Series: A Glance in the Rear View Mirror to Understand the Present

From Friedman and Hayek to Greenspan passing through the duo World Bank-IMF: Neo-liberal dogmas

30 September 2009 by Eric Toussaint


Series: A Glance in the Rear View Mirror to Understand the Present (Part 6 [1])

From Friedman and Hayek to Greenspan  passing through the duo World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

-IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
: Neo-liberal dogmas

The neo-liberal current made the University of Chicago one of its bastions. Friedman spent his entire academic career there, while Hayek taught there between 1950 and 1961. Later on, people began to refer to the neo-liberals as the Chicago School, and spoke of Friedman’s ’Chicago Boys Chicago Boys The phrase Chicago boys refers to a team of neoliberal economists at the University of Chicago who in the wake of Milton Friedman (who died in 2007) had a deep influence on the economic policy of the Pinochet regime, then Margaret Thatcher’s in Britain and Ronald Reagan’s in the United States. ’. From 1970, Friedman declared that he had seen through the victory of the ’counter-revolution in monetary theory’, defined by him as the ’renewed accent placed on the role of the quantity of money [2]. In his book The Counter Revolution in Monetary Theory, Friedman argues that all variations in the money supply are followed by corresponding changes in prices, production and revenues. He says this law has been observed for centuries and can be compared to the laws of natural science. He concludes that the state cannot boost demand through the creation of money, lest unemployment rise in the same proportions. He proposes a constitutional amendment whereby the money supply should change at a constant rate, equal to the long-term rate of growth of national production [3].

Following in the footsteps of J.B. Say, Friedman argues that the free functioning of the market is enough to ensure the optimum allocation of resources and the full use of production capacity. This view has been refuted by real life, but this has not stopped it from gaining wide recognition as a matter of ’common sense’.

Friedman did not remain aloof from politics; he put himself squarely in the reactionary camp. In 1964, he was economic advisor to Republican presidential candidate Barry Goldwater. He held the same post alongside Richard Nixon in 1968 and Ronald Reagan in 1980.

After the government of Salvador Allende was overthrown by a military coup in Chile in 1973, he was advisor to General Pinochet. He supported the repression that was carried out and called for measures of extreme austerity. Michel Beaud and Gille DOstaler add, “In 1977, Milton Friedman produced a publication called Against Galbraith, based on conferences given in Great Britain. In one such conference, he proposed that Great Britain, in order to solve its problems, should use a form of shock therapy, such as the method used in Chile, which was an example to aspire to [4]. Hayek also expressed support for the general’s dictatorial and bloodthirsty methods. In response to a Chilean journalist’s questions in 1981, he said: ’A dictator may rule in a liberal way, just as it possible for a democracy to rule without the slightest liberalism. My personal preference is for a liberal dictatorship rather than a democratic government thoroughly lacking in liberalism [5]’. After ten years of application of his economic policies, Chile entered a recession that saw its GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
plummet by 15% in 1982-1983, and unemployment of 30% [6]. Indeed, Chile was only able to become something of an economic success story in the 1990s by breaking cleanly with the approach of the ’Chicago Boys’.

While Ronald Reagan was inspired by Friedman, Margaret Thatcher was a disciple of Hayek. ’It was only in the middle of the 1970s, when Hayek’s works figured prominently in the readings that Keith Joseph [Thatcher’s economic advisor and participant at Mont-Pèlerin meetings] gave me that I really grasped his ideas. It was only at that point that I considered his arguments from the point of view of the type of state dear to Conservatives (a limited government based on the rule of law), as opposed to the point of view of the type of state to be avoided (a socialist state where bureaucrats ruled unchecked [7])’

If one looks carefully, from September 11th 1973, Chile became the testing ground in the southern hemisphere where the neo-liberal project was implemented in a particularly violent and brutal manner. After the Chilean experiment of Augusto Pinochet’s dictatorship, the neo-liberal project was implemented in the northern hemisphere, starting with Great Britain and the United States. Of course, the methods of implementation differed but the social and economic orientation remained identical. The ideological reference points were the same.

Robert Lucas and the denial of involuntary unemployment

The neo-liberal counter-revolution has added a whole new dimension to reactionary ideas.

According to Robert Lucas, who describes himself as a partisan of ’new classical macro-economics’, involuntary unemployment does not exist. For Keynes, the existence of involuntary unemployment was a given. However, according to Lucas, unemployment is caused by the choices a worker makes between work and leisure. Lucas argues that any economist seeking to understand changes in the labour market, must postulate that workers make rational choices between the amount of work time and leisure time. In other words, an unemployed worker is a person who has chosen to increase leisure time, even if this means their revenues fall or disappear.

The IMF and the non-existence of involuntary unemployment

According to Joseph Stiglitz, winner of the 2001 Nobel Prize for Economics, the doctrine of the non-existence of involuntary unemployment is still deeply ingrained within the IMF. ’In some of the universities from which the IMF hires regularly, the core curricula involve models in which there is never any unemployment. After all, in the standard competitive model - the model that underlies the IMF’s market fundamentalism - demand always equals supply. If the demand for labour equals supply, there is never any involuntary unemployment. Someone who is not working has evidently chosen not to work. […] While these models might provide some amusement within academia, they seem particularly ill-suited to understanding the problems of a country like South Africa, which has been plagued with unemployment rates in excess of 25% since apartheid was dismantled.

’The IMF economists could not, of course, ignore the existence of unemployment. Because under market fundamentalism […] there cannot be unemployment, the problem cannot lie with markets. It must lie elsewhere - with greedy unions and politicians interfering with the workings of free markets, by demanding - and getting - excessively high wages. There is an obvious policy implication- if there is unemployment, wages should be reduced [8].’

In line with the classical orthodoxy targeted by both Marx and Keynes, Lucas argues that there is a natural rate of unemployment, and that it is counter-productive for governments to seek to influence this rate with pump-priming job-creation measures.

Lucas is a professor at the University of Chicago; in 1995, his contribution to the neo-liberal offensive was rewarded with the Nobel Prize for economics.

He and his colleagues made a radical critique of Reagan’s policies, rightly arguing that they had strayed from monetarist orthodoxy. They approved Reagan’s monetarist plans to reduce the money supply; but said that tax cuts and high military spending - which could only widen the public deficit - were incompatible with this objective. They backed cuts in social spending and opposed the increase in military spending.

There was nothing ethical about their opposition to military spending, yet it revealed the striking incoherence between Reagan’s monetarist convictions and his actual policies involving an increase in the public deficit. He partially applied Keynesian methods to get the USA out of recession with an increase in public spending. He did so in a reactionary manner, channelling the increased public funds into arms spending (and space research for the Strategic Defence Initiative - or “Star Wars” - project). As far as the interests of US imperialism were concerned, Reagan’s approach - much criticised by the neo-liberal keepers of the faith - ended up serving them quite well. The social costs, however, have been enormous.

A key postulate of neo-conservatism: Free markets ensure the optimum allocation of resources

’For the hand to remain invisible, the eye must be blind [9].

Of course, it is easy to argue that there is no example of a fully free-functioning market. This is obviously true in those countries where the authorities and organised workers refuse neo-liberal dogmas and have managed to defend their social welfare system and retain reasonably stable employment and intact public services. Yet it is also true in all those countries where neo-liberal policies have been implemented most aggressively. The neo-liberals in power in the USA since 1980 have indeed cut back on what they see as obstacles to the free functioning of the market - for example, by diminishing the strength of the trade union movement and rolling back social welfare. But they have also strengthened other such ’obstacles’: through the greater concentration of companies, creating oligopolies in certain sectors; through the privatisation of state-owned companies, eliminating any form of democratic control; through maintaining protectionism against foreign competitors (tariff barriers and other constraints on the free market); through strengthening the power of financial players, leading towards a ’tyranny of the markets’; through restricting the free circulation of labour; and through a multiplicity of acts of financial delinquency that obstruct the working of the free market (one need merely look at the several scandals since the Enron debacle right up to the Bernard Madoff’s Ponzi pyramid scheme).

Meanwhile, in the case of the USA, inequalities have increased and poverty affects a larger portion of the population. A significant share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of new jobs are poorly paid and short-term. The prison population rose from 250,000 in 1975 to 744,000 in 1985, reaching 2.3 million in June 2008 (half of whom are African American or Latin Americans). Never before have there been so many economic activities of a criminal character by company heads and public officials - encouraged by the deregulation of capital flows.

In defence of their record, neo-liberals always retort that resources are not optimally allocated since there is nowhere that the market functions unfettered. The task, therefore, is to struggle against obstacles to the market in view of achieving universal prosperity at some point in the distant future.

In fact, in the name of the quest for a free market (the neo-liberal promised land), the objective is to destroy the gains of workers and the oppressed generally - gains which are described as so many reactionary ’rigidities’.

Neo-liberal sleight of hand: portraying the oppressed as oppressors

In fact, there is nothing new about this line of argument. The idea is to single out the trade union movement and legislation defending workers as oppressive mechanisms. These mechanisms, the argument goes, were established by the privileged sectors of the population that have well-paid jobs, against those who merely want to accept the jobs they are offered.

Back in 1944, Hayek wrote in The Road to Serfdom:

Never has a class been so cruelly exploited as are the weakest sectors of the working class by their privileged brothers - a form of exploitation made possible by the ’regulation’ of competition. Few slogans have done as much damage as the ’stabilisation’ of prices and wages. By ensuring the wages of the few, the situation of the many is made increasingly precarious [10]’.

