Neoliberal Vicious Circle

Causes and Consequences of the Neoliberal Globalization

An Article in the Compendium of Market-Based Social-Ecological Economics

Key issues in view of the neoliberal crisis:
How can we guarantee employment and fair income?
How can we protect the environment effectively?
How should we shape the economic globalization?
What should the economic sciences contribute?
What must be the vital tasks of economic policy?
How can we legitimize economic policy democratically?

Click here for the list of all articles: Compendium

Table of Contents

  1. Abstract
  2. Preliminary Notes
  3. The 21 Elements of the Neoliberal Vicious Circle
  4. The Inevitable Consequences
  5. The Feedback Effect

1. Abstract

The neoliberal globalization is driven by the striving for expansion and profit of industrial and financial players and smooth-talked with false promises of growth, employment and prosperity. The selfish process has led the world economy into a vicious circle, destroying social and natural capital. Because the devil is in the details, the elements of the vicious circle are listed below.

2. Preliminary Notes

One of the peculiarities of the neoliberal globalization is that its protagonists seek to fight the devastations – for which they bear responsibility – by the same means that cause the devastations. They call these means »market liberalization« or simply »liberalization«. With each of the two terms they refer to the deregulation of national markets for the purpose of integrating them into deregulated, uncontrolled global markets. The process aims at the complete detachment of international trade from economic policies and democratic decisions. The motivation behind this aim is complex: The entrepreneurial avant-garde, one of the immediate winners of this globalization, is obviously motivated by self-interest. Among politicians and economists different reasons crop up, which are, at least in individual cases, difficult to determine. They range from striving for power, craving for recognition, professional dependence and career promotion to opportunistic blindness and naivety. What is decisive, however, is the omnipresent indoctrination and lobbying, making the majority of the electorate believe that the development is without alternative. (Aspects of the neoliberal globalization are extensively addressed in the article Economic Globalization.)

It needs no further explanation that growing mass unemployment and poverty caused by »market liberalization« is not to be fought with »market liberalization«, especially not by constantly increasing the dose. Even the financial crisis that emerged in 2008 and the debt crisis thereafter have halted the destructive process only temporarily. Meanwhile, considering the half-hearted political advances ever since, the protagonists have an easy game to regain the former acceptance of their selfish interests.

The term »vicious circle« generally means destruction, in this case even self-destruction. Mainly, because the neoliberal economic doctrine systematically undermines the regional foundation upon which it still flourishes. Logically, it will ultimately destroy itself by destroying its foundation. But we should not let things get that far.

Therefore, we must carefully examine the vicious circle, since this is the key and the first step to overcome it.

3. The 21 Elements of the Neoliberal Vicious Circle

The Starting Point

With the failure of the postwar economic order (see the article Bretton Woods System) in the early seventies, global economic and financial players, engaged in the pursuit of expansion and profit, freed themselves from the primacy of economic policy. Under the public perception of high employment levels and growth rates at the time, the players managed to cover up their selfish ambitions with a doctrine unprecedented in economic history: They stylized the deregulation of national markets and the »liberalization« of economic activities as an inevitability dictated by »the logic of economic history and even the laws of nature«. Furthermore, they called the development an issue of global fate, and thus motivated national governments to withdraw from their regime of economic policy.

The Illusory Promise

The process of deregulation and »liberalization« is described by the majority of entrepreneurs, economists and politicians as inevitable and without alternative. To avoid uncertainty, the doctrinal claim is combined by its protagonists with a promise: The world economy would emerge as a self-regulating and self-stabilizing economy and bring growth, employment, prosperity and welfare to all countries.

The Fragmentation of Economic Systems

National governments bow to the increasing pressure exerted by the competition in open global markets and abstain from exercising economic policy powers, or carelessly assign powers to the EU or the World Trade Organisation (WTO). Decisions of national importance are increasingly taken by impenetrable oligarchic circles at the supranational level. The national economic and competitive systems lose their function originally aimed at macroeconomic balance (equilibrium), especially between the levels of productivity, wages, prices, and purchasing power – a balance that is the only means of ensuring social welfare. At the same time, national economic systems, or what is left of them, lose their democratic legitimacy. (For more details see the article World Trade Organization (WTO).)

The Inhomogeneous Global Markets

In the course of »liberalizing« the financial, goods, services and labor markets, regulation and control is removed from exchange rates, capital transfers, trade quotas, tariffs and labor migration. Domestic markets, initially being subject to consistent social and environmental regulations and characterized by »truthful« pricing, are integrated into supranational and global markets, where incompatible national standards clash without protection, in particular with regard to productivity, wage, purchasing power, and price levels. This kind of integration gives birth to anarchic, uncontrollable global constructs resembling battlefields rather than markets, where players monopolize and eliminate each other.

