The Decline and Fall of Neoliberalism: Rebuilding the Economy in an Age of Crises 9781032181851, 9781032181875, 9781003253297

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THE DECLINE AND FALL OF NEOLIBERALISM

The Decline and Fall of Neoliberalism argues that the neoliberal era – starting after the collapse of the Bretton Woods system – is coming to an end. In the wake of the financial and economic crisis of 2008 and the outbreak of the pandemic in 2019, the doctrine outlined by monetarists appears to offer an inadequate response to the economic instability that characterises our contemporary world. To deal with the fallout of these crises, central banks have stepped in as major regulators of the economic system through massive interventions to support both financial markets and public spending, marking a clean break with the traditional conception of their role as depoliticised actors. Is the resurgence of inflation a consequence of this reckless strategy over which they seem to have lost control? Or is it rather rooted in an outdated understanding of money and monetary policy? One thing is certain: a profound change in policy is emerging. The growing turmoil in the global economy and the environmental challenges that face us demand an urgent and comprehensive rethinking of the economic role of the state. This book further develops the analysis presented in Populism and ­Neoliberalism and takes a closer look at the nature of neoliberalism as a political doctrine. Through this detailed description, it identifies the difficulties within economic thought that prevent it from responding appropriately to contemporary challenges. Drawing from the lessons of history, it proposes a renewed relationship between the state and the market that strikes a balance between planning and self-regulation. A post-neoliberal world is about to dawn, but its shape can still be determined by the path we choose to follow.

David Cayla is an Associate Professor of Economics and Vice-Dean of the Faculty of Law, Economics and Management at Angers University, France. His research focuses primarily on the history of economic thought and institutional economics. He has published several books in France, most notable of which are L’Économie du réel (De Boeck Supérieur, 2018) and La Fin de l’Union européenne (Michalon 2017, with Coralie Delaume) and a book called Populism and ­Neoliberalism (Routledge) available in both French and English. An active member of the French association of heterodox economists “Les Economistes atterrés”, he defends an approach to economics that is more open to other social sciences and better equipped to engage with contemporary political issues.

THE DECLINE AND FALL OF NEOLIBERALISM Rebuilding the Economy in an Age of Crises

David Cayla

Designed cover image: © Irina Kudryavtseva (Ирина Кудрявцева) First published 2023 by Routledge 4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2022 David Cayla The right of David Cayla to be identified as author of this work has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-032-18185-1 (hbk) ISBN: 978-1-032-18187-5 (pbk) ISBN: 978-1-003-25329-7 (ebk) DOI: 10.4324/9781003253297 Typeset in Bembo by codeMantra

CONTENTS

List of figures List of tables Acknowledgements Introduction: Does neoliberalism even exist?

vii ix xi 1

1

Depoliticising money

12

2

Monetarism: One pillar of the neoliberal system

26

3

A system of regulated economies

53

4

The Neoliberal Revolution

72

5

Monetarism in a time of crisis

91

6

Doxa and praxis

122

Conclusion: What could a post-neoliberal world look like?

143

Index

167

FIGURES

0.1 1.1 2.1 3.1 4.1 4.2 4.3 5.1 5.2 5.3 5.4 5.5 5.6

6.1 6.2

The temple of neoliberalism Schematic representation of contemporary monetary systems Schematic representation of the neoliberal logic The effects of a change in supply in markets with high and low elasticity Average inflation level of G7 countries (1956–2010) Share of manufacturing employment in the labour force (1965–2019) GDP per capita growth rates in G7 economies (1950–2018) Schematic representation of the different financial markets Evolution of the trade balance between 1970 and 2020 (2015 dollars) Changes in the bank rates of the main central banks (2007–2009) Financial assets held by the Federal Reserve from August 1, 2007 to May 18, 2022 (USD billion) Ten-year government bond market rates in Europe (2007–2017) Share of government bonds of Eurozone countries held by the Eurosystem and monetary and financial institutions respectively (Q1 2014–Q4 2021) Schematic representation of the institutionalist logic Change in US sectoral debt as % of GDP (1953–2022)

9 17 49 64 75 77 78 92 98 106 108 113

115 135 139

TABLES

1.1 Change in the consumer price index between Jan 2021 and Jan 2022 15 3.1 Share of agricultural employment in total employment after World War II (United States and Italy: share of active population) 65 3.2 Share of agricultural employment in total employment in 1990 (Bairoch 1997: 383) 67 4.1 Evolution of the labour income share in the G7 economies 76 4.2 Overview of the three post-war financial systems 84 5.1 Interest rates by borrower 109 6.1 Level of annual inflation (November 2021–November 2022) and interest rates (November 2022) 138

ACKNOWLEDGEMENTS

It is becoming increasingly difficult for academics to find the time and energy to develop their ideas and write books. The growing and widespread application of “performance” and evaluation metrics, the confounding bureaucratic requirements and so-called pedagogical reforms made to cut costs, and the constant merry-go-round of calls for proposals are more discouraging than conducive to creative production. As such, I owe the completion of this book not only to time carved out over weekends and holidays but also to the generous involvement of my colleagues – both from the administrative and from the teaching departments – from the Faculty of Law, Economics and Management at the University of Angers. Their work made my own possible. Although I cannot name them all, I would like to specially thank Christophe Daniel and Michèle Favreau, whose contribution to our faculty has greatly relieved me of some of my own workload and helped me devote my time to writing this book. I would also like to thank the Routledge editorial team for once again placing their trust in me and for accompanying me through the writing and editing process. Thanks to my editor Andy Humphries, and to Holly Martin for her inputs. Finally, I must thank Julie Albert, Olivier and Monique Cayla, Pierre Funalot, Oriane de Laubrière, Florian Navarro, and Jean-François Ponsot, whose critical reviews of early drafts of this book helped me to better structure and present my argument. Many thanks also to Amruta Prabhu for her editorial assistance on the English-language version of this book and for her critical remarks that helped improve the accuracy of its contents. Despite the editorial and technical support I have received, any errors or omissions in this publication remain my own.

INTRODUCTION Does neoliberalism even exist?

It is always a tricky endeavour to comment on or analyse history as it unfolds. There are countless examples of premature declarations announcing the end of a cycle, an age, or an era. More often than not, such epochal predictions are proven vain. It is difficult for analysts to sort through the maze of current events and distinguish between those that are significant and likely to shape the future, and those whose effects are temporary and will leave no trace. The task is rendered even more difficult when attempting to identify a transitional phase. The world does not evolve randomly; rather it follows a path that has its own underlying logic. The work of the historian is to understand these eras of relative stability, when societies evolve driven by a set of coherent forces, and to study the transitional phases between two different eras during which these forces shift and the evolutionary path takes a new direction. During these transitional phases, events appear chaotic and difficult to interpret. It is only much later that historians can identify these watershed moments and the forces that led to the shift. Evidently, this task is made possible by their knowledge of the characteristics of the subsequent phase. In this way, historians determine in hindsight which of the factors actually predicted the future and foregrounded a new path for history. Are we witnessing the decline and fall of neoliberalism? It is difficult to categorically make this assertion at this point in time. Despite this uncertainty, it is possible to formulate a hypothesis and develop some lines of argument to support it. This is what I intend to do in this book. My aim is not to definitively make a predictive claim that neoliberalism is dead but, more simply, to outline and develop a descriptive thesis of the fall of neoliberalism. In other words, this is rather an intellectual exercise aimed at viewing the events of the last few decades through such a lens.

DOI: 10.4324/9781003253297-1

2  Introduction: Does neoliberalism even exist?

In this book, I draw on recent history with the aim of highlighting the elements that seem to me to be the most significant in supporting this thesis. It is based on the following chronology. In the 1920s and 1930s, the rise of the Soviet Union, the economic difficulties faced by capitalist countries, and growing social unrest prompted a number of intellectuals and economists to devise a new approach to liberalism. This new liberalism was first implemented partially and only in one country, West Germany, from 1948 onwards. Monetary instability and the end of the Bretton Woods system in the early 1970s ushered in a phase of more widespread neoliberal policies. This phase ended due to the inability of the neoliberal doctrine to address the problems raised by the Global Financial Crisis of 2008. Since then, we find ourselves in a transitional phase in which economic policies have become incoherent. The question of what might emerge in a possible post-neoliberal era remains an open one. Without venturing too far into what a post-neoliberal order may look like, I will limit myself to offering some perspectives in the conclusion of this book. Whether or not one may believe that neoliberalism is at its end, it remains undeniable that the Western world has seen a succession of crises that have upended economic policy since 2008. The Global Financial Crisis of 2007–2008, the Eurozone sovereign debt crisis of 2011–2015, the Covid-19 pandemic since 2020, and finally, the 2022 war in Ukraine – each of these crises has compounded the impacts of those that preceded them. Collectively, they forced the adoption of new economic policies that would have been previously unthinkable during the neoliberal era. As so often in history, changes in international trade were the most apparent symptom of this upheaval. The recent financial crises affected confidence in banks and adversely impacted international payment systems, leading to a sudden collapse of international trade. Similarly, the pandemic disrupted supply chains and forced companies to switch to sources of supply that were geographically closer to them. Finally, the outbreak of the war in Ukraine marked a resurgence in the use of international trade as a tool of diplomatic pressure. This caused a dramatic paradigm shift in global trade policy. This shift in logic was particularly evident in the United States. The era of “happy” globalisation, which began under Bill Clinton, was vehemently challenged by Donald Trump. Significantly, Trump’s departure from the White House and the Democrats’ subsequent return to power did not mark a return to unfettered globalisation. On the contrary, US Treasury Secretary Janet Yellen put forward the idea of promoting “free but secure trade” with trusted partners; that is, to move towards a new kind of globalisation based on “friend-shoring”.1 This discourse broke with the principles on which trade relations have been founded since the end of World War II ( James 2022). Happy globalisation is well and truly a thing of the past. While it is evident that this succession of crises has transformed globalisation, the idea that this may mark the end of neoliberalism remains debatable. In an opinion paper published in April 2022, the historian and philosopher Philip Mirowski considered it premature to announce the death of neoliberalism, as

Introduction: Does neoliberalism even exist?  3

some on the Left already have done. According to him, recent crises have instead transformed the nature of neoliberalism by reinforcing its authoritarian and antidemocratic tendencies. “It would be an error to regard anti-globalization trends on the Right as an obvious rejection of previous neoliberal strictures, or to gather the impression that a resurgent nationalism somehow inherently violates the creed,” he wrote (Mirowski 2022). Thus, for Mirowski, Trump’s presidency has not broken with neoliberalism, but adapted it. He points out how Trump relied heavily on institutions and executives from the neoliberal establishment and how this influence manifested itself in the implementation of economic deregulation and the weakening of federal agencies responsible for environmental protection or consumer welfare. This, he argues, is proof that the exercise of power by a populist does not necessarily spell the end of neoliberalism. In my previous book, Populism and Neoliberalism, I argued that populism represents the dark side of neoliberal policies (Cayla 2021). Drawing on the work of Karl Polanyi (1944), I argued that the resurgence of populist movements was the product of a dysfunctional relationship between society and the market. My aim was to show that by making the state an institution that is subservient to both the market and its underlying logic of competition, the neoliberal project tends to distort its other institutional functions, in particular its capacity to advance the interests of the public at large. This condition leads to a growth of mistrust which is at the root of populism. In short, neoliberalism engenders a state that is powerless to respond to social discontent as it is primarily concerned with preserving the functioning of the market. In reaction to this, populist forces give rise to an authoritarian state preoccupied with satisfying the immediate wishes of its electorate. I also stressed a paradox: while populist movements claim to provide alternatives to neoliberalism, they are not, in most cases, opposed to the organisation of the society by the market. The case of Trump is a good illustration of this phenomenon. Like other populist leaders, he is himself a multi-billionaire and a product of the market, so to speak. As such, a disillusionment with the weakening of the institutions of the state does not always or necessarily lead voters to adopt a more collectivist stance. On the contrary, the support for populist movements is often more pronounced in regions where people distrust the state and its interventions (Cayla 2021: 31–2). In short, there are good reasons to believe that populism tends, in some ways, to perpetuate the neoliberal project by idealising individualism and further participating in the de-legitimisation of the state. Could Trumpian populism then be the new garb of neoliberalism? Some economists such as Joseph Stiglitz, who sees Trump’s economic project as a continuation of Reaganism (Stiglitz 2019: Preface) have argued this. However, philosopher Chantal Mouffe does not share this view, seeing populism instead as a global movement of resistance fuelled by the crisis of what she calls the “neoliberal hegemony” (Mouffe 2018). Finally, for philosopher Wendy Brown, reactionary populism is the unintended consequence of neoliberal policies, which have intensified “nihilism, fatalism, and ressentiment” (Brown 2019: 16).

