-interest-rates-by-kenneth-rogoff-2020-05?barrier=accesspaylog
Peter Martin,
I think the limitations of monetary policy are what Andrew Bailey is pointing out in his comment.
“…this level of central bank asset purchases, (QE), “shouldn’t always be taken for granted.” When the time comes to withdraw monetary stimulus, in my opinion it may be better to consider adjusting the level of reserves first without waiting to raise interest rates on a sustained basis,”
Bailey said he did not want big central bank holdings of government debt to become a permanent feature. “Elevated balance sheets could limit the room for manoeuvre in future emergencies.”
“The fact that the predominant borrowers in this emergency are governments — reflecting the essential role of the state in such a crisis — makes no difference to the underlying economics or the importance of keeping borrowing costs in line with objectives,”
“Far from calling into question or suspending that independence, this episode has called for a response from central banks that’s only possible because their independence gives them the freedom to operate.”
The treasury expects to need £300billion+of borrowing this year https://www.theguardian.com/business/2020/may/14/uk-budget-deficit-to-rise-to-300bn-this-year-obr-says. The BofE cannot be relied upon to purchase a similar level of debt in the market to drive real interests further into negative territory. The government will need a credible strategy to maintain the confidence of financial markets in its commitment to financial stability while rolling out a large fiscal scale stimulus to contain rapidly rising unemployment.
As important as the creation of money certainly is, might a significant part of our apparently chronic financial and financial-economic problems lie in its distribution and storage?
@ Joe B,
If Andrew Bailey was saying that it wasn’t reasonable to expect the Govt to expect the BoE to be doing with monetary policy what only the Govt can do with fiscal policy I’d fully agree and fully understand what he was saying.
Instead he’s saying things like “adjusting the level of reserves” and “Elevated balance sheets could limit the room for manoeuvre in future emergencies.”
Why? and How? I really can’t make any sense of this.
Sorry that first bit should read:
“If Andrew Bailey was saying that it wasn’t reasonable for the Govt to expect the BoE….”