The Absolute Productivity and Price Advantage

With the removal of regulation and control from exchange rates, followed by speculative currency manipulations and unpredictable, chaotic exchange rates, the natural differences of productivities and prices between trading partners can not be neutralized anymore. As a consequence, the only mutually profitable trading method is excluded, namely the use of comparative (relative) productivity and price advantages to achieve gains in trade based on bilateral comparison of price ratios of potential trading products, as shown by British economist David Ricardo 200 years ago. Instead, international trade is determined by uniform US dollar prices, increasingly by Euro prices as well, allowing instant price comparisons worldwide, thus pushing up the global trade volume for the purposes of the neoliberal doctrine. However, that way prices are not related to the productivity levels of their countries of origin anymore. The competition based on absolute price advantages in dollars or euros forces market participants to repeatedly cut prices down to world market levels. That’s why price dumping has become a »legalized« standard that causes predatory competition with a tendency towards uniformly equipped products and global diversity being forced into retreat. Consequently, regulated and controlled trade relations have become impossible (see also Comparative Advantage – Upgraded).

The Anarchic Global Competition

Global competition is reduced to marketable technological features and, on that basis, further reduced to pricing. Pricing is driven both by government and business interests and based on selective social, environmental and currency dumping, the latter usually by devaluation of national currencies. In this environment, developed industrial countries and newly industrializing countries are seeking to beat their competitors through technological innovation, thus enforcing the highest possible price bonus, whereas developing countries are forced to rely mainly on the exploitation of their social and natural resources. Competition, now aimed at the definite elimination of competitors, loses its remedial effect that would, under controlled conditions, allow players to turn failures into learning processes and progress.

The Hegemonic Pricing

With the support of the WTO, social, ecological and currency dumping have become accepted means of a business strategy of hegemonic price-fixing, which is pursued by nation-states and economic unions (like the EU) together with resident enterprises. That is, governments and business enterprises are jointly competing for national or supranational business establishments and jobs. The global cost pressure induced by hegemonic pricing forces governments to deny and sacrifice their social and environmental standards as necessitated by relevant market conditions. Prices lose their original function, which would provide sellers and buyers under controlled market conditions with information about the interests of other market participants and the scarcity of economic resources.

The Cost and Innovation Pressure

The neoliberal necessity to undercut global prices and to outdo global technological standards exerts an ever-increasing pressure upon both private enterprises and governments, which, as a destructive side effect of open markets, also hinders enterprises solely operating on regional and local markets. The pressure is particularly exerted by countries of traditionally low standards and by those focusing on a few selected production methods and products.

The Tendency towards Specialization and Mass Production

The cost and innovation pressure generates – especially in the absence of enforceable antitrust laws – an unstoppable tendency towards complete international specialization and centralized mass production with correspondingly high concentrations of economic power and capital. Ultimately, transnational corporations arise forming global corporate networks based on the criterion of lowest factor prices (labour, natural resources and capital) and highest returns on investment, thus seeking monopoly status. In developed industrial countries the tendency causes a widespread structural de-industrialization with a sharp decline in diversity (medium-sized businesses and grown decentralized economic cycles are diminished). In developing countries the tendency gives rise to export-oriented monopoly structures. At the same time, the global transport volume rises unproportionally with respect to the increasing specialization and centralization.

The Shortening of Business Cycles

Due to the high cost and innovation pressure, enterprises are forced to shorten the intervals of their cycles of innovation, automation and rationalization. The acceleration is conducted in violation of social and environmental concerns and is achieved mainly by gradually replacing the supposedly expensive production factor »labor« by both the factors »capital« and the supposedly inexpensive »natural resorces«. That way, national wealth is wasted threefold: through unemployment, exploitation of natural resources and absurdly shortened depreciation and amortization periods of real capital.

The Abstract Definition of Economic Productivity

Under the cost pressure, centralized mass production is focused on highest possible quantities and therefore on minimal unit costs. The cost advantages thus gained are called economies of scale. Since decreasing costs equate with increasing productivity, forced mass production with inherently improved economies of scale is seen as the primary means of boosting business productivity. Achieving sustainable productivity falls by the wayside, for the uncontrolled process entails high social and ecological costs mainly in the form of mass unemployment and environmental destruction. In other words, the achievement of economies of scale is selfishly made an absolute priority issue in that the production is detached from its social and ecological responsibility.

The International Locational Competition

The ongoing cost-pressure-driven international relocations of businesses, mainly conducted by transnational corporations, provoke locational competition for industrial establishments and jobs among nation-states and economic unions (such as the EU), and entail a worldwide spiral of rising direct and indirect subsidies for all factors of production. The subsidies are meant to cut (dump) factor prices and improve competitive positions. The dumping includes wages, social contributions, raw materials and real estate, but also environmental standards, taxes, legal provisions and safety standards. Due to the deregulation of labor markets the international locational competition is further intensified, because capital can still move to »cheap« labor, but conversely, »cheap« labor can now move to capital as well. So, the social responsibility of owners of productive capital towards employees can be circumvented by both capital flight and immigration of workers from low-wage countries.