4  Introduction: Does neoliberalism even exist?

The central question raised by this debate is, essentially, how one defines the term “neoliberalism” itself. One of the difficulties with the concept is that there is no “Bible” of neoliberalism, nor is there a clear school of thought that claims to be neoliberal. Friedrich Hayek and Milton Friedman, who are generally considered to be among the most influential members of the neoliberal movement, never claimed to be neoliberals and rarely use the term in their writings.2 Both called themselves “liberal” but specified “in the European sense of the term” to distance themselves from the American definition of liberalism, which connoted Keynesian policies in defence of the welfare state. The Statement of Aims of the Mont Pelerin Society, which the two economists founded in 1947 and chaired,3 defended what they called the “liberal order”. So why speak of “neoliberalism” rather than “liberalism” when referring to the theoretical and normative ideas of these authors? Some argue that describing Friedman and Hayek as neoliberals is a pejorative way of devaluing their intellectual contributions on the part of those intellectually or politically opposed to neoliberalism. However, Philip Mirowski (2013: 38) and Serge Audier (2012: Chapter 2) recall that many members of the Mont Pelerin Society did call themselves “neo-liberals” in the early 1950s and that the term was at the centre of the sometimes divisive debates that shook the institution until the schism of 1962. It was not until the late 1950s that most members of the Society stopped using the label “neo-liberal” completely, in a bid to emphasise a continuity with the authors of classical liberalism (Mirowski 2013: 39–40). Is this continuity genuine or self-appropriated? Is neoliberalism a revival of liberal thought or a different kind of liberalism altogether? Indeed, those who use the term “neo-liberal” do so to distinguish it from classical liberalism. This was the case with the early neoliberals, for whom the “re-foundation” of liberalism was a priority. This is why the legal framework necessary for the functioning of markets came to be emphasised in the 1936 Ordoliberal Manifesto (Böhm et al. 1936) and at the 1938 Walter Lippmann Colloquium (Reinhoudt and Audier 2018). Unlike classical liberals, who saw the market as a natural institution that could flourish in the absence of the state, the neoliberals of the time saw the market as an artificial institution that could not survive on its own and required the continuous intervention of the state to provide the institutional environment necessary for its proper functioning. These profoundly different views of the market are what originally marked the difference between liberalism and neoliberalism. Are these debates from the 1930s still relevant today? As the philosopher Serge Audier (2012) has shown, neoliberal thinking has itself evolved considerably since that time, and not all neoliberals have held the same views on the economic role and functions of the state. When we talk about neoliberalism today, we do not necessarily define it in the same way as the participants of the Walter Lippmann Colloquium. This explains why the word “neoliberalism” has come to have a diverse set of meanings and interpretations.

Introduction: Does neoliberalism even exist?  5

In its most common understanding, neoliberalism is seen as a partial and distorted form of liberalism. In this conception, neoliberalism rejects the political and emancipatory aims of classical liberalism in favour of a paradigm that is essentially economic. Under such a definition, the Pinochet regime in Chile (1973–1990) can be called “neoliberal” despite its serious restrictions on political freedoms, simply because it defended economic freedoms. Neoliberalism in this view is then a kind of dogmatic liberalism, marked by the radicalisation of its economic proposals. This approach can be found in Joseph Stiglitz (2019: Chapter 7) and Dani Rodrik (2021), who both describe neoliberalism as “market fundamentalism”. Other approaches view neoliberalism not as an altered vision of liberalism but as a fundamentally distinct, even philosophically opposed doctrine. Its relationship with institutions is one element of this opposition. While classical liberalism defends the nation-state as the foundation for the development of liberal democracy, neoliberalism aims to go beyond this framework by advancing the economic integration of the world. The aim of neoliberalism then is to establish an economic world order that would better regulate – or even limit – democracy and nationalism by embedding them in a system of international competition. This conception of neoliberalism is based both on the history of ideas and on the history of organisations and influence networks that seek to promote and move towards a globalised world. The work of historian Quinn Slobodian (2018), for instance, is in this vein. Another way to look at neoliberalism is to situate it in its socio-political and historical context and see it as an instrument for conservative interest groups in the ideological battle. In this approach, neoliberalism is a rather plastic ideology with little intellectual coherence apart from its defence of a few major principles such as private property, the competitive organisation of the market and the fight against social collectivism. This view is defended by geographer David Harvey (2005), who argues that neoliberalism allowed for a doctrinal refoundation of conservative thought at the turn of the 1970s and 1980s. Without denying the political aspirations and indeed success of the supporters of neoliberalism, Philip Morowski defines it slightly differently, as a “Thought Collective” organised around the Mont Pelerin Society. According to him, neoliberalism is a “pluralist entity (within certain limits) striving to distinguish itself from its three primary foes: laissez-faire classical liberalism, social-welfare liberalism, and socialism” (Mirowski 2013: 48). One of the most prevalent approaches to neoliberalism, at least in the social sciences and humanities, understands it as a new conception of both the art of governing and, more broadly, the way in which the individual relates to society. This vision of neoliberalism, directly inspired by Michel Foucault’s lectures on biopolitics, emphasises its cultural dimensions and sociological effects. Understood in this way, neoliberalism intends to build a society of generalised competition in which the individual is asked to become an “entrepreneur of himself, being for himself his own capital, being for himself his own producer, being for

6  Introduction: Does neoliberalism even exist?

himself the source of [his] earnings” (Foucault 2008: 226). This approach is also shared by philosopher Pierre Dardot and sociologist Christian Laval, who define neoliberalism as “a certain existential norm”. According to them, this norm enjoins everyone to live in a world of generalized competition; it calls upon wage-earning classes and populations to engage in economic struggle against one another; it aligns social relations with the model of the market; it promotes the justification of ever greater inequalities; it even transforms the individual, now called on to conceive and conduct him- or herself as an enterprise. (Dardot and Laval 2013: 3) Also drawing on the Foucauldian approach, Wendy Brown understands neoliberalism as a social force pushing for self-entrepreneurship in a social space reduced to a system of markets: one way neoliberalism differs from classical economic liberalism is that all domains are markets, and we are everywhere presumed to be market actors. […] [I]n neoliberal reason, competition replaces exchange as the market’s root principle […]. Human capital’s constant and ubiquitous aim, whether studying, interning, working, planning retirement, or reinventing itself in a new life, is to entrepreneurialize its endeavors, appreciate its value, and increase its rating or ranking. (Brown 2015: 36) In the age of social networking and personal branding, this cultural approach to neoliberalism sheds light on many contemporary issues. However, it tends to over-interpret and distort certain aspects of the foundations of neoliberalism. This is at least the opinion of Serge Audier, who points out that Foucault’s interpretation of neoliberalism is far from exhaustive and tends to leave out the many, sometimes virulent, debates that raged among neoliberals themselves during the 1950s and 1960s. More fundamentally, Audier points out that Foucault’s vision of neoliberalism tends to undermine its economic conceptions: “Foucault’s framework of analysis, which is more philosophical and sociological than economic, does not in fact provide many tools for understanding contemporary financial deregulation,” he notes (Audier 2012: Introduction). Audier takes a history of ideas approach to neoliberalism. Following the republishing of the proceedings of the Walter Lippmann Colloquium in 2008, Audier attempted to conduct an “intellectual archaeology” of neoliberal thought, with the aim of tracing its evolution and understanding the debates and contradictions that arose within the neoliberal movement, notably within the Mont Pelerin Society. Eventually, he comes to the radical conclusion that “there is not one neoliberalism, but many neo-liberalisms, which open up to very different concrete policies” (Ibid.).

Introduction: Does neoliberalism even exist?  7

This way of deconstructing one’s object of study, however interesting it may be from an intellectual point of view, remains not entirely satisfactory. Historian Jean Solchany, author of a noteworthy biography of Wilhelm Röpke – one of the main theorists of neoliberalism – considers that Audier’s book does not propose a clear definition of neoliberalism, which “amounts to denying it any relevance in characterising an ideological position” (Solchany 2012). A distorted and radicalised version of liberalism, a political project in support of a globalising world, a conservative doctrine deployed by the dominant classes, a thought collective structured around the Mont Pelerin Society, a sociological vision of the world based on ever-increasing competition, or a varied set of doctrines that share little in common with each other… The list of definitions I have just presented for neoliberalism is certainly not exhaustive, but already long enough to leave one perplexed. At this point, it seems legitimate to ask whether neoliberalism really exists or not. And if it does not, then writing a book about its decline and fall is hardly possible. However, this problem of definition is not entirely new, and I was confronted with it when writing Populism and Neoliberalism as well. This led me to propose my own definition based on the following features. First, neoliberalism is a doctrine, that is, a set of relatively coherent principles that can be used to guide action. Unlike a theory, which is descriptive, a doctrine is normative and enables the assessment of whether a given measure is in line with its principles or not, i.e. “good” or “bad” from its point of view. This distinction between doctrine and theory is essential, as it explains why it is possible to classify Friedrich Hayek and Milton Friedman as neoliberals even though they each had quite different theoretical conceptions of economics. It also allows us to make the claim that neoclassical economic theory, the dominant paradigm in economics today, should not be confused with neoliberalism.4 Secondly, in order to speak of a neoliberal doctrine, it must be possible to clearly distinguish it from classical liberalism, which means being able to identify propositions that would be compatible with classical liberalism but incompatible with neoliberalism, and vice versa. This does not mean that there cannot be points of agreement between these two doctrines. For instance, classical liberalism and neoliberalism align on the principles of free trade and private property. Thirdly, neoliberalism, like all doctrines, is incomplete and allows room for interpretation. Thus, a certain plurality of policy positions is admissible as long as the main principles of neoliberalism are respected. Moreover, the incomplete nature of neoliberalism means that there may be economic policies for which it is impossible to decide between “good” and “bad”. One example is the issue of intellectual property rights. Slobodian (2021) rightly points out that neoliberals have always been divided on whether or not protecting intellectual property is a good thing. Finally, neoliberalism is essentially about economic policy, and more specifically, about the role of the state in the economy. In other words, in contrast to liberalism, the field that neoliberalism seeks to assess is relatively narrow. For this

8  Introduction: Does neoliberalism even exist?

reason, neoliberalism has little to say about the management of civil liberties, the domestic sphere, or the treatment of waste. This does not prevent neoliberal authors from having well-founded opinions on these subjects and expressing them. Economist Gary Becker, for instance, has written about marriage, crime, and discrimination (among other topics) while Hayek published a book on cognitive science (Hayek 1952). These works should not be taken to imply that there is a neoliberal conception of cognitive science or of marriage, since other neoliberal authors may hold different opinions on the same issues. Having established these points, it is now possible to propose a definition of neoliberalism that is as clear as possible, so that the scope of this book is well understood. Neoliberalism is based on the fundamental principle of market prices. In the neoliberal view, prices are determined by the interaction of supply and demand as opposed to administered prices or monopoly prices. Prices have two functions. The first is to respond and adjust to the behaviour of economic agents, for instance, by bringing a new source of supply to the market if they express a new demand for a good or a service. Thus, when the demand for a product goes up in a market, its price should ideally increase too. The second is to modify incentives and economic behaviour through fluctuations in price. Market prices therefore constitute a mechanism for social coordination through this signalling function. This conception of the market, which constitutes the core of neoliberal reasoning, explains why they insist that all prices should be determined by the market. When prices are fixed by monopoly firms or by the state, they lose their primary function: they are no longer influenced by changes in demand and supply. As a result, they are no longer able to produce meaningful incentives or to carry out their coordination function properly. This failure could then result in wastage, shortages, poor investment choices and worse economic performance. The neoliberal view of the market differs from the liberal view in two respects. The first is that, for classical liberals, the market is first and foremost a site of exchange and transactions, whereas for neoliberals, the market is a system of valuation and coordination. In the liberal view, the market is independent of politics, and politics is independent of the market. Conversely, in the neoliberal framework, the market and politics are interlinked, since they are both competing systems of coordination.5 As a result, in a neoliberal perspective, the market price mechanism is fundamentally fragile as it is embedded in a social and political system that can circumvent or alter it. Moreover, as mentioned above, classical liberals see the market as a natural institution that functions autonomously, whereas neoliberals insist on the artificiality of markets and their need for a supportive institutional environment. This understanding of the risks of market and price distortion leads neoliberals to make several recommendations for the economic role of the state. These recommendations consist of four pillars intended to ensure that market prices can adjust correctly. The first of these pillars is free trade. The opening of economic borders is seen as having stabilising effects, acting to mitigate local or regional

Introduction: Does neoliberalism even exist?  9

disruptions and to prevent the creation of monopolies. The second pillar is the preservation of competition. For most neoliberals, the main danger to the market price system, after state intervention, is the absence of competition. The state must therefore actively combat the formation of monopolies and try to preserve healthy competition. The third pillar of neoliberalism is the preservation of social order. Demonstrations, strikes, let alone insurrectionary movements, are seen as a danger to the social coordination function of markets. It is therefore necessary to preserve a certain social order by ensuring a minimum income for all. To achieve this, a safety net must be provided through cash benefits rather than in-kind benefits, so that everyone can participate fully and fairly in the market. The fourth pillar is the guarantee of price stability. In times of high inflation, prices lose their ability to produce effective incentives and regulate economic behaviour. These four pillars represent the positive measures the state must take for markets to function correctly. These pillars are themselves based on more fundamental principles that frame the functioning of the state. The state’s interventions must be free of any discretionary action that could disrupt the market mechanism. This means that the state must maintain a balanced budget to prevent its own financing needs from directly influencing financial markets. Lastly, neoliberals defend a rule of law that preserves property, security, the separation of powers and respects the hierarchy of norms (constitution, laws, decrees) while staying away from arbitrary intervention. Figure 0.1 above schematically summarises the main tenets of the neoliberal doctrine (Cayla 2021: 110). It is precise enough to distinguish neoliberal approaches from

FIGURE 0.1

The temple of neoliberalism.

10  Introduction: Does neoliberalism even exist?

competing doctrines, and broad enough to include the thinking of most authors who are generally recognised as neoliberals. In the rest of this book, I will describe the origins of neoliberal doctrine and its implications, explain how it shaped economic policy at the end of the 20th century, and finally argue why these broad principles have become dysfunctional in the years following the 2008 Global Financial Crisis. My analysis will more specifically focus on questioning the fourth pillar, that of the price stability objective, and will show how monetary and financial policies relate to the defence of market prices. The first chapter provides a brief introduction to monetary theories and to the principles underlying monetarism – the neoliberal approach to monetary policy. The second chapter aims to show how monetarist thinking fits into the broader scheme of the neoliberal doctrine and why this thinking still informs central bank practices. In Chapter 3, I shall explain how and why economic policies moved away from neoliberal principles between the 1930s and the 1960s. The subsequent chapter will show how and why neoliberalism became the dominant economic approach during the 1970s–2000s. Chapter 5 will discuss the 2007–2008 subprime crisis and how it radically transformed monetary policies. Finally, in the last chapter, I will show why monetarism has become ineffective and why this decline makes it difficult to maintain the coherence of the neoliberal project. In conclusion, I will offer some perspectives on what a post-neoliberal world might hold. We seem to have reached the end of a 50-year cycle of history. By studying its evolution, we can see what useful lessons can be drawn from it, and whether it is possible to give a better direction to the period that is to follow.

Notes

Introduction: Does neoliberalism even exist?  11

References Audier, Serge (2012), Néo-libéralisme(s). Une archéologie intellectuelle, Paris: Grasset, collection Mondes vécus. Böhm, Franz, Walter Eucken and Hans Grossmann-Doerth (1936), “The Ordo Manifesto of 1936”, in Peacock, A. and Willgerodt, H. (eds.), (1989), Germany’s Social Market Economy: Origins and Evolution, London: Palgrave Macmillan: 15–26. Brown, Wendy (2015), Undoing the Demos: Neoliberalism’s Stealth Revolution, New York: Zone. Brown, Wendy (2019), In the Ruins of Neoliberalism, New York: Columbia University Press. Cayla, David (2021), Populism and Neoliberalism, London and New-York: Routledge. Dardot, Pierre and Christian Laval (2013), The New Way of the World: On Neoliberal ­Society, London and New York: Verso. Foucault, Michel (2008), The Birth of Biopolitics: Lectures at the Collège de France, London: Palgrave Malmillan. Friedman, Milton (1951), “Neo-Liberalism and its Prospects”, Farmand, 89–93 Friedman, Milton (1970), “The Social Responsibility Of Business Is to Increase Its ­Profits”, The New York Times, Sept. 13, 1970. Harvey, David (2005), A Brief History of Neoliberalism, New York: Oxford University Press. Hayek, Friedrich A. (1952), The Sensory Order. An Inquiry into the Foundations of Theoretical Psychology, Chicago: University of Chicago Press. James, Harold (2022), “Friends without Benefits”, Project Syndicate, Apr. 29, 2022. Mirowski, Philip (2013), Never Let a Serious Crisis Go to Waste, London, New York: Verso. Mirowski, Philip (2022), “The Death of Neoliberalism Has Been Greatly Exaggerated”, Jacobin, Apr. 27, 2022. Mouffe, Chantal (2018), For a Left Populism, London and New York: Verso. Polanyi, Karl (1944) [2001], The Great Transformation: The Political and Economic Origins of Our Time, Boston, MA: Beacon Press. Reinhoudt, Jurgen and Serge Audier (2018), The Walter Lippmann Colloquium: The Birth of Neo-Liberalism, London: Palgrave Macmillan. Rodrik, Dani (2021), “Beware Economists Bearing Policy Paradigms”, Project Syndicate, May 5, 2021. Slobodian, Quinn (2018), Globalists: The End of Empire and the Birth of Neoliberalism, Cambridge, MA: Harvard University Press. Slobodian, Quinn (2021), “Are Intellectual Property Rights Neoliberal? Yes and No”, ProMarket, Apr. 18, 2021. Solchany, Jean (2012), “Vertus et limites du déconstructivisme”, La Vie des idées, Jul. 3, 2012. Stiglitz, Joseph E. (2019), People, Power, and Profits: Progressive Capitalism for an Age of ­Discontent, New York: W. W. Norton & Company.

1 DEPOLITICISING MONEY

The value of money Monetary stability is central to the neoliberal paradigm. Neoliberals believe that maintaining the value of money is essential since, for them, the proper functioning of the economy hinges on the ability of households and firms to plan their behaviour, for which they need to be able to anticipate the economic consequences of their decisions. Without a stable monetary unit to express value, this ability to make appropriate predictions and plan one’s behaviour is compromised, undermining decision-making and consequently the smooth functioning of society as a whole. Money is a difficult concept to grasp for a general audience. Among economists, its definition and nature are the source of much debate. Rather than going into the controversies that surround monetary theory in detail, we can start by noting the characteristics of money and the risks and challenges associated with it. This will help us better understand and explain how neoliberals approach monetary theory. Economist Michel Aglietta defines money in no uncertain terms when he says, “all money is a kind of debt” (Aglietta 2018: 59). All money, by definition, has a purchasing power, because it can be exchanged for goods and services. As such, money constitutes a promise of future repayment in kind. To buy is to redeem this promise; to accumulate money is to increase the debt that society owes to the saver. Money derives this power from its status as legal tender, which means that it cannot be refused as payment in its territory of issuance. Money is therefore a social institution; it is linked to the community that issues it and assures its universal acceptance as a means of payment. For anthropologist David Graeber (2011: 49–50), money as we know it is a historical creation of the state and its system of taxation, and institutes “a relationship between the individual and the collective” (Aglietta 2018: 59). DOI: 10.4324/9781003253297-2

Depoliticising money  13

Like other types of debt, the value of money is based on the confidence that its holder has in its ability to be effectively exchanged for goods and services. However, while the acceptance of monetary payments may be legally guaranteed, its conversion rate into goods and services, or “value”, remains variable. This problem posed by the rate of conversion of money into goods and services underpins all monetary issues. To understand this, all one needs to do is compare two figures: the accumulated amount of total savings on the one hand, and the monetary value of the annual production of goods and services on the other. In most developed economies, the sum of claims held by economic agents – which is equal to the sum of debts – is three to four times1 the gross domestic product (GDP)2. This means that if everyone were to liquidate their savings and spend all of them within a year, the economy would have to be able to triple or quadruple its national output and bring it to market. This would be an impossible task. But not all of a country’s savings are available at a given moment, as most debt is not immediately due. Only a part of these savings, which are called liquid savings, can actually be spent at any time. In addition to physical stocks of coins and banknotes, these include current accounts and some types of savings accounts. In the Eurozone, the total amount of savings that could be immediately mobilised was around 14,700 billion euros at the end of 2021.3 In its forecasts at the beginning of 2022, the European Commission predicted a GDP growth of 4% in 2022 for the Eurozone, which corresponds to a production output valued at approximately 12,800 billion euros (European Commission 2022). Given this difference, it would be impossible for European households to spend the total amount of these liquid savings in a few weeks or even months. The total production of goods and services available for purchase would be largely insufficient. So, let us consider what would happen then if, in a sudden frenzy, Europeans decided to spend not all their savings, but less than 15% of the total, i.e., 2,000 billion euros in one fortnight? That would be like asking companies to put eight times more goods and services on the market than the usual rate of consumption.4 And because it is, of course, impossible to increase the supply of all consumer products and services by a factor of eight, shortages would quickly arise. Restaurants would overflow, cinemas would be full, and car manufacturers would be unable to supply their dealerships with new vehicles. Confronted with empty shop shelves, the grand promise of money, which is its purchasing power, would be broken. The demand for imports would go up, but so would their cost, as special charters of trucks, ships and cargo planes would need to be arranged to bring them to market. But soon, one would run out of vehicles or drivers as well. In the short and medium run, companies would be compelled to increase their prices to prevent shortages. In other words, inflation works to correct the imbalance between supply and demand by devaluing the purchasing power of the additional money introduced on the market. Another way for companies to prevent shortages would be to increase their production. Increasing production implies recruiting more workers and making productive investments. This would only make sense if entrepreneurs believed

14  Depoliticising money

that the rise in consumption was likely to last for a while. One might think this to be impossible, as consumers would soon run out of savings by increasing their spending at such a pace. However, counter-intuitive though it may seem, it is actually theoretically possible for such an increase in consumption to be sustained over a long period. This is because eight times more spending by households would necessarily mean eight times more income for retailers and for the economy as a whole. Part of this income would, in turn, go back into savings. So, consumers would not necessarily deplete total savings as they draw from them, because they would continue to be replenished. In practice, however, it would be impossible to sustain an eightfold increase in consumption by households. For production to increase, there must be a plentiful supply of available and skilled labour as well as abundant raw materials and energy. As we all know, this is not the case, and will probably be less and less so in the future because of the increasing difficulty we face in extracting ever more natural resources. So even if it were possible, on paper, to increase expenditure and income eightfold, it would not be possible to increase the output of the real economy eightfold. Producers would very quickly face serious bottlenecks. This brings us back to our previous scenario of scarcity and inflation. On a smaller scale, this is precisely the sequence of events that played out in the global economy in the months following the summer of 2021. To limit the spread of the virus during the COVID crisis, many countries were forced to suspend some economic activity, especially in the service sector, and to close down social venues. To compensate for the collapse in income and to prevent enterprises from going bankrupt, households were given income replacement allowances and businesses were given subsidies. As a result of these measures, incomes fell at a slower rate than consumption during lockdowns and household savings grew, particularly in the middle-income and high-income brackets. With the help of vaccination campaigns, economic restrictions were gradually lifted in most countries of the world by the summer of 2021. Some of these accumulated savings were then spent, boosting economic activity. But this consumer spending soon ran up against bottlenecks in production and trade. Prices of raw materials and certain electronic components soared; a labour shortage emerged, particularly in the US and the UK 5, reflecting a difficulty in matching supply and demand in the labour market (Pizzinelli and Shibata 2022). Similar problems impacted the freight transport sector. By the autumn of 2021, it was estimated that there was a shortage of almost 400,000 lorry drivers across Europe.6 The breakdown in logistics chains led to disruptions in supply and a sharp rise in costs. Some production lines were forced to shut down due to a lack of components, which further exacerbated shortages. As a result, by early 2022, all G7 countries except Japan had seen a surge in inflation (Table 1.1). In his New York Times column of December 2021, American economist Paul Krugman estimated that this inflation was likely to be transitory, as it was mostly related to the disruption of supply chains that followed post-COVID economic

Depoliticising money  15 TABLE 1.1 Change in the consumer price index between Jan 2021 and Jan 2022

Canada

France

Germany Italy

Japan

United Kingdom

United State

5.14%

2.85%

4.89%

0.5%

4.90%

7.48%

4.84%

Source: OECD (2022), Inflation (CPI), https://data.oecd.org/price/inflation-cpi.htm; accessed on Mar. 6, 2022.

recovery (Krugman 2021).7 He also noted that the increase in households’ consumption expenditure was not sufficient to explain the price rise on its own. The shock, he argued, came not from an overall increase in consumption, but from a change in purchasing behaviour. Despite the waning impact of COVID-19, households’ preference for goods over services remained high.8 However, the production and delivery of manufactured goods is longer and more complex than the production of services. He therefore argued that it was mainly these supply difficulties and the shortage of labour in associated industries that explained the inflationary dynamic. In short, the first thing we need to understand about money is that its purchasing power is never fully assured. While it is true that money has purchasing power on an individual scale – anyone can freely decide to buy whatever they want, whenever they want – its purchasing power at the scale of the economy taken as a whole is not always guaranteed. The COVID crisis demonstrates that the wealth available to a society is always closely linked to the capacity of its economy to produce and deliver goods and services to buyers. Without productive capacity, i.e. without the real economy, money is worthless.

How money is created The neoliberal intellectuals who met in 1938 at the Walter Lippmann Colloquium to rethink the liberal doctrine were well aware of the fragility of the value of money (Reinhoudt and Audier 2018, Cayla 2021: 83–95). The collapse of the gold standard in the early 1930s and the experience of German hyperinflation in 1921–1923 were still uncomfortably fresh in everyone’s memory. From these experiences, they concluded that it was essential to safeguard monetary stability. Under the metal standard regime of the 19th century, the question of monetary stability did not arise because money could be converted into gold or silver at a legally determined rate. But once the convertibility of money was no longer guaranteed, another way of assuring its value had to be found. For neoliberals, monetary stability required ensuring that the total amount of money available to spend did not exceed the total productive capacity of the economy. In practical terms, this means limiting the rate of expansion of money supply so that it more or less keeps pace with GDP growth. How does new money come into the economy? Most people believe that it is the central bank that creates money by controlling the mint, i.e., the printing

16  Depoliticising money

presses that physically produce banknotes. But this physical money, which is called fiduciary money, represents only a very small part of the money in circulation. Most of the money used for consumption is recorded as entries in bank accounts. This second form of money is called scriptural money. It circulates via interbank transfers, cheques and, most significantly, payments by credit card or smartphone. Let us call the amount of money directly available for purchases the “money supply”. Ordinarily, this money supply is seen as the combination of fiduciary and scriptural money. In this sense, one would assume that any credited account or any banknote is part of the money supply. However, this is not exactly true in practice. Banknotes issued by national mints are not money in the sense of our definition as they cannot be directly used for making purchases. Nor are they money when fed into ATMs or the vaults of deposit banks. They only enter into supply when distributed to an economic actor that can actually spend them. In other words, the banknote becomes part of the money supply when it leaves the ATM for the wallet, not when it is printed. But withdrawals from ATMs do not actually increase the overall supply of money or the purchasing power of those making the withdrawals either, because each withdrawal is simply debited from an associated bank account. In effect, a withdrawal therefore simply converts scriptural money into fiduciary money; it does not add any new money into circulation. As a result, we can see that at no time does the printing of new banknotes increase money supply. This is why the image of the mint as an instrument of money production is misleading, although the visual metaphor lends itself quite nicely to television and news broadcasts. Money supply can thus only be increased by adding scriptural money to the accounts of economic actors. However, since central banks as a rule do not deal directly with households or businesses, this scriptural money does not come from the central bank either. In reality, the central bank’s role is primarily to ensure that commercial banks have access to liquidity to allow the smooth running of payment systems. For a payment transaction to take place, not only must the account of the individual making the payment have the available funds, but the account of their bank must also have that amount of money available, since such payments involve an interbank transfer when the accounts are held in different banking establishments. If the bank does not have this amount in liquidity, it has to refinance itself either by borrowing from another bank on the interbank market or by taking out a bank refinancing loan directly from the central bank at the bank rate. To summarise, money circulates at two levels in modern banking systems. The central bank operates at the highest level, facilitating transactions between banks. The money that circulates in this circuit is not available to households and firms and is called the monetary base. It does not generate any real expenditure and hence cannot be considered as a part of money supply. For new money to appear in the real economy, it must somehow appear in the accounts of households, firms and governments. This is only possible in one way: through bank credit. Therefore, new money only appears in the real economy when economic actors

Depoliticising money  17

FIGURE 1.1

Schematic representation of contemporary monetary systems.

borrow from their banks. This shows how closely tied money is to debt: not only is money a form of debt in itself, but money can only be created through a credit operation (Figure 1.1). This is why it is sometimes said that banks create money. However, this is only partly true. Banks do not create money on their own or without an expectation of repayment: they need borrowers with plans to buy or make investments. Money is created by the loans that households, companies, and public administrations take out with banks. Money creation is therefore contingent on the real demand for credit from borrowers. Borrowers need to convince bankers of the seriousness of their proposals and their ability to repay, because loan defaults directly impact banks’ financial performance. If bad loans accumulate, banks risk bankruptcy. Money is created when borrowing from banks and destroyed when a loan is repaid to them. If the sum of borrowings grows faster than the sum of repayments, money supply in the economy tends to increase. The key point to note from this explanation is that, in contemporary monetary systems, central banks have no ability to create money since they do not distribute money directly to firms and individuals, nor can they force them to borrow. Finally, in most developed countries, they do not finance governments directly either. Ultimately, it is only the demand for credit that creates money.

The principles of monetarism With the nature and origin of money now clarified, we can return to neoliberal thinking. Neoliberals believe that monetary instability or inflation is caused by an excessive expansion in the money supply. As we have just seen, money is created through credit operations. Therefore, this expansion can be controlled only by central bank action to limit the money supply.

18  Depoliticising money

From a neoliberal point of view, the allocation of credit in the economy should be organised through a market process. In this understanding, there is an internal competition between the supply of credit from banks and savers, and the demand for credit from borrowers. The price of credit is the interest rate, which varies according to supply and demand. If the supply of credit is greater than demand – which is the case when there are excess savings in the economy looking to be invested – interest rates tend to fall. This then boosts the demand for credit and restores market equilibrium. If on the contrary demand for credit is higher than supply, interest rates rise, encouraging economic actors to save. In other words, neoliberals believe that the credit market functions just like any other market, naturally balancing itself through changes in interest rates. But this vision poses a problem because it is inconsistent with how contemporary monetary systems actually function. As we have seen above, there is an interest rate which is not determined by the market: the bank rate. This rate is fixed by a public institution – the central bank – which occupies a monopolistic position in the economy. It concerns refinancing operations but also plays an important role in the interbank credit market, in which banks traditionally extend short-term loans of a few days or a few weeks to each other to meet their liquidity needs. These rates differ from and are generally lower than the medium- and long-term rates at which households and firms borrow. However, the bank rate has an influence on the banks’ willingness to lend. A low bank rate reduces the cost of money for banks and therefore increases the margins they make on the loans they grant. This allows them, in turn, to lower the interest rates paid by borrowers and to stimulate loan applications and money creation. We will see in the next chapter why neoliberals insist on the idea that the economy should operate on market prices and not administered prices. But the fact is that contemporary banking systems do work on the basis of administered prices: the interest rates offered by central banks. There is thus a contradiction between the neoliberal idea that all prices necessarily emanate from the interaction between supply and demand, and the reality of interbank markets which are based on monopoly prices. Setting the bank rate is the primary instrument of monetary policy. Lowering the bank rate to encourage borrowing is known as an expansionary monetary policy. Conversely, raising the bank rate to make money more expensive for banks is described as a restrictive monetary policy. How – and more importantly who – should control monetary policy? Neoliberals believe that if monetary policy is left to political discretion, there will be an incentive to set interest rates too low. Elected governments would need to focus on job creation and pursuing an expansionary monetary policy would be one of the easiest ways to increase employment in the economy. By lowering the cost of refinancing, commercial banks would be pushed to lower their long-term interest rates, encouraging credit supply from businesses and borrowing by households. This would in turn boost overall demand and stimulate economic growth.

Depoliticising money  19

However, neoliberals take an unfavourable view of such government intervention into what should ideally be a purely competitive market, because they believe that structurally low interest rates adversely affect the economy in a number of ways. Firstly, they encourage bad investments. When credit is cheap, the number of potentially profitable activities goes up and companies become less discerning about their investments. Taken to the extreme, this can even favour financial or real estate speculation at the expense of more productive investments. Secondly, low interest rates encourage households to borrow, which can result in over-indebtedness. And finally, low interest rates increase the flow of bank credit and therefore of money supply in the economy. According to the neoliberal doctrine, this growth in money supply would weaken the currency and inevitably lead to inflation, ultimately impeding the ability of economic actors to reasonably adjust their expectations and hampering economic prosperity in the process. The idea that inflation is always and necessarily caused by an increase in money supply underpins monetarist theory. Monetarism is based on the assumption that money is neutral because it is only a means of exchange, and consequently an increase in money supply cannot fundamentally alter economic activity. As a result, its only effect would be to weaken the value of money over time and accelerate inflation. So, in the monetarist view, if the money supply increases by 10% in a steady state economy, there will be a resulting medium term inflation rate of 10%, without any discernible impact on employment or economic growth. The idea that inflation has a monetary origin is very old, but it was the American economist Milton Friedman who formulated this idea into theory in the year 1956 and after. Friedmanian monetarism rejects the idea that expansionary monetary policies can have any positive long-term effects. Instead, he recommends a strict control over money creation to prevent governments from using monetary policy as a tool to support employment growth. Friedman was of the view that the expansion of credit could only temporarily increase economic activity for the short period where economic actors would not have had time to correct their price expectations. However, he believed that this effect would be shortlived and that the economy would soon revert to its previous state. Secondly, he foresaw an adverse impact on price stability because governments could end up generating an ever-increasing rise in inflation by pursuing highly expansionary monetary policies, eventually leading to a loss of confidence in the currency among the population. In the monetarist imagination, expansionary monetary policies resemble the behaviour of drug addicts or alcoholics who are forced to increase the doses they take of a drug over time to obtain the same effect. This metaphor is one that Friedman is particularly fond of: We have a great deal of evidence that the average rate of inflation over a period of time has no relationship at all with the average rate of growth or the average level of unemployment. […] It is not inflation that produces a

20  Depoliticising money

stimulus, it is only higher inflation than you expect, only the surprise. If you get adjusted to it, it doesn’t do any good. It is just like again alcoholism and drug addiction. When a fellow first gets started on drinking, all it takes is one drink to make him happy. But after his body get adjusted to that, it takes a little more, and pretty soon he is taking half a bottle. Similarly, with drugs it takes bigger and bigger doses to have the same effect. And similarly with inflation. As a country gets accustomed to higher and higher rates of inflation, it needs a bigger dose to have any stimulating effect.9 Not only does Friedman believe that an increase in the money supply has little effect on activity and produces accelerating inflation, but he also believes that once inflation has set in, people get used to it, making it very difficult to eliminate. The only way to do so would be to enforce a restrictive monetary policy and accept the temporary decline in growth and rise in unemployment that this would inevitably bring about. Friedman argued that governments rarely have the courage to pursue such policies. For this reason, the only way to effectively control rising prices according to Friedman would be to avoid increasing money supply in the first place, which would imply depoliticising the management of money, i.e., removing the ability of elected officials to influence monetary policy altogether.

Three main schools of monetarism Monetarism is shared by all neoliberals. It constitutes the essence of the “price stability” pillar of neoliberal ideology. However, though neoliberals agree that the management of money should be depoliticised, its various proponents differ in the means by which this aim could be achieved.10 For Friedrich Hayek and the Austrian neoliberal school, monetary policy has simply no reason to exist as contemporary monetary systems are based on a “dangerous monopoly” that needs to be dismantled (Hayek 1976a: 16). “With the exception only of the 200-year period of the gold standard, practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people,” he wrote (Ibid.). In other words, the government’s monopoly over monetary supply could only lead to inflation: if governments are to remain in office in the prevailing political order, they have no choice but to use their powers for the benefit of particular groups – and one strong interest is always to get additional money for extra expenditure (Ibid.: 14) To counter this monopoly, Hayek’s solution is to abolish the principle of stateissued legal tender by allowing everyone to use whatever currency they want. A currency issued in another country could provide this alternative currency,

Depoliticising money  21

or it could even be floated by a private institution. Private currencies would be protected by registered trademarks, controlled by their issuing bank and protected against counterfeiting (Hayek 1976b: 46). Hayek argued that a system of currency competition would better preserve the value of money than the existing system of currencies issued by monopolistic states. Households and businesses would then have incentives to choose the currency whose value remains most stable over time.11 Hayek’s position, known as free banking, which is the inspiration for today’s cryptocurrency systems, is rather marginal among neoliberal authors. While he admits that, historically, state monetary interventionism “was at least as often a source of instability and inefficiency as the reverse, and that the major ‘reform’ during the period, the establishment of the Federal Reserve System, in practice did more harm than good” (Friedman and Schwartz 1987: 292), Milton Friedman is unconvinced by Hayek’s proposal. Friedman feared that the multiplication of monetary systems in an economy would create significant practical issues, increase transaction costs and lead to problems in quantifying value, as money constituted an indispensable unit of account for economic calculations. In an article co-authored with the economist Anna Schwartz, he points out that although “leaving monetary and banking arrangements to the market would have produced a more satisfactory outcome than was actually achieved through governmental involvement” (Ibid.: 311), the monetary revolution proposed by Hayek appears impractical. For the authors, it would take decades for a private currency to gain enough confidence to become a serious competitor to the US dollar (Ibid.: 312). The solution proposed by Milton Friedman and the American monetarists is, on the other hand, easier to implement as it does not require such a radical overhaul of contemporary monetary systems. They suggested that the central bank should be forced to follow strict rules to eliminate the risk of any discretionary interventions on its part. “Our personal conclusion,” he wrote, “is that a rigid monetary rule is preferable to discretionary monetary management by the Federal Reserve” (Ibid.: 292). A famous 1968 article by Friedman lays out his monetarist creed more clearly. In it he argues that the main problem with monetary authorities is that, under pressure from governments to respond to economic fluctuations, they tend to overreact, cycling between an expansionary policy in times of falling employment and a more restrictive policy when inflation begins to rise. The reason for the propensity to overreact seems clear: the failure of monetary authorities to allow for the delay between their actions and the subsequent effects on the economy. They tend to determine their actions by today’s conditions-but their actions will affect the economy only six or nine or twelve or fifteen months later. Hence they feel impelled to step on the brake, or the accelerator, as the case may be, too hard. My own prescription is still that the monetary authority go all the way in avoiding such swings by adopting publicly the policy of achieving a steady

22  Depoliticising money

rate of growth in a specified monetary total. The precise rate of growth, like the precise monetary total, is less important than the adoption of some stated and known rate. (Friedman 1968: 16) In a way, Friedman’s proposal supports Hayek’s conclusions. Limiting the action of central banks to simply following a strict rule for money growth amounts to curbing its powers to dictate monetary policy. In this scenario, the central bank is left with virtually no discretion, as it must then keep to an algorithm that calculates the requisite growth of money supply and follow its suggestions. A third monetarist approach was put forth by the Ordoliberals. Ordoliberalism is the term often used to collectively refer to the Freiburg school and German neoliberals. But not all ordoliberals are German, nor have all Germans representing this school of thought necessarily had institutional associations with the University of Freiburg. This is the case, for example, of German economist Wilhem Röpke, one of the most influential representatives of ordoliberalism. Röpke showed an interest in the theory of business cycles as early as the 1920s. Like his Austrian counterparts Friedrich Hayek and Ludwig von Mises (1881–1973), he believed that financial crises were the consequences of overly accommodating monetary policies that led to excessive credit expansion. Though Röpke recognised that the administration of a “dose of inflation initially gives a new impulse to the economy,” he too viewed these monetary impulses as being similar to morphine injections or alcohol consumption, arguing that these artificial stimuli end up producing the “sickly change of the economic process,” doing the economic system more harm than good in the long run (Röpke 1926). From this analysis, Röpke also deduced that monetary policy should be detached from political pressure. He therefore proposed, decades before Friedman, that the expansion of money supply should be strictly regulated. In a book published in English in 1936, he summarised his thinking as follows. How to shape a monetary and credit policy which attains this objective of the neutrality of money is a question whose elucidation is at present only in its beginnings […]. So much is, however, already clear that a neutral monetary policy must involve a much stricter preservation of the constancy of the amount of money than does a policy of stabilizing the value of money; we may even say that, contrary to all the traditional ideas of the necessity of an “elastic” monetary system, the keeping constant of the quantity of money must be the rule and the alteration of its quantity the exception. (Röpke 1936: 151) When the Second World War ended, ordoliberal economists gained considerable influence in Germany, especially Ludwig Erhard (1897–1977). Trained as an economist, Erhard received his doctorate from the University of Frankfurt in 1925. Politically, he was a liberal, although his position at an institute funded by German industry led him to work with the Nazi regime. Once peace was

Depoliticising money  23

restored, he joined the ordoliberal school and gained great political influence. After the federal election of 1949, he was appointed Minister of Economy in the government of Konrad Adenauer, a position he held until 1963 and which he combined with the position of Vice-Chancellor from 1957 onwards. He concluded his political career by becoming Chancellor of the Federal Republic of Germany (FRG) from 1963 to 1966. Erhard is considered the architect of the German post-war economic “miracle”. During his years in power, he pursued a strict monetarist policy, making the fight against inflation one of his main objectives.12 However, German monetarism did not achieve its objective of regulating monetary expansion by directly limiting the money supply. In practice, it relied on another tool instead: a central bank strictly independent of political power and entrusted with a mandate limited to the objective of price stability. This strategy, which was the distinctive feature of German monetary policy, was pursued without interruption until the single European currency came into circulation. Thus, together with the Swiss National Bank, the Bundesbank was considered the most independent central bank in the world, and its monetary policy was seen as one of the most restrictive (Alesina and Summers 1993). In the end, whether it is through competing currencies, following a rigid rule for monetary expansion or instituting a strictly autonomous central bank with a mandate to maintain price stability, monetarist doctrines all pursue the same goal: depoliticising the management of monetary policy by forgoing the use of monetary instruments for anything but the objective of fighting inflation. Once the specific problem of the bank rate is solved, monetarist thinking can apply its logic to favouring the creation of a vast financial market in the lower part of the monetary system where debt securities can circulate and where competition is as extensive as possible. As long as the interest rates that regulate the interbank market are not controlled by a government authority, the rest of the financial system – the relationships between actors in the real economy and financial institutions – can be left up to market forces. We will see in Chapter 4 that this second objective of the monetarists, the establishment of a deregulated financial market ruled only by the laws of competition, was not achieved until the neoliberal turn of the 1980s. The purpose of the rest of this book is to show how – and why – the monetarist doctrines, which gradually took root in the academic world of the 1970s, went on to become dominant in the 1980s, inspired most monetary and financial policies in the decades that followed, only to collide with reality in the aftermath of the 2007–2008 financial crisis, leading to them being eventually abandoned. What is most curious in this story is that this monetarist vision was abandoned in practice after the subprime mortgage crisis without any new monetary theory replacing it as the dominant school of thought in the academic community. So, we are now living in a strange period of economic history. Monetarist conceptions continue to have a firm hold in the thinking of most economists and experts and continue to guide representatives of most governments...while they

24  Depoliticising money

have almost entirely disappeared from the policies actually implemented by these very same authorities. It is this cognitive dissonance that I hope to explain and which will guide the following discussion. The next chapter will explore how monetarism fits into the broader pattern of neoliberal thinking and will especially show why the question of market price is a central issue in this doctrine.

Notes

Depoliticising money  25

References Aglietta, Michel (2018), Money: 5,000 years of Debt and Power, London and New York: Verso. Alesina, Alberto and Lawrence H. Summers (1993), “Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence”, Journal of Money, Credit and Banking, Vol. 25, No 2: 151–162. Cayla, David (2021), Populism and Neoliberalism, London and New-York: Routledge. European Commission (2022), European Economic Forecast, Winter 2022, Institutional paper 169, ISSN 2443-8014. Friedman, Milton (1956), “The Quantity Theory of Money – A Restatement”, in Friedman, Milton (ed.), Studies in the Quantity Theory of Money, Chicago, IL: The University of Chicago Press, 1–21. Friedman, Milton (1968), “The Role of Monetary Policy”, The American Economic Review, Vol. 58, No 1: 1–17. Friedman, Milton (1980), “Why Inflation Is Like Alcoholism”, The Listener, Apr. 24. Friedman, Milton and Anna J. Schwartz (1987), “Has Government Any Role in Money?”, in Schwartz, A. J. (ed.), Money in Historical Perspective, Chicago, IL: University of ­Chicago Press. Gerber, David J. (1994), “Constitutionalizing the Economy: German Neo-liberalism, Competition Law and the ‘New’ Europe”, American Journal of Comparative Law, Vol. 42: 25–84. Hayek, Friedrich A. (1976a), Choice in Currency: A Way to stop Inflation, London: Institute of Economic Affairs. Hayek, Friedrich A. (1976b), The Denationalization of Money, London: Institute of ­Economic Affairs. Krugman, Paul (2021), “The Year of Inflation Infamy”, The New York Times, Dec. 16, 2021. Pizzinelli, Carlo and Ippei Shibata (2022), “Has COVID-19 Induced Labor Market Mismatch? Evidence from the US and the UK”, IMF Working Paper No. 2022/005. Reinhoudt, Jurgen and Serge Audier (2018), The Walter Lippmann Colloquium: The Birth of Neo-Liberalism, London: Palgrave Macmillan. Röpke, Wilhem (1926), “Zins, Preis und Konjunktur”, Bankwissenschaft. Zeitschriftc für das Bankwesen, Vol. 3, No 1: 2–9. Röpke, Wilhem (1936), Crises and Cycles, London: William Hodge & Company, Limited.