To all intents and purposes, the World Bank said the same thing 50 years later in its 1995 report entitled ’The World at work in a border-less economy’. Here are a few excerpts (author’s emphasis):

Through the obstacles it places to job creation, overly restrictive job-security regulations threaten to protect those in salaried positions at the expense of excluded sectors, the unemployed and workers in the informal and rural sectors [11].

Down with job security! It thrives at the expense of the oppressed!

There is good reason to fear that those who most benefit from social security - usually well-off workers - do so at the expense of other workers [12].
Down with social security!

There can be no doubt that trade unions often behave like monopolies to secure improvements in wages and working conditions for their members at the expense of holders of capital, consumers and the non-unionised work force [13]’.

Down with the trade unions!

Hayek and Friedman have imitators in the East. Vaclav Klaus, elected president of the Czech Republic in 2003, told the British weekly The Economist:

The Western European social system is too much a prisoner of rules and excessive controls. The Welfare State, with all its generous transfer payments unconditioned by criteria relating to the efforts and merits of the people concerned, destroys the work ethic and feelings of individual responsibility. Public-sector workers are too protected. The Thatcher revolution - that is, the liberal, anti-Keynesian revolution - is in midstream in Western Europe. It has to be taken to the other shore [14]’.

In another document drawn up especially by the World Bank for the Global Summit on Social Development, organised by the UN in Copenhagen in March 1995, the Bank says that for Third World countries:

Minimum wages, unemployment insurance, redundancy payments and job-security legislation are of no use to rural and informal workers, who account for the majority of the poor in developing countries [15]’.

This type of statement is in perfect harmony with those made by another champion of neo-conservatism, Gilder, for whom: ’Social security now erodes both work and the family, keeping the poor in poverty [16]. It is worth pointing out that Gilder favours such an approach for the entire planet, including the industrialised countries! Such declarations are reminiscent of something Thomas-Robert Malthus said: ’To be sure, the Poor Laws can be seen as weakening the willingness and ability of the common people for uplift. In this way, they weaken one of the most powerful motives for work’. [17]

Alan Greenspan falls in line behind Malthus, de Gilder, Hayek and the World Bank when he writes, “Social safety nets exist virtually everywhere, to a greater or lesser extent. By their nature, they inhibit the full exercise of laissez-faire, mainly through labor laws and income redistribution programs. [18]
Furthermore, Greenspan cannot see why there should be legally fixed limits on CEOs’ wages, “ Even given the flawed aspects of corporate governance, executive salaries are ultimately and, one must assume, voluntarily assented to by the company’s shareholders. As I noted earlier, there should be no role for government in this transaction. Wage control, like price control, invariably leads to grave unexpected distortions. ”
He adds the icing to the neo-liberal cake in stating, “The autocratic-CEO paradigm appears to be the only arrangement that allows for the effective functioning of a corporation. We cannot get around the authoritarian imperative of today’s corporate structure. [19].

The visionary capacity of this great neoliberal Alan Greenspan must be emphasized. Just before the financial system, which he had helped deregulate, started to collapse in 2007-2008, Greenspan wrote: « In order to facilitate the financing, insuring, and timeliness of all that trade, the volume of cross-border transactions in financial instruments Financial instruments Financial instruments include financial securities and financial contracts. has had to rise even faster than the trade itself. Wholly new forms of finance had to be invented or developed—credit derivatives Derivatives A family of financial products that includes mainly options, futures, swaps and their combinations, all related to other assets (shares, bonds, raw materials and commodities, interest rates, indices, etc.) from which they are by nature inseparable—options on shares, futures contracts on an index, etc. Their value depends on and is derived from (thus the name) that of these other assets. There are derivatives involving a firm commitment (currency futures, interest-rate or exchange swaps) and derivatives involving a conditional commitment (options, warrants, etc.). , asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). -backed securities, oil futures Futures A futures contract is a standardized advance commitment, negotiated on an organized futures market, to deliver a specified quantity of a precisely defined underlying asset at a specified time – the ‘delivery date’ – and place. Futures contracts are the most widely traded financial instruments in the world. , and the like all make the world’s trading Market activities
trading
Buying and selling of financial instruments such as shares, futures, derivatives, options, and warrants conducted in the hope of making a short-term profit.
system function far more efficiently
.” Finally, Greenspan states that the economy had found a rhythm of continual growth and great stability thanks to the invisible hand, “In many respects, the apparent stability of our global trade and financial system is a reaffirmation of the simple, time-tested principle promulgated by Adam Smith in 1776: Individuals trading freely with one another following their own self-interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. leads to a growing, stable economy. [20].
What is the central swedish bank waiting for in order to award him the Nobel Prize in economics?J [21]

Translated by Vicki Briault, Francesca Denley and Raghu Krishnan.

Bibliography:

Anderson, Perry. 1996. « Histoire et leçons du néo-libéralisme: La construction d’une voie unique », Page Deux, octobre 1996.

Beaud, Michel et Dostaler, Gilles. 1993. La Pensée économique depuis Keynes, Seuil, Paris, 1996, 444p.

Bensaïd, Daniel. 1995a. Marx l’intempestif, Fayard, Paris, 415 p.

Bensaïd, Daniel. 1995b. La Discordance des temps, La Passion, Paris, 301 p.

Friedman, Milton. 1970. The Counter-Revolution in Monetary Theory, London of Economic Affairs.

Gilder George. 1981. Richesse et Pauvreté, Albin Michel, Fayard.

Greenspan, Alan. 2007. The age of turbulence: Adventures in a new world. Penguin Books Edition, 2007.

Hayek von, Friedrich August. 1944. The Road to Serfdom, Routledge Press, UK

Keynes, John. M. 1936. The General Theory of Employment Interest and Money, MacMillan, London, 1964, 403 p.

Malthus, Thomas-Robert. 1798. An essay on the principle of population , J Johnson, Paris.

Salama, Pierre et Valier, Jacques. 1994. Pauvreté et inégalités dans le tiers monde, La Découverte, Paris, 222 p.

Smith, Adam. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations. http://www.adamsmith.org/smith/

Toussaint, Eric. 2005. Your Money or Your Life, Haymarket Press, Chicago, 2005.

Toussaint, Eric. 2007. The World Bank: A Critical Primer, Pluto Press, London, 2007

Udry, Charles-André. 1996. “Los Origenes del neoliberalismo: F von Hayek : el apostol del neoliberalismo”, Desde los Cuatro Puntos, n°1, Mexico, 1997.

Urriola, Rafael, coord. 1996. La Globalizacion de los desajustes, Nueva Sociedad, Caracas, 138 p.

World Bank/ Banque mondiale. 1995a. Rapport sur le développement dans le monde. Le monde du travail dans une économie sans frontières, Banque mondiale, Washington.

World Bank/ Banque mondiale. 1995b. Promouvoir le développement social. Contribution de la Banque mondiale au Sommet social, Banque mondiale, Washington.



Footnotes

[1The first part of this series ‘A Glance in the Rear View Mirror to Understand the Present’ was posted on the CADTM website on 12 June 2009 under the title ‘Adam Smith is closer to Karl Marx than to those who sing his praise’ http://www.cadtm.org/spip.php?article4462; was posted on June 13th under the title: “Neo-liberal ideology is a hard nut to crack” http://www.cadtm.org/spip.php?article4468; the third part was posted on the 19 June 2009 : ˝The 1930s to the 1970s: liberalism eclipsed” http://www.cadtm.org/spip.php?article4495; the fourth part was posted on the 25th June 2009: “The 1970s: Liberal ideology returned with a vengeance” http://www.cadtm.org/spip.php?article4508; Part 5 was posted on the 15th July 2009: “Keynesian Revolution and neo-liberal Counter-revolution” http://www.cadtm.org/spip.php?article4592

[2Friedman, The Counter Revolution in Monetary Theory, 1970

[3Beaud and Dostaler, 1995, pp. 274-275.

[4Beaud and Dostaler, 1993, p. 188.

[5Quoted in Salama and Valier, 1994, p.149

[6Ominami in Urriola, 1996

[7Thatcher, The Path to Power, 1995; quoted in Udry, 1996. Margaret Thatcher, Les chemins du pouvoir, t.2., Albin Michel, 1995, p.55-56, in Udry, 1996

[8Joseph Stiglitz, Globalization and its Discontents, 2002, p.35

[9Bensaïd, 1995, p. 178.’

[10Hayek, 1944, The Road to Serfdom , French ed. p.96

[11World Bank, 1995, p.104’

[12World Bank, 1995, p.104’

[13World Bank, 1995, p.95

[14Quoted in Anderson, 1996, p.27

[15World Bank, 1995b, p.35

[16Gilder, 1981, p.127

[17Malthus, 1820.

[18Alan Greenspan. 2007. The age of turbulence: Adventures in a new world. Penguin Books Edition. Chapter 25.

[19Alan Greenspan. 2007. The age of turbulence: Adventures in a new world. Penguin Books Edition.
Chapter 23.

[20Alan Greenspan. 2007. The age of turbulence: Adventures in a new world. Penguin Books Edition.Chapter 19.

[21ust as a reminder, Myron Scholes and Robert Morton were awarded the « Nobel Prize » for economics for their options pricing model. LTCM (long term capital management), the speculative funds which they were advising, was on the verge of bankruptcy in 1998. Alan Greenspan was one of the main actors involved in the bail-out of LTCM in September 1998.

cadtm.org
Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc.
See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. Since the 4th April 2015 he is the scientific coordinator of the Greek Truth Commission on Public Debt.

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