The Domestic Economic Imbalance (Disequilibrium)

National governments run into trouble with the imbalance between their productivity and wage developments. On the one hand, because wages are, like prices, subject to absolute comparison in global competition and therefore gradually decline to the level of developing countries. On the other hand, because business productivities are pushed up by shifting costs to the general public (to the taxpayer) and by introducing globally marketable technologies. The economically vital regular adaptation of wage levels to productivity levels is negated, so that local, regional and national economic cycles are harmed and partly destroyed due to the erosion of purchasing power. As consumers suffer from falling real incomes, they turn to cheap imported products and reinforce the destructive effect.

The Export Strategies and the »Bazaar Economy«

With eroding purchasing power and aggravating domestic market stagnation, enterprises residing in high-wage countries are inclined to switch to export businesses, thus coming under rising global cost and innovation pressure. The pressure forces them to substitute a growing proportion of their value creation by imported intermediate products, finally turning their export production gradually into simple assembly lines for low-price imports. That way, they take a course that contributes to a »bazaar economy«, a development that can even be intensified by current account surpluses, as is the case in Germany, when inflowing monetary capital is in part redirected to foreign direct investments to further increase the global supply of low-price intermediate products. High export quotas in combination with the »bazaar effect« bear the risk of specialized niche productions, that is, they speed up structural de-industrialization and cut-back of jobs. (The principles of sustainable foreign trade are addressed in the article Future-Proof Foreign Trade.)

The Delayed Effects of Large Current Account Surpluses

Due to global cost pressure, the mass purchasing power in high-wage countries is declining. The resulting poverty in turn creates strong political incentives to remove reasonable tariff and non-tariff trade barriers for low-price imports to not let the living standard of lower-income groups fall even faster. Together with the cost-related incentives of the »bazaar effect«, a lasting divergence of foreign trade flows is initiated between rising low-price imports and declining value creation for exports. The divergence further accelerates de-industrialization and shedding of jobs, and is a harbinger of current account deficits.

The Factor Inefficiency and the Apparent Productivity

The inevitable downward spiral of factor prices under global competition at first brings about apparently high capital efficiencies, correspondingly high returns on capital, and high overall productivities for enterprises. This, however, at the expense of society and environment, because labor and natural resources are inefficiently allocated, which is indicated by massive unemployment and environmental destruction. The development causes negative aggregated productivity in national accounts (just like the above mentioned economies of scale). In fact, the actually destroyed values of the original factors labor and natural resources can obviously not be compensated by apparent efficiencies and increased values of the derived factor capital as accounted for by private businesses. Ultimately, the apparent efficiencies of business capital allocation will eventually become conspicuous, when the harm inflicted on labor and natural resources will strike back at the global players. (For more details regarding factor allocation see the articles Factors of Production and Factor Price Equalization).

The Inefficient Allocation of Labor

The proportion of the workforce, or the proportion of disposable humane working hours, still being engaged in economic processes is shrinking and is also less and less engaged in accordance with its qualifications, while the proportion not engaged in economic processes anymore is growing and correspondingly causes increasingly higher social costs. At the same time, fewer workers manage to secure their livelihood with a fulltime job, leaving a growing proportion of the workforce dependent on state transfer payments. In addition, the nation-states are forced to rely on the taxes imposed on earned income and private consumption as the primary tax source, since the tax revenue from the private economic sector and from natural resource consumption in particular is declining under neoliberal competitive conditions. All in all, the inefficient allocation of labor fulfils the conditions of social dumping.

The Inefficient Allocation of Natural Resources

Due to predatory competition, prices of natural resources are discounted ignoring both the scarcity of the resources and the subsequent disposal costs, thus offering no incentive for recycling and waste avoidance. Non-renewable resources are wasted and depleted, and renewable ones exploited beyond their natural capability of regeneration. The high follow-up costs caused by partially irreversible destruction of natural resources mostly arise time-delayed and are therefore imposed on future generations. The inefficient allocation of natural resources fulfils the conditions of ecological dumping.

The Inefficient Allocation of Capital

Despite the primacy of capital efficiency and capital returns, enterprises do not succeed in allocating their capital efficiently and in gaining sustainable capital returns, because depreciation periods shorten and investment risks rise under neoliberal competition. Therefore, the losses of substance in society and environment deriving from economic activity add up to the increasing losses of substance of real productive capital. The economic destruction of real capital value and the resulting negative aggregated productivity on the national level are further reinforced by entrepreneurial inefficiencies due to rising global economic risks.

