Worlds majority face dismal prospects
by Prof James Crotty*
Geneva, Jan 2001 If the world continues down the path of Neo-liberalism and its current economic trajectory, the prospects for the majority of people, in both developed and developing nations are dismalwith more of the same disappointing performance of the recent decades or quite possibly eruption of serious political and economic instability as in the 1930s, the last market-dominated era.
Two logically incompatible theoretical perspectives are used to defend neo-liberal policies of maximum deregulation, liberalisation, privatization and global economic integration: the general equilibrium theory of perfectly competitive market system found in neo-classical micro-economic textbooks; and Schumpeterian ideas about innovation, economies of scale, the positive effects of monopoly power.
In the standard neo-classical view, absent government interference, both national economies and the integrated global economy operate efficiently. Resources flow to their most productive possible uses. When fully liberalized, global financial markets will allocate world savings efficiently, and the flow of funds from the capital rich North to the resource rich South should increase. The most productive investment projects will be funded, no matter where in the world they are located. Replacing state economic guidance with liberated markets will thus improve output and productivity growth rates in the developing world.
But in terms of the theory of the behaviour of natural oligopolies (in the work of Joseph Schumpeter and John Maurice Clark), the conditions required for perfect competition exist only in a small number of industries, the great majority of which are not of major importance to national or global economic performance. As Schumpeter put it: perfect competition is the exception and ...if we look more closely at the conditions ... that must be fulfilled in order to produce perfect competition, we realize immediately that outside of agricultural mass production there cannot be many instances of it.
Natural oligopolies need corespective rather than perfect or cut-throat competition for at least four reasons:
First, price wars must be avoided. Second, high trend excess capacity must be avoided, and industry must establish some method of investment coordination that can prevent supply from running too far ahead of demand. Third, corespective competition may be a necessary, though not a sufficient, condition for the adoption and maintenance of high road enterprise-labour relations, to ensure a loyal, experienced and flexible labour force, with maximum firm specific skills, needed to initiate and react efficiently to innovations and to environmental change of all types, and to a high degree of production efficiency. Fourth, and most important, corespective competition in natural oligopolies is necessary to achieve fast paced capital accumulation and rapid innovation, forces that create high long-term productivity growth.
Cooperation is essential in natural oligopolies, and natural oligopolies are an essential part of the development process. When corespective relations are stable, competition that puts industry growth and profitability in jeopardy tends to be avoided. However, the intensity of struggle across other dimensions of competition may be quite intense. Firms may fight within broad limits over market share through advertising, and by developing more effective marketing and distribution systems. Product differentiation and the development of brand loyalty is an ongoing process.
The kind of competition that is crucial for dynamic efficiency, Schumpeter insists, is not the price competition focussed on in neoclassical theory which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest scale unit of control, for instance) competition which commands a decisive cost or quality advantage and which strikes not at the margin of the profits and outputs of the existing firms but at their foundations and their very lives.
Dominant firms in natural oligopolies cannot set price as high as they please. Though large barriers to entry give them a good deal of pricing leeway, they cannot let price or profit rates get so high that they entice outsiders to the industry. It is entry prevention pricing combined with competitive pressure to lower cost which induces firms in natural oligopolies to eventually share the benefits of long term productivity improvements with consumers in the form of lower prices.
However, corespective relations among dominant firms in natural oligopolies do not last forever. An initial distribution of relative power among firms, leading to a particular mode of domination and cooperation, is likely to change over time, possibly triggering an outbreak of war within the industry.... a successful invasion of the industry by more technologically and/or more financially powerful domestic or foreign firms. The collapse of the global dominance of Big Steel in the US after the 1960s is just one example of this phenomenon.
The policy lesson to be drawn from this is that society cannot depend solely on markets to ensure that powerful groups of corporations will operate in a manner consistent with the interests of the majority of the populationno matter what form of competitive relations prevails in core industries. It is imperative that the competitive environment be effectively regulated by government bodies that are both competent and politically insulated from the corporations they oversee.
To achieve sustained economic good times, governments must regulate industrial and financial markets, see to it that aggregate demand grows fast enough to maintain high employment, keep excess capacity low, secure the conditions needed for corespective relations among core industry firms, and take whatever actions are required to counter the markets natural tendency toward inequality and instability. If the state performs these tasks adequately, markets may function reasonably well for a time. But market processes eventually undermine the initial conditions that enabled them to function successfully. Any set of government institutions and policies adequate to generate egalitarian growth in one period, will become to some degree obsolete and ineffective as conditions in the market economy evolve over time. The challenge to design institutions capable of exercising adequate social control over markets, though not necessarily the political power needed to do so, is thus presented anew to each generation.
The demise of the Golden Age is an oft told tale. By the tempestuous 1970s, reflecting the law of uneven development, several decades of growth and change had reduced the effectiveness of the Golden Age matrix of public and private institutions and policies. This forced Northern elites and electorates to consider a change of economic regimes. They could have chosen either to reform the existing system of government managed growth so it could achieve its traditional objectives in the new environment, or, alternatively, they could have changed course, letting lightly regulated global markets determine the broad outlines of the economic future. Powerful economic elites, especially in the US, in pursuit of their own self interest rather than the public good, chose the market dominated option Global Neoliberalism was the result. It has by now created a new and destructive dynamic inter-relation among public and private sector institutions and policies, turning the virtuous circle of prosperity into a vicious circle of slow growth, destructive competition and low road labour relations. And it has undermined state led development strategies in the South.
Six related forces, deeply rooted in Neoliberalism, have pushed global aggregate demand growth well below its Golden Age level in the past two decades. The slowdown in demand growth is a crucial component of the complex forces that have caused a deterioration in economic performance in the Neoliberal era. However, this does not imply that strong global growth rates would be necessary for a healthy global economy under all possible institutional frameworks. There are economic reforms which would make the achievement of full employment in the developed world possible at lower rates of growth than are presently required for this purpose. And environmental problems may force governments in the intermediate future to seriously redesign modes of economic growth.
But rapid demand growth is required for global prosperity under existing institutions and policies.
The most important constraint on global demand is the slow growth of wages and mass consumption brought on by global Neoliberalism. Second, the evolution of the global financial system has depressed global growth. Third, the pace and the character of global investment restrain growth. The growth of investment spending has slowed due not only to high real interest rates, but to sluggish aggregate-demand growth as well. Investment has also been restrained by low profit rates in most industries most of the time, by excess capacity and by increasing uncertainty. Fourth, fiscal policy has become increasingly restrictive. Fifth, the expanding role of international institutions such as the IMF and World Bank has slowed global growth. As more developing countries experienced national insolvency over the past two decades, the Fund and the Bank have stepped in with ever larger loans, but have invariably mandated austerity macroeconomic policies plus Neoliberal restructuring in return for their money, thus severely constraining global aggregate demand. It has been estimated that something like 40% of the worlds population living in 55 countries is under IMF dictate.
Finally, the 1990s witnessed a severe weakening of East Asian type models of state- guided development. Battered by increased liberalization of trade, investment, and, especially, financial capital flows, by threats from the G7 nations, the IMF, the World Bank, the WTO, and multinational firms and banks, and by ever stronger demands from domestic elites for freedom from government control, the traditional structures of state economic regulation across Asia are weakening. If Neoliberalism were to permanently replace state-guided growth in East Asia, lower average global growth rates could be expected to follow.
The recent Asian financial crisis is one example of the way that structural contradictions within the global system create financial instability and real sector crises in the developing world. Slow growth and low industrial profit rates in the North helped stimulate financial flows to Asia, but the combined impact of slow growth and coercive competition made it almost impossible for the recipient countries to sustain the trade performance needed to service their loans and hold on to their portfolio investments from the North. Having forsaken import regulation as part of the liberalization process, affected countries felt they had little choice once the crisis hit but to accept IMF intervention and the deep, import slashing, recessionary policies it brought. Paradoxically, the structural contradictions of the Neoliberal Regime ended up destroying, at least temporarily, the high growth and profit rates that attracted the funds to Asia in the first place.
Since the mid 1990s, core global industries have experienced a ongoing merger and alliance wave of historic proportions. Since 1994, M&A activity has skyrocketed; in 1999 global merger deals were worth $3.4 trillion (with $1.7 trillion in the US), about six times their 1994 value. There was $850 billion of cross border mergers in 1999, ten times the 1991 amount.
Will the current momentum toward consolidation overcome the forces of global stagnation that destructive competition is itself helping reproduce? That is, can the ongoing efforts to re-oligopolize core industries be generally successful if aggregate demand continues to be constrained by the same forces that are creating the consolidation movement? And, if the re-oligopolization of global core industries is successful, what government institutionsif anywill force these global super groups to act in the interest of the majority of the worlds people?
Neoliberal economic theory is deeply flawed in all its forms -- macro and micro theory, the theory of financial markets, and development theory. It is, therefore, a misleading and dangerous guide for institution building and government economic policy making. Neoliberalism is moving the world towards a disappointing and perhaps disastrous economic future, a forecast that is not inconsistent with the economic experience of the past two decades. If the economic interests of working people and the majority of citizens are to be served and protected, markets must be socially embedded and the broad outlines of economic development socially determined.
The logic of this implies that the state must play an important role at both macro and micro levels of economic activity. Thus, the first issue to be addressed concerns political power and the determination of economic policy priorities. In the current environment, capitalist class forces dominate the political process, and their world view, Neoliberalism, determines which economic ideas are respectable and sets the parameters within which political economic discourse takes place. Progressive economic change will therefore not be possible unless and until the political and ideological balance of power shifts significantly.
Government control over cross border capital flows and direct foreign investment must be crucial parts of this political power re-alignment. As Keynes taught us, it is the credible threat that money, physical capital, technology, and jobs will flee the country if government policies are not pro-business that has given capital the power to determine political priorities in the Neoliberal era. Capital controls can help reverse this perverse political power relation between capital and the majority of citizens.
Governments must reassert their responsibility to regulate aggregate demand, and shift their policy priorities so that full employment growth once again is the dominant goal. Growth is needed not just for its direct benefits, but to create important preconditions for dynamic efficiency in core industries. Reasonable growth is also necessary to make high road labour relations and a more progressive income division between capital and labour possible, but growth alone cannot assure this outcome. [it] requires not only a strong union movement, but sustained full employment, a labour oriented government with effective collective bargaining laws, and a social safety net that gives workers an attractive exit option in their negotiations with business and raises the minimum living standard for the weakest in society.
Assuming we avoid a global financial collapse and/or depression, many core industries are likely to re-oligopolize and restore cooperative relations. This raises an important question: who will make sure that the necessary balance between cooperation and competition is maintained, and that global oligopolies do not abuse their great market power? In the Golden Age, dominant firms in core industries had deep roots in one country and were at least potentially subject to that countrys political will. Prior to the Neoliberal era, even advanced country governments often used anti-trust and other policies to intervene when core industries acted against the pubic interest.
In the current era, however, decision making power in consolidating core industries is likely to be distributed across truly transnational giant firms or multi-firm super groups. Yet there are no democratically constituted transnational government agencies capable of ensuring that these new oligopolies act in the public interest. In many global industries, barriers to entry are becoming virtually insurmountable. For example, no new firm could possibly compete with the big six auto super groups.
The creation of effective forms of social regulation of the emerging global corporate super groups, whether at the national or transnational level, is one of the great policy challenges of our times. At a minimum, all governments should restore their ability to regulate the conditions under which firms and money can enter and exit their borders, enhancing their ability to regulate all businesses that operate domestically. Collectively, the US and European governments certainly could subject all important global businesses to effective regulation, if they had the political will to do so.
Successful development by poor and middle income countries cannot take place under the Neoliberal rules of the game. No one has developed successfully without extensive state interference in market processes. Developing country governments must rely on industrial policy, and therefore on capital controls and tightly regulated financial markets, to have a chance at equitable growth. A collective effort to restore the right to utilize these policy tools is most likely to be successful, but as Malaysia recently demonstrated, even a small, isolated country can impose a regime of capital controls effectively on its own if necessary. The restoration of capital controls in both advanced and developing countries will also reduce exchange rate instability and make global financial crises, and the deep recessions which follow in their wake, much less likely.
The international institutions that currently manage global integration -- the IMF, the World Bank, and the WTOare saturated with Neoliberal ideology and dedicated to the pursuit of the interests of global finance and multinational corporations. They must be replaced with new institutions that support egalitarian growth and encourage state-guided development models. They also must guarantee the right of nations to control capital flows. And, mimicking the medical maxim that the first obligation of a doctor is to do no harm, they must stop imposing austerity macroeconomic policy on countries who need their help in times of crisis.
In sum, the evaluation of the current global economic trajectory presented here is quite pessimistic. If the world continues down the path of Neoliberalism, economic prospects for the majority of people, in both developed and developing nations, are dismal. More of the same disappointing performance that we have experienced in recent decades may be the most likely scenario, but it is also quite possible that serious political and economic instability will eruptjust as it did in 1930s, in the last market dominated era. There is thus an urgent need to reverse course.
[* James Crotty is Professor of Economics at the University of Massachusetts, Amherst. The above is the second part of an article, based on and excerpted with his permission, from a paper on Structural Contradictions of Current Capitalism, presented by him at the Conference on Globalization, Structural Change and Income Distribution, held in Chennai (Madras) in December 2000. The first part appeared in SUNS #4813]
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