Beginning in earnest in the late Seventies, a sustained and pervasive ideological attack was mounted against the role of the State in managing economic affairs. The terms of the attack ranged from ethical and philosophical arguments about individual liberty and property rights to more pragmatic arguments about the supposed economic advantages of private ownership, deregulation of capital and flattened fiscal regimes. Alternative visions of the role of the State were marginalised and discounted as either economically misguided or politically totalitarian.
The emerging consensus became known as Neo-Liberalism, or Economic Rationalism. It had its intellectual progenitors - Adam Smith, the Austrian and Chicago Schools, Ayn Rand; its political trail-blazers - Pinochet, Thatcher and Reagan, and its demons - Socialists, Marxists and Keynesians. When the Berlin Wall came down, and the 'evil empire' collapsed, it seemed that the ideological battle had been won - the deprived masses of the Socialist bloc had overthrown their Orwellian masters and would readily embrace the new credo. Ahead lay a brave, new, unipolar world in which largely unregulated markets would constitute the bedrock of a free, dynamic and innovative global economic order in which social wealth would be maximized.
In due course, after some initial resistance, the center-left caved in to the Neo-Liberal gospel, especially in the Anglosphere, always the geopolitical fulcrum of the Neo-Liberal order. By the mid 90's the center-left in the UK, USA and Australia were committed to an economic program that was virtually indistinguishable from the Reagan/Thatcher platform of the previous decade, all be it dressed up in a more progressive social liberalism.
The reason that so many 'social-democrats' and 'socialists' embraced the Neo-Liberal revolution is that they came to accept its core claim that not only is capitalism the most effective way of generating wealth but that, contrary to now supposedly outmoded Keynesian and socialist views, it is also the best way of actually spreading the benefits of that wealth as widely as possible.
There are no losers - everyone's a winner. The view is that governments don't create wealth - they just spend it on coercing people and distorting market mechanisms that would otherwise produce greater social utility. By extracting the State from economic activity and allowing a more lightly regulated capitalism to structure production, distribution, exchange and finance, everyone is actually better off. The market mechanism can even play a positive role in improving social services like health and education, and providing essential infrastructure like transport, communications and energy - all with minimal regulatory regimes.
Under cover of this ideological offensive, the entire post-war Bretton-Woods economic order was dismantled. Capital controls were removed, public assets and infrastructure privatized and markets deregulated. Manufacturing and back-office functions were off-shored. Organized labor was suppressed by legislation and by exporting traditional unionized industries to low-cost non-unionized labor markets. In addition to the huge profits to be made from deploying capital to low-wage economies, this also made it possible for capital to significantly increase the rate of surplus value extraction in the developed economies. The monetary value of what labor was making began to grow much more quickly than the monetary wage cost of the labor itself. Now that most consumer goods - for example clothing, electronic goods and household items - were produced cheaply in low-cost markets, the living costs of the developed economy worker were kept low, alleviating pressure on wages. It was a win/win for capital.
Consequently, for 40 years real wages in the developed world have been virtually stagnant - especially in the USA. In fact, income as a share of GDP has been in steady decline in many developed economies. Labor was producing more commodities than it had the monetary means to purchase, because an increasing share of the monetized value of commodities was being realized as capital, not wages. Inequality between capital and labor was further exacerbated by huge cuts in marginal tax rates and corporate taxes.
This is where the financial system stepped in to eliminate potential under-consumption. By leveraging capital sourced from expanding corporate profits and the personal wealth of the super-rich, the banks began to sell huge quantities of lucrative debt to the working class, enabling the latter to buy back the product of its own labor and keep capital accumulation ticking over.
Credit controls were relaxed leading to massive asset bubbles in property and consumer spending, which in turn spawned a parasitic, multi-trillion dollar shadow banking economy of 'collateralized debt obligations' (CDO's) - tranched securities built from bundles of debt. These in turn spawned another equally large market in 'credit default swaps' (CDS's) in which entities offered to 'insure' securities, even though the 'insurance-buyer' was often not even the owner of the reference assets, and the 'insurance provider' was not able to underwrite the debt 'insured'. It wasn't actually called 'insurance', so it didn't fall under any insurance regulatory regime. In fact, most of the trade in CDO's and CDS's was wholly unregulated, taking place 'over the counter' rather than in organized exchanges.
As if the bankers were not getting rich enough from buying and selling consumer and property debt, they also branched out into buying and selling student debt - a new concept for most of Europe, which had previously operated under the assumption that tertiary education should be publicly funded.
The property asset bubble, limitless personal credit lines, and the market in low cost consumer goods kept the developed world working class largely integrated into the capitalist order. Real wages were stagnant and labor was being deprived of an increasing share of the value it created, but as long as property values were rising and credit card limits expanding there was always a source of liquidity to make up the difference. If you didn't own a property, the answer was to work harder and longer and borrow the money to buy one - to 'get on the property ladder'.
In 2007/8, the massive Ponzi scheme collapsed. Trillions of dollars were wiped off the market. The immediate cause of the collapse was over-leveraged household debt. Working class home-buyers in the USA began to foreclose. They had been sold mortgages on 'teaser' interest rates by brokers making a living flipping mortgages to CDO funds. The homeowners on teaser rates couldn't actually afford the mortgage repayments at the market rate - they were relying on property values increasing so they could refinance once the teaser rate expired. As foreclosures spread, property values actually dropped, leading to more foreclosures, leading to further drops. Suddenly, trillions of dollars of CDO's began to lose value across the board as debts went toxic, debt repayment flows dried up and asset values collapsed. When large numbers of CDO holders tried to cash in their CDS's the underwritten cash sums simply didn't exist - the money wasn't there. Exit AIG, the largest insurance company in the world. Banks stopped lending to each other because they all knew how heavily leveraged they were, and they all knew that the leveraged debt was going toxic. The financial system was deadlocked.
It then became clear that when the Neo-Liberals said that government interference in the economy is a bad thing, what they really meant to say is that it is a bad thing when it is for the benefit of labor. It turns out that it is in fact a very good thing when it is done in order to save the capitalist system from falling on its own sword. That would appear to be the only explanation for what followed - the biggest government bailout in modern economic history. All the money that hadn't been available for manufacturing, for healthcare, for education, for infrastructure - suddenly became available to save the banking system. The Federal Reserve, Bank of England and European Central Bank have, in the last 6 years, created trillions of dollars and handed them straight to the bankers. The process is called quantitative easing. The central banks create money via a digital book entry, and then use the money to purchase commercial paper from the banking sector - typically government and corporate bonds, but also CDO's. This does two things. Firstly, it means that governments and corporations can raise credit cheaply, because the buyer of the debt knows they can flip it to the central bank and earn a return. This keeps interest rates low. Secondly, it injects liquidity into the banking system and keeps the business cycle going.
In the meantime, it's austerity for the rest of us, as costs are driven down to encourage business investment and governments cut back on social programs in order to finance their ever growing debts.
It will be recalled that the 'useful idiots' of Neo-Liberalism - the center-left that abandoned not just socialism but any semblance of Keynesianism - bought into the idea that privatization, deregulation and flattened fiscal regimes were all consistent with traditional center-left values of economic justice and equity. As it happens, there is overwhelming evidence that they were completely wrong.
In January of this year, Oxfam published a briefing paper called 'Working for the Few' ( http://www.oxfam.org/sites/www.oxfam.org/files/bp-working-for-few-political-capture-economic-inequality-200114-en.pdf ). The paper was released to coincide with the 2014 World Economic Forum at Davos, the premier public social event for self-respecting members of the global elite. The paper is based on the tactical idea that the World Economic Forum is part of the solution, which rather flies in the face of the commonplace historical observation that, with some notable individual exceptions, the rich and powerful are not given to fundamentally questioning the structures that support their wealth and power.
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