The Transnational Economic Sphere

Under the auspices of the WTO – and with active support of the EU – a transnational sphere of economic activity takes shape, detached from democratic control and influence of national economic policies. This unprecedented development provides limitless freedom to multinational enterprises and investors, including the opportunity to exploit national resources and claim national privileges and subsidies at favorable conditions. The typical action taken by transnational enterprises is to combine advanced production capital and know-how from developed industrial countries with low wages and low standards from developing and newly industrializing countries (see also Transnational Corporations).

The Impact of Speculation on the Real Economy

With the deregulation of financial markets, institutional financial players get tempted to repeatedly develop new financial instruments, so-called derivatives, that serve no other purpose except to speculate in securities, capital and currency markets. On the one hand, the transactions made are a zero-sum game in which the funds are redistributed from the losers to the winners – bearing the risk of social imbalances. On the other hand, the transactions constitute a permanent threat to the real economy, for example, if stock prices rise many times above the real (intrinsic) value of stock corporations due to the influence of derivatives or other speculative transactions, and if business policies and credit-financed investments are subsequently based on the speculative value. Once a stock market bubble (or a bubble of other securities) bursts by profit-taking and subsequent panicky sales, the speculative values that serve as collateral for the loans turn out to be worthless and can lead to insolvency of banks, borrowers and entire economies. The financial market crisis that emerged in 2008 has made the global public aware of this threatening mechanism.

4. The Inevitable Consequences

The illusory notion or false promise that the market mechanism could solve general political problems, and therefore, social and environmental regulation of economic activities could be dispensed with, creates the conditions for the unbalanced entrepreneurial pursuit of capital returns against sustainable wages and sustainable prices for natural resources. This »modern« version of capitalism leads to anarchic conditions in global markets (see also the article Excesses of Capitalism):

a) The cost pressure arising from global competition based on absolute price advantages induces a tendency towards complete worldwide territorial specialization and concentration of capital, which is accompanied by a destruction of economic diversity, or to put it another way, accompanied by structural de-industrialization. Subsequently, unemployment, underemployment and unequal distribution of earned and capital income arise leading to falling tax revenues and increased demand for public transfer payments, ending up in private and public poverty.

b) The demand in the labor market declines due to international specialization and capital concentration not only in terms of quantity, but also regarding the spectrum of workers’ qualifications. The demanded spectrum covers less and less of the skills and talent of the workforce, so that more and more people of good vocational and academic education are affected by unemployment and poverty, whilst at the same time – seemingly paradoxical – the demand for very special, globally marketable skills increases, accompanied by indoctrinating neoliberal slogans claiming a »huge lack of specialists«.

c) The public poverty leads to job losses in the public sector, prevents investments in general-interest public services and promotes selectively targeted privatizations of public services.

d) With generally declining real income, societies split into few winners and many losers giving up their strive for optimal income distribution, which is an essential condition of social welfare.

e) The exploitation of non-renewable resources, the disregard of the necessary regeneration of renewable resources, and the use of substances harmful to health and environment entail ecological devastations like climate change, species extinction and famines, and leads to international disputes over the access to scarce national resources.

f) The dwindling influence of democratically legitimized institutions strengthens the power of system-supporting oligarchies and stabilizes the neoliberal conditions.

g) Because of their subjection to external forces and incidents, national economies slip deeper and deeper into a permanent depression with massive unemployment, which is beyond economic control.

5. The Feedback Effect

With declining real income, the purchasing power is equally declining and weakens the local and regional reflux of workers’ income to the consumer industry and subsequently to the capital goods industry, with both refluxes being indispensable for the economic cycle:

a) With declining real income, consumers turn towards cheap imported products and damage the economic cycles even further.

b) For fear of unemployment, underemployment and poverty, consumers increase their savings rate, thus reducing their purchasing power even further and, at the same time, providing enterprises with cheaper loans, which increase the already existing overcapacities in the production of globally marketable goods.

c) Easy monetary capital and overcapacities further heat up global competition and worsen its impact. The ever-increasing competitive pressure forces enterprises and investors to demand additional cost reductions from national governments in view of their diminishing returns on capital.

d) The more devastating the effect of global competition on social conditions becomes, the more hardened neoliberal protagonists demand doctrinaire measures for the deregulation of national markets, the »liberalization« of economic activities and so-called stimuli for growth. The stimuli are mostly granted in the form of tax cuts for enterprises and combined with the promise to bring about higher economic growth, new jobs and less social imbalance.

e) Grim and stubborn, the protagonists drive the vicious circle into the next round making use of enforced »market liberalization«, repeated growth stimuli and social promises, and continue the self-destruction of the system.

For a better understanding of the doctrinaire background of the neoliberal development I recommend the article Neoliberal Economic Doctrine.

___________________________________________________________________________________

Click here for the German-language version: Neoliberaler Teufelskreis

1 Comment

Comments RSS

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

%d bloggers like this: