By all measures, the UK has not fully recovered from the financial crisis of 2007. Since 2007, wages have risen slower than inflation, causing a 10% relative decline in the spending power of the average household. Homelessness has risen, food bank use has risen. The education of the next generation is being cut back, and social care and the NHS are in a state of crisis. Rhetoric abounds in the mainstream media and political discourse, blaming our current crisis on an overextension of the government, and of the need for the state to step back, so that the free markets can extend, bringing with efficiency, productivity and growth. This rhetoric does not reflect the real data. The real problems with the British economy can be traced back before the financial crisis, to the late 70s, when much of the western world began a series of economic changes that are now known as neoliberalism.
Neoliberalism is a catch-all term to describe the rhetoric of free-market fanaticism used by its supporters, and the policy changes they advocated; most notably cutting taxes; shrinking the state and deregulating the financial markets – its inevitable effect was to suppress the wages of workers, worsen income inequality and lead to consolidation of control over resources in an oligarchic minority. The result, charted by academics such as Joseph Stiglitz has been steadily falling rates of economic growth, particularly for the poorest parts of our society.
Since the financial crisis, the failures of neoliberalism have become more plain to many, and mainstream parties of the left have begun to recalibrate their position, first coming out against the latest series of cuts (austerity), and now beginning to challenge neoliberalism itself. The most prominent institutional proponent of this philosophy in economics, the IMF has also admitted the failure of neoliberalism to spawn economic models that are sustainable and amenable to a progressive society. However, it is not enough to simply reverse the changes that happened under neoliberalism, and return to the economic models and policies of the 60’s. The global economy has changed in two other significant ways and any other way forward has to account for these changes.
First, the development of technology, allowing for faster movement of people, goods, and money, which in turn spurred the process now known as globalisation. The start of this period saw a rapid shift in investors away from the developed world to the developing world, particularly China, where low wages allowed them to produce goods much cheaper than their rivals. While this has been seen to be a problem for the West in the short-term, from a progressive viewpoint, it is little reason for alarm, and can be seen as a natural process making the world a more balanced place. Globalisation has, however, had another impact. Steadily, more of the world’s large businesses have become global players, detaching themselves from local and national communities. A business grounded in a single nation or community, needs their community to thrive, so they invest in their community, helping the area to grow. Globalised businesses are much more fluid, able to abandon communities when they are failing, and go elsewhere. As a result, they invest much less in communities, and the process of globalisation has seen investment in communities across the world fall sharply.
The second major change to western economies, has been a steady decline in the competitiveness of global markets, as control of the world’s major markets has consolidated in the hands of progressively fewer, sluggish mega-corporations. Academics such as Paul Mason, John Bellamy Foster and Robert W. McChesney have studied this phenomena in detail. Their review of trends across the four-hundred year history of capitalism goes to show that in a free-market, competitiveness declines naturally over time.
Looking back, this phenomenon can be understood in the following manner. When innovation creates new markets, at first businesses compete intensely to secure a foothold, which pushes prices down, encourages risky investment and drives growth. But over time, this competition becomes less intense, the businesses that have gained a foothold in the market begin to accept each other, and work together, even collaborate to the detriment of the public. Prices fall, investment falls, and economic growth slows down.
With this in mind, it’s important for economists to understand that in the decades after World War II capitalism functioned much better than it usually does. The destruction of the wars disrupted many of the established markets, letting new players in, and the very efficient post-wartime economies produced an abundance of new technologies, opening up new markets to be claimed. This was thus a uniquely productive period, where intense competition between businesses drove economic growth. Since then, the markets have calmed down, and competition has fallen dramatically.
Both of these changes make it easier to understand why neoliberalism has happened, and why pundits continue to defend it. The economic decline caused by globalisation and the consolidation of the major markets, has caused the profits of large CEO’s and investors to fall. These groups have latched onto neoliberalism as a way to increase their own profits, by taking money from the state, their workers and shifting into the financial sector. Though profitable for each company individually, as a collective process it has meant further economic decline. Politicians, pundits, and people without a financial interest in neoliberalism, support it based on an impression of capitalism as it supposedly functioned in the decades directly after World War II, when competition was uniquely intense, and before the impact of globalisation. But that is the crucial point. This is a vision of capitalism, that does not hold in the modern world.
What then is the solution to our economic woes? In the last few decades, competitive markets have become less effective, and we have placed progressively more of our economy in the hands of such mega corporations. The reforms of neoliberalism must be reversed, and we have to look beyond the welfare state towards new ways to boost the economy. If led by progressive governments, this could look like an entrepreneurial state, with state led investment in industry, infrastructure and the technologies of the future. It is possible that such an option may tend to bring to mind visions of socialist or communist failures. If led by the progressive grassroots, this could look like an explosion of workers and community cooperatives, putting their money into businesses with a firm commitment to building up their local communities, and their workforce.
Whatever direction this country takes, however, the future of our economy rests on shifting our culture away from the narrative of individualism, and competitive markets, to a new vision of a cooperative, democratically led economy.