2 MONETARISM One pillar of the neoliberal system

The hegemony of monetarism When Milton Friedman died in 2006, American economist Lawrence Summers wrote a tribute that illustrates how hegemonic Friedman’s doctrine of monetarism had become: Not so long ago, we were all Keynesians. (“I am a Keynesian,” Richard Nixon famously said in 1971.) Equally, any honest Democrat will admit that we are now all Friedmanites. Mr. Friedman, who died last week at 94, never held elected office but he has had more influence on economic policy as it is practiced around the world today than any other modern figure. (Summers 2006) Summers’ observation was completely accurate at the time of its writing. In the academic world, monetarist approaches had indeed become the new orthodoxy. Most economists were so convinced that expansionary monetary policies had no long-term effect on employment that they developed a new theoretical concept called the Non-Accelerating Inflation Rate of Unemployment (NAIRU). The NAIRU reflects the idea that there is a “structural” or “natural” rate of unemployment below which an economy cannot fall for any substantial amount of time without giving rise to inflation.1 This unemployment rate is considered to be the consequence of rigidities or a lack of competitiveness in the labour market slowing down the economy. In such a situation, NAIRU theorists argue that an expansionist monetary or fiscal policy would not only be futile – as its effect on employment would be negligible – but actually dangerous for price stability. This theory naturally calls for responding to unemployment by so-called DOI: 10.4324/9781003253297-3

Monetarism: One pillar of the neoliberal system  27

“supply-side” policies, aimed at increasing the profitability of companies or improving the flexibility of the labour market. As monetarist ideas spread and took hold, central banks sought to assert their independence from governments. In 1979, the appointment of Paul Volcker as head of the Federal Reserve (the Fed), the US central bank, marked a turning point in monetary policy. With an inflation rate over 10%, Volcker did not hesitate to proclaim that “the standard of living of the average American has to decline”2, going against the advice of President Jimmy Carter who had just appointed him. His first year at the US Fed was marked by a relentless fight against inflation. This commitment took the form of a sharp rise in the bank refinancing rate. By the beginning of 1980, the bank rate had reached almost 20%. As a result, the cost of credit soared to such heights that the US economy went into a recession and there was a sharp rise in unemployment. Volcker had kept his promise: American standard of living had fallen. A few months later, Jimmy Carter was soundly defeated by Ronald Reagan in the 1980 presidential election. By 1983, the battle against inflation seemed to be bearing fruit, so Reagan confirmed Volcker in his position. Four years later, in 1987, he appointed Alan Greenspan, who remained at the helm of the Fed for almost 20 years until 2006. Greenspan was an eccentric character who made no secret of his admiration for the ultra-liberal writer Ayn Rand. He called himself a “Libertarian ­Republican” and zealously aimed to reduce the role of the state in the economy. This political position, however, did not prevent him from showing great sympathy for Democrat Bill Clinton. Clinton himself proved to be the perfect soldier of neoliberalism. During his two terms in office (1993–2001), admittedly marked by constant pressure from Republican politicians who dominated the legislature, he completed the process of financial deregulation and brought about a sharp decline in public spending and debt. Greenspan’s presidency had a profound effect on the history of the Federal Reserve. During this period, the annual inflation rate was mostly kept within a range of 1%–3%, and only once, in 1990, did it exceed 5%. Such sustained price stability in the United States was historic. It was all the more remarkable that, between 1992 and 2000, this very low level of inflation was achieved in the context of strong growth. It is probably this performance that led Milton Friedman to say that Alan Greenspan was the greatest Fed Chairman ever: In the first 75 years of its history the Fed on the average was a major negative feature in the economy. We never would have had the Great D ­ epression if there hadn’t been a Fed. Since then, since 1982 or 1983, the Fed has been beneficiary [sic] for the economy. So that I had very seldom anything good to say about the Fed before the 1980s. But since Alan Greenspan took over, I’ve had very little but good to say about it.3 Greenspan’s strength was his ability to free himself from political constraints and to impose a strict separation between the decisions of the US central bank

28  Monetarism: One pillar of the neoliberal system

and government policies during the 20 years of his five mandates in office. He achieved this in part by never revealing his intentions clearly, especially when addressing congressional representatives, a technique that proved to be highly effective. “I would engage in some form of syntax destruction which sounded as though I were answering the question, but in fact, had not,” he confessed on CBS’s popular 60 Minutes programme.4 Despite this strong independent streak, Greenspan was criticised for being too accommodating in the 2000s. According to his critics, the sharp drop in interest rates set by the Fed after the attacks of September 11, 2001 facilitated the expansion of credit, the real estate bubble and the subprime mortgage crisis that broke out in 2007 (Ravier and Lewin 2012, Fillieule 2013). Such criticisms might have been heard from Wilhelm Röpke or Friedrich Hayek had they lived to see the day. Yet, it seems difficult to call Greenspan a Keynesian. What these criticisms instead show is that from the moment monetarism became dominant, there have always been monetarists to challenge the actions and track record of another monetarist in the name of monetarism. On the European continent, these neoliberal ideas also began to exert considerable influence over monetary policy. Most Western European countries embarked on a long battle against inflation in the late 1970s. This strategy was made all the more necessary by the fact that, because of the exchange rate agreements that bound them, the countries in which prices rose the least quickly gained a competitive advantage over the others. Monetarism accompanied the “competitive disinflation” strategies that were pursued during the 1980s, particularly in France where the leaders decided very early on to peg their currency to the Deutschmark (Fitoussi et al. 1993). The Maastricht Treaty, signed in February 1992, marked the beginning of the formal institutionalisation of monetarism in Europe. The major reform initiated by this Treaty was, of course, the creation of the single currency – the Euro. But creating a common currency required European countries to agree on the type of monetary policy that would be pursued. Europe’s leading economic power Germany would not concede to monetary unification if it meant breaking with the ordoliberal tradition that had been the consensus in the country. For France, which had managed for almost a decade to conduct a German-style monetary policy, it was the perfect opportunity to prevent future governments from abandoning the new doctrine. France was thus eager to sign up. Fearing for its sovereignty, the United Kingdom back-pedalled and was granted an exemption that allowed it to opt out of the single currency. The other countries had little choice in the matter since the Maastricht Treaty was mostly a Franco-German project (Mazzucelli 1997). Even Italy, which had much to lose, agreed to embrace the new doctrine in order to join the single currency. The European Central Bank (ECB) was thus modelled on the German ­Central Bank and scrupulously followed ordoliberal recommendations. Article 105 of the Maastricht Treaty clearly outlines the mandate of the European S­ ystem of ­Central Banks (ESCB).

Monetarism: One pillar of the neoliberal system  29

The primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2. The ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 3a. (European Union 1992). Article 107 enshrines the independence of the ECB in the clearest terms. When exercising the powers and carrying out the tasks and duties conferred upon them by this Treaty and the Statute of the ESCB, neither the ECB, nor a national central bank, nor any member of their decision-­ making bodies shall seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body. The Community institutions and bodies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks. (Ibid.) And if this legal independence were not enough, the Treaty also provides that the President and the members of the Executive Board of the future central bank shall have a non-renewable term of office of a total of eight years (Art. 109a). Finally, to ensure that monetary policy would remain within the bounds of monetarism, the Treaty provides that candidate countries must fulfil “convergence criteria” before joining the single currency. These criteria required maintaining a fixed exchange rate with other European currencies and interest rates close to each other. They also required that the public deficits of the Euro candidate countries remain below 3% of GDP and that their public debt be kept below 60% of GDP. While the exchange rate and interest rate criteria appear to be consistent with the objective of monetary unification, the criteria based for the management of public finances may seem surprising. What is the relationship between the level of indebtedness of a state and the stability of a common currency? To understand this question, we must return to neoliberal logic. As explained in the previous chapter, expansionary monetary policies can be used by governments to stimulate activity and employment. The problem is that, by introducing a European currency managed by an independent central bank, states would lose the ability to autonomously conduct their monetary policies. In an economic crisis, the only tool in the hands of national governments is the fiscal arm. However, a fiscal stimulus policy implies an increase in the deficit and consequently in public debt.

30  Monetarism: One pillar of the neoliberal system

Monetarists believe that excessive public deficits increase the demand for credit from the public sector, which diverts part of the national savings to the state and dries up the financing of the private sector. This is referred to as the crowding-out effect, which forces the private sector to look abroad for financing. In such a situation, two possible scenarios exist. If that country runs an autonomous monetary policy, it must then pay higher interest rates to attract foreign investors who trade in another currency. ­U ltimately, when a state runs too large a deficit, the country as a whole is forced to borrow from abroad. For monetarists, such a country would then be ­“punished” by international financial markets: its currency would weaken, the cost of its debt would go up, eventually threatening price stability. In the case of a country that takes on debt while participating in a monetary union, this is not necessarily how things unfold. If the country is the only one to take on debt, it can benefit from the savings of the countries belonging to the same currency zone at no cost, and without paying a higher interest rate. For instance, if the Portuguese government were to borrow massively, it could not significantly disrupt European financial markets because of the small size of its economy. Portugal would thus be protected from a rise in interest rates and its companies could take advantage of the savings available in the rest of the currency area. The limitation to this reasoning is that while each individual country no longer has a financing constraint because it is a member of a larger currency area, this is not true at the level of the entire currency area. As a result, if most countries in the currency area were to run too large deficits, interest rates could rise for everyone, including those who have run tighter public finances. The introduction of a common currency could therefore lead to “free rider” behaviour. As each country is tempted to run a loose fiscal policy in order to benefit from its neighbour’s savings, the monetary area as a whole is confronted with an increased demand for credit beyond its financial capacity and runs the risk of becoming dependent on foreign savings. This explains why monetarists demanded the introduction of public spending controls for Eurozone countries. *** By the time of Milton Friedman’s death, monetarist thinking had become axiomatic in the US and Europe. Experts and politicians were unanimous in their call for an independent central bank to conduct monetary policy, for public spending to be limited, and for governments to surrender their influence over monetary and financial policy. It was generally agreed that interest rates should be set by vigilant and intractable financial markets that would discipline countries which were too interventionist or lax in managing their public budgets. This thinking was disseminated in universities and implemented by finance ministries, international institutions, and the European bureaucracy. It was based on economic studies with questionable methodologies promoted to the highest level without

Monetarism: One pillar of the neoliberal system  31

critical review.5 It was incorporated into legislation, government practices, and our collective mentality. But Friedman’s victory proved to be short-lived. The entire doctrine came apart within a few years, so that one had to unlearn all this “knowledge” which had come to be regarded as the gospel truth.

To be or not to be a monetarist? The subprime crisis that erupted in the summer of 2007 did not directly cause a change in the neoliberal paradigm or its practices. Rather, monetarist practices were gradually abandoned by an accumulation of crises that became increasingly difficult to manage. An important step towards this was taken when Donald Trump entered the White House. Because of his particular way of exercising power, he did not intend to leave the handling of monetary policy to someone else. In his first year as president, he decided to remove the Democrat Janet Yellen – an academic – from the Federal Reserve and replace her with the Republican Jerome Powell – a former investment banker. Though the US President technically has the right to make this nomination, Trump’s action was tantamount to breaking the unwritten rule of a newly elected president confirming the choice of his predecessor and not dismissing the head of the Federal Reserve.6 By deciding not to reappoint Yellen, Trump probably hoped to influence monetary policy, but things did not go as planned. Powell, once appointed, maintained his independence. In his first few months in office, he raised Federal Reserve interest rates four times, which greatly upset the US president. In October 2018, Donald Trump gave an interview to the Wall Street Journal in which he made his displeasure clear. “I’m just saying this: I’m very unhappy with the Fed because Obama had zero interest rates,” he said. “Every time we do something great, he raises interest rates.” 7 From Trump’s point of view, such resistance from someone he himself had appointed was unacceptable. A few months later, the president blamed Powell for the poor performance of Wall Street and for adversely affecting household savings. According to press reports, he then began to look for a way to remove him.8 The idea that a head of government could “fire” the chair of the central bank sparked horror and outrage. Monetarists exclaimed that such an act directly violated the principle of central bank independence and threatened the very principle of the rule of law. In any event, this was the opinion expressed by Democrat Senator Mark Warner, a member of the Senate ­Banking Committee: What the president fails to understand is that monetary policy should be separate from politics. Any action taken to dismantle the independence of the Fed would not only be inappropriate, it would threaten the institutions that protect our rule of law.9

32  Monetarism: One pillar of the neoliberal system

Despite coming up against these obstacles in controlling the Federal Reserve and its policy directly, Donald Trump did not give up trying to exert pressure on it in different ways. “Here’s a guy, nobody ever heard of him before, and now I made him and he wants to show how tough he is? O.K. Let him show how tough he is,” he said of Jerome Powell in June 2019, before adding, “He’s not doing a good job.”10 In September 2019, in a series of tweets, he again directly attacked the Board of Governors, calling its members “boneheads”. “The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt,” he angrily tweeted.11 A few months later, he went so far as to call Powell in for what he called a “cordial discussion”. The Fed was then engaged in a policy of interest rate cuts, but these were still deemed insufficient by the White House. It can be tempting to treat the conflict between Trump and Powell over the takeover of monetary policy with an attitude of relative indifference. After all, this is just one of the many anecdotes of a rather unusual presidency. Moreover, these attempts were not very successful, as we have just seen. But this would be to ignore other similar events that demonstrate that the challenge to the monetarist paradigm did not come only from Trump. One of the most spectacular examples of these is Turkish monetary policy in recent years. Turkey has been ruled since 2003 by the Islamic conservative Recep Tayyip Erdoğan. Between 2003 and 2012, the country pursued a rather classical neoliberal economic policy: lower public spending, privatisation, economic liberalisation, deregulation of the banking and financial sector. This strategy was lauded by staunch advocates of monetarism and international institutions alike. In the mid-2000s, inflation fell below 10%, which was a historically low level for Turkey. The country was enjoying strong growth and remained relatively unscathed by the 2008 financial crisis. This favourable situation allowed Turkey to repay all the debt it owed to the International Monetary Fund (IMF) in 2013. At the same time, the regime was hardening on the domestic front. In 2016, a coup attempt sparked a fierce crackdown on opposition networks, the media, the civil administration, and even academic circles. In 2017, Erdoğan pushed through a referendum to amend the constitution and strengthen the powers of the president. Business confidence in the Turkish economy declined and economic difficulties soon began to reappear. Turkey underwent a severe financial crisis in 2018. The Turkish Lira collapsed and inflation accelerated. In such a situation, monetarist logic would demand that the Turkish central bank raise interest rates to slow down money creation, attract foreign savings, and strengthen its currency on the foreign exchange market. But increasing interest rates would have limited access to credit for companies and increased insolvency in the economy. To avoid such a difficult scenario, Erdoğan made the political decision to take back control of monetary policy, leading to him sacking three Turkish central bank governors between 2018 and 2022. Thus “relieved” of its autonomy, the central bank could then pursue a curious strategy that ran directly counter to monetarism. Officially, the price stability

Monetarism: One pillar of the neoliberal system  33

objective was never abandoned but it was claimed that there was another way of achieving it. In spring of 2018, when inflation exceeded 10%, Erdoğan declared that it was in fact the excessively high level of interest rates that explained the rise in prices.12 So, in the name of fighting inflation, the Turkish central bank began to cut its key interest rates sharply in 2019, and again in 2021. The argument presented by the Turkish authorities was as follows: Inflation measures a gap between the quantity of money available and the output that can be bought. Therefore, instead of reducing the money supply, as monetarists demanded, the productive sector should be stimulated to increase the quantity of available goods and services. Lowering the bank rate would organise this stimulation in two ways. On the one hand, the drop in the cost of credit would facilitate productive investments by companies; on the other hand, devaluing the Turkish Lira would enhance the competitiveness of national production. This unconventional monetary policy struggled to convince economists, to say the least. “Why Erdogan’s unorthodox Turkish economic experiment isn’t working,” wrote Chris Giles of the Financial Times in December 2021 (Giles 2021). For Giles, contrary to Erdoğan’s wishful thinking, lower bank rates do not always lower the cost of credit. Instead, the COVID crisis initially led to an increase in foreign currency borrowing at high interest rates, and then government bond rates rose sharply as foreign and domestic investors lost confidence in the lira. The Turkish central bank’s lowering of short-term rates therefore led to a collapse of the Turkish Lira and eventually to a rise in long-term interest rates, which represent the cost of credit for agents in the real economy. Producers therefore suffered additional costs and were not incentivised to make productive investments at all. By the beginning of 2022, Erdoğan’s gamble seemed well and truly lost. By March 2022, the Turkish Lira had plunged 47% from a year earlier and annual inflation had risen to 54%, its highest level in two decades, far above the official 5% target. Despite this failure, the central bank maintained its policy and refused to raise interest rates. Erdoğan denied the official inflation figures that proved him wrong, but still felt it necessary to sack the director of Turkey’s national statistics agency. This obviously did not have the desired effect as the official inflation rate continued to register a rise over the following months. One would think that Trump and Erdoğan’s failed attempts to re-politicise monetary policy would have strengthened the monetarist camp. Yet, curiously, the opposite has happened. Was Erdoğan’s gamble absurd and doomed to failure? Not necessarily, argued economist Dani Rodrik, professor of economics at ­Harvard University. In a post published in January 2022 he wrote: Even the idea that lower interest rates reduce inflation is not necessarily outlandish. There is a school of thought within economics – dismissed by most mainstream economists today – which associates inflation with cost-push factors, such as high interest rates (which boost the costs of working capital). (Rodrik 2022)

34  Monetarism: One pillar of the neoliberal system

More broadly, Rodrik thinks that orthodox economists’ characterisation of Turkish monetary policy as a “science denial” is unnecessarily arrogant and out of touch with the reality of the discipline of economics. “The true science of economics is contextual, not universal,” he argued (Ibid.). In other words, the ready-made recipes of monetarists may not always offer the best solution to combating inflation. According to Rodrik, heterodox strategies such as price controls or lower interest rates should not be ruled out a priori. Rodrik has long argued that economists should abandon large models and uniform solutions (Rodrik 2015), basing his idea on the existence of studies whose results run contrary to standard models. For example, a 2015 IMF research paper has questioned the monetary effects of capital flows. Standard models assume that when a country attracts foreign capital, the value of its currency increases, bringing down inflation. But this study shows that the opposite effect is also possible, which means that a rise in interest rates, by attracting foreign investors, could have expansionary effects and accelerate inflation (Blanchard et al. 2015). Overall, it seems that in recent years, monetarist principles have become increasingly contested and seem to be on the decline in the academic world. The idea of using the central bank to conduct policies that are no longer limited to fighting inflation is, for instance, increasingly being put forward. In a notable book published in 2015, the British investment banker Lord Adair Turner, who chaired the Financial Services Authority at the height of the financial crisis, proposed allowing the central bank to credit households and businesses directly (Turner 2015). As we have seen above, the central bank does not create money directly in contemporary monetary systems. However, for Turner, the classical mechanisms of money creation, namely bank credit, come at the cost of increasing the overall indebtedness of the economy. He argues that it is the growth of this debt, often speculative in nature, that has caused capitalism to dysfunction and led to the eruption of financial crises. His proposal is therefore to bypass the debt mechanism entirely and support household income and economic activity by distributing money directly from the central bank. This idea is not entirely new. Surprisingly, it was originally formulated by Milton Friedman who referred to it as “helicopter money” (Friedman 1969: 4). For Friedman, this expression was ironic because to him, it was not a feasible monetary policy that could be implemented. He coined the term only to demonstrate that such an influx of money into the economic system would not change anything in real activity and would increase inflation. Turner’s argument challenges Friedman’s logic. He argues that handing out money to households could boost economic activity and have little effect on inflation. Moreover, a slight increase in inflation would not necessarily be a bad thing as it would reduce the relative weight of debt in the economy. The proposal to create helicopter money, i.e., to put the central bank at the service of households’ purchasing power and companies’ financial needs, was revived at the time of the COVID crisis, notably by French economist Jézabel

Monetarism: One pillar of the neoliberal system  35

Couppey-Soubeyran. In a note published in April 2020, the economist from the Paris School of Economics proposed a two-stage distribution of helicopter money. In the first stage, the ECB would credit the accounts of the states so as to give them the means to meet the costs of the pandemic. This is what she calls “monetising public spending”. In the second phase, the ECB would distribute money directly to households and businesses to support recovery. Couppey-Soubeyran explains: Helicopter money is not a new form of central bank money or a new way of creating it; it is just a different way of distributing it and pouring it into the economy, without going through the banks and financial markets. (Couppey-Soubeyran 2020: 1) Does the idea of creating a debt-free currency offer a meaningful solution? As we have seen in Chapter 1, money is, by its very nature, a debt since it implies purchasing power and therefore a promise of repayment in real goods and services. ­Furthermore, Couppey-Soubeyran’s argument is not just that monetisation would reduce total debt, but that it would disintermediate it from the financial sector, thus limiting speculation and the risk of precipitating financial crises. Creating helicopter money could even, according to her, strengthen the euro and limit imported inflation: As it would be redirecting central bank money13 to the real sphere rather than the financial sphere, one might expect that many purely speculative transactions, such as those carried out on the foreign exchange market without any counterpart in the real economy, would no longer be necessary; this is likely to lead to a reduction in the trading of euros against foreign currencies, thus making the euro more scarce on the foreign exchange market and supporting its exchange rate against other currencies. (Ibid.: 11) Other economists in Europe have put forward similar arguments for making the central bank an active agent of economic policy. In February 2021, in an opinion column published in the French newspaper Le Monde and eight other major European media, nearly 150 economists and intellectuals, including Thomas Piketty, proposed that the ECB should cancel the 2.5 trillion Euros of public debt it held in exchange for investing the same amount in “ecological and social reconstruction.”14 The economists argued that European budgetary rules established at the time of the creation of the Eurozone would prevent states from undertaking the investments necessary for the ecological transition. Since it is not possible to modify these rules immediately, they believed that the central bank could relax the budgetary constraint by forgiving debt in exchange for spending commitments for specific social and environmental objectives by Eurozone countries.

36  Monetarism: One pillar of the neoliberal system

Thus, rather than re-politicising monetary policy, the ECB would be given a say in budgetary policies and the ability to assess the merits of public spending on ecological transition. The ECB would thus become a political actor in its own right, able to provide clear impulses to the budgets voted by national parliaments. It is worth noting that the President of the ECB, Christine Lagarde, responded to this open letter the very next day, saying that it was “unthinkable” that the ECB would take on such a role as this would go beyond its mandate as set out in the treaties.15

The reverse monetarism of MMT Where does all this creativity in monetary policy come from and why have these alternative theories proliferated? The financial crisis of 2007–2008 was the principal event that prompted researchers to revisit monetary questions. The collapse of Lehman Brothers in September 2008 confronted economists with a spectacular case of a systemic crisis event, a theoretical situation that had never occurred before on such a scale. A systemic crisis occurs when bank failures multiply and spread in a mutually reinforcing process until they affect the entire banking sector of a country. If not curbed by government intervention, this kind of crisis can result in the collapse of the entire financial system and an irretrievable loss in bank savings.16 Other events have stimulated economists’ interest in monetary issues. The emergence of crypto-currencies or the development of local complementary currencies have shown that the nature of money could also be questioned, and that other payment or savings mechanisms could emerge and compete with traditional banking systems. Further, the academic world increasingly recognised that monetary systems raised many issues that had been neglected by monetarist thinking. Among heterodox economists, this renewed intellectual interest in monetary issues took the form of a new approach called the Modern Monetary Theory (MMT). As formulated by American economist Stephanie Kelton in The Deficit Myth, MMT is not an original theory as such, rather a new way of defining the relationship between states and money (Kelton 2020).17 To put it briefly, this approach is based on two main principles. The first states that since contemporary money is no longer linked to a real asset such as gold or silver, there is no longer a limit to the power of money creation. The second principle is that the exclusive issuer of this money is the central bank, which is part of the state.18 It follows from these two principles that a state cannot go bankrupt and that it does not need to find revenues to cover its expenses since it can finance itself through its own central bank. At the outset of her book, Kelton makes it clear that her theory is only valid for monetary sovereign states, meaning states that are mainly financed by domestic savings. This excludes developing countries with externally dependent financial systems as well as European countries belonging to the Eurozone. Her book

Monetarism: One pillar of the neoliberal system  37

also underlines that this theoretical affirmation of the state being able to finance itself without limit does not mean that there need be no constraints on public spending. Rather, this limit must not be determined financially but should emerge from the real economy. According to her, excessive government spending can indeed divert jobs and resources from the private sphere to the public sphere, thereby reducing the availability of the market supply of goods and services. In the long run, such a situation can lead to inflation and adversely affect the purchasing power of households. Hence, for Kelton, although taxes would no longer be necessary to finance the budget, as the latter could be financed without limit by the central bank, they would remain a necessary public policy tool. By reducing the overall purchasing power of households, taxation limits inflationary pressures. Moreover, a well-thought-out tax policy could direct household consumption towards socially or ecologically useful products, for example by taxing the most polluting consumption or by granting tax credits to households that renovate their homes. Finally, taxation and redistribution can also be used as tools to redress economic inequality and uplift the most economically vulnerable sections of society. When MMT’s approach is taken to its logical conclusion, it becomes clear that public debt and deficits are not as important as they appear in the public imagination. Public debt, Kelton explains, is not of a profoundly different nature from money creation by the government, but can be understood as a particular kind of money that earns interest. Public debt is always sustainable since governments can refinance it from the market at any time by buying it back via their central banks. Similarly, according to her, the fact that part of the public debt is held by foreign governments should not be seen as an obstacle since the state can always finance itself. On the whole, Kelton downplays the problems of external imbalances. If a country runs trade deficits and goes into foreign debt she states, this only proves the rest of the world has an interest in holding assets denominated in its currency and that these other countries are willing to pay for these assets by exporting goods and services produced by their labour. Thus, running a trade deficit is not an issue for Kelton, especially if the state can compensate for the corresponding loss in employment. MMT reverses monetarist logic and reasoning. It argues that it is fiscal rather than monetary policy that causes inflation; that the problem is not so much the increase in the money supply as the shortage of supply of goods and services. S­ imilarly, the crowding-out effect between the public and private sectors would not be a matter of finance, but of the real economy. Indeed, from the point of view of MMT, as long as there are unemployed people to hire, public spending is not likely to be at the expense of the private sector since the existence of unemployment demonstrates that available productive resources have not been used by the private sector. Employing these unemployed and making them produce socially useful services is therefore not a cost but, on the contrary, a form of wealth creation. This last observation leads Stephanie Kelton to argue that MMT could eradicate unemployment. To accomplish this lofty objective, the American

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government would simply have to introduce a “Federal Job Guarantee” that consists of hiring, for a socially useful occupation, any unemployed person who wishes to work.19 Above all, MMT allows for a rehabilitation of fiscal policy and demonstrates the importance of discretionary public interventions in the economy. Thus, in contrast to monetarist principles, Kelton defends the usefulness of interventionism and argues that the economy needs to be politically steered in this way. Although MMT proposals are intellectually stimulating in the way they upend monetarist logic, they are not unanimously accepted, even among opponents of monetarism. For example, the Keynesian economist Henri Sterdyniak, a member of the French economists’ collective of the Économistes atterrés, offers an interesting critical analysis of MMT on his blog (Sterdyniak 2021). According to him, Stephanie Kelton fails to specify that her theory is only valid in periods of underemployment. Indeed, in a full-employment economy, an economy where the unemployment rate would be around 2%, the question of the state’s ability to source unlimited financing from its central bank would arise. While the central bank can issue an unlimited amount of money, public spending cannot find an unlimited number of productive resources and people to hire. Thus, in a situation of full employment, public spending would have to be rationed to avoid weighing on the activity of the private sector. In such a context, it is therefore no longer possible to argue, as she does, that the social needs she describes in Chapter 7 of her book can all be financed by more public spending. What is possible in an economy with underemployment (hiring the unemployed to develop a particular economic sector) becomes impossible once full employment is reached, unless the resources of the private sphere are restricted. But a restriction of market production would necessarily lead to a decrease in household purchasing power which might not be socially accepted. The question of trade-offs and social choices, set quickly aside in the early part of the book on the pretext that any public expenditure can be financed by the central bank, reappears at the end because of the introduction of the Job Guarantee, the disappearance of unemployment, and a resulting inability to increase the productive capacity of the economy. Moreover, using public employment as a mechanism to stabilise unemployment would be extremely fastidious to implement in practice. It would require the state recruiting in periods of underemployment, and then parting with some of these people in periods of full employment and inflationary pressure to allow the private sector to recruit them. This could lead to several problems. On the one hand, there would be no guarantee that these people would then have the skills required by private companies. On the other hand, the services provided by the dismissed people would no longer be provided, which may cause difficulties especially if, as Kelton proposes, the people hired under the Job Guarantee happen to work in the care sector. More fundamentally, Sterdyniak notes that the vision proposed by Kelton is incomplete. Firstly, by focusing on the role of the central bank as a money-issuing

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institution, it overlooks the key role of banks and bank credit in the money ­creation process. Similarly, the role of financial markets and the constraints of globalisation are underestimated. Contrary to Kelton’s assertions, it is possible for a monetarily sovereign state to find itself unable to finance its expenditure if it loses the confidence of financial markets. Its currency may come under speculative attack, there could be a flight of capital and a rise in interest rates for both the public and the private sector. If Kelton’s analysis were true in any context, the UK would never have needed to call on the IMF in 1976. Another oversight of MMT is that it reasons as if the central bank and monetary policy were directly supervised by the executive power. But as we have seen above, this is an incorrect assumption. For instance, Kelton explains in her book that the interest rates at which the government borrows could be controlled by the central bank and kept below the growth rate so that the public debt remains sustainable (Kelton 2020, Chapter 3). For this to be possible, the central bank would have to make the management of public debt part of its mandate. Otherwise, the economy could find itself in a situation where controlling the cost of public debt would require low interest rates, while high inflation would mean raising those same rates. Faced with such a dilemma, a contemporary central bank would necessarily arbitrate in favour of the inflation reduction objective. Therefore, as long as central banks act independently and according to a mandate centred on price stability, it is not correct to say that governments can finance their expenditures without limit. To be implemented, MMT requires a change in the institutional framework by which economic policies are decided. Instead of being entrusted to an independent authority, monetary policy would have to be legislated alongside fiscal policy in parliaments, in a naturally complementary manner. Finally, the last limitation of the MMT approach concerns monetary sovereignty, which Kelton posits as a principle of her theory, without explaining all its conditions in detail. Indeed, her book is essentially about the United States and the dollar is a very unique currency, in the sense that it is the leading reserve currency for central banks around the world and the preferred instrument for international transactions. Unfortunately, other countries in the world cannot count themselves so lucky. Even a monetarily sovereign country can find itself in a situation of financial and commercial dependence vis-à-vis foreign countries. The country’s trading partners may reject securities issued in a currency in which they have lost confidence, in which case the central bank may have to manage speculative attacks or defend its currency, thereby impeding its ability to finance public spending and lower interest rates to meet the needs of its economy. The fundamental task of MMT should not be to solve public financing constraints by claiming that they do not exist. It should be to explain how to create the conditions for true monetary sovereignty in any country whose currency is not the US dollar. This task is theoretically simple, but practically very delicate as it would require limiting the openness of national economies, i.e., introducing protectionist policies to reduce foreign trade and produce more locally. It would also be necessary to introduce exchange controls to avoid any flight of capital

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and direct national savings primarily towards domestic investments. In short, it would be necessary to de-globalise, to partially isolate national economies from international commercial and financial circuits. Without relative economic isolation, it is difficult to make MMT a feasible solution for most countries. However, the fact is that the economies of most developed countries are deeply integrated into the global economy. Thus, even if European countries, for instance, decided to dismantle the Eurozone and revoke the single currency, their high degree of openness would mean that their monetary sovereignty would be very limited, making the implementation of MMT proposals largely unworkable. And it is even possible to question the relevance of MMT for the United States, where most major companies are now largely integrated into global markets. Admittedly, a speculative attack against the dollar is unlikely, as demand for US securities is almost unlimited. However, a sharp fall of the dollar on the foreign exchange market is possible, as is a rise in the price of certain components or imported commodities. In such a scenario, the United States could still find itself, as in the late 1970s, in a situation of underemployment, high inflation, and rising raw material costs, making MMT’s proposed solutions tricky.

What alternatives to monetarism? The point to note from the above analysis is not that MMT is of no practical or theoretical interest, but rather that it is not a panacea that would miraculously solve all the economic difficulties of a country. It is, in fact, only a partial solution that requires very specific conditions to be implemented. This is true of all the alternative policies to monetarism presented above. None of them is entirely satisfactory. To be truly operational and credible, they all lack an element that only monetarism has: a symbiotic relationship with the general functioning of the society. A policy is truly practicable only if it is implemented within an appropriate institutional framework, that is, if it is consistent with the set of formal and informal rules that contribute to the organisation of social behaviour. Contrary to the belief of many contemporary economists who study society on the basis of individual behaviour, social and economic life does not result from a simple combination of individual acts. If this were the case, there would simply be no society. Each person would act autonomously without coordinating with others, or else it would be necessary to enter into ad hoc agreements with each person one wishes to collaborate with. The role of institutions is to organise the coordination of behaviour over time. ­Institutions are primary. They define the limits and conditions of all possible behaviour. Individuals then choose their behaviour within this institutional framework. There are two main kinds of institutions. Legal and juridical institutions are those of which we are aware of and on which we can act directly. The laws and treaties that have established the independence of central banks, for example, are

Monetarism: One pillar of the neoliberal system  41

formal institutions. Since MMT is contrary to their rules, it cannot determine monetary policies without first changing them. This issue does not raise much debate. Everyone, including MMT supporters, agrees that such a change would be necessary.20 Cultural and ideological institutions correspond to ways of doing things, to habits. This second kind of institution constitutes an even more extensive framework than formal institutions. Its influence on our lifestyles is very important. The weekend, for example, is an institution not provided for by law. In most countries, the law states that employees should have a weekly day of rest. It sets the preferred day, most often Sunday, but says nothing about giving a second day off on Saturday, which is legally a working day like any other. In fact, the tradition of the two-day weekend only gradually took hold in the United States between the two World Wars, before being exported to the rest of the world. This practice originated in the manufacturing sector with the introduction of the assembly line, when it became important to increase worker loyalty and limit turnover by compensating them in some way. The tradition of the weekend then gradually extended to management and services. It should be noted that, although the Saturday and Sunday weekend is an informal institution in most professions, it is far from being generalised. It does not exist, for example, in commerce, tourism or catering. Other informal institutions, even less noticeable, influence ways of thinking, ideologies, values and perceptions. When Democrat Senator Mark Warner tells the Washington Post that attacking central bank independence would be contrary to the rule of law, he is clearly stating a deep conviction shared by many of his peers. In this regard, Stephanie Kelton gives a very convincing account of the difficulties she encountered when trying to explain the logic of MMT to senators. Both ­Democrats and Republican senators were unable to grasp that states do not, in fact, need to manage their finances like households and that the question of its solvency does not therefore present itself in the same way (Kelton 2020: Chapter 3). Neoliberal thinking is not only engraved in formal institutions, in the texts of laws, constitutions, and the functioning of certain administrations, but is even more strongly embedded in habits, perceptions, and ideologies. The challenge of implementing the solutions proposed by MMT is therefore not only that laws should be changed to re-politicise the management of money, but also that S­ enator Warner must be convinced that giving up the independence of the Federal Reserve is not incompatible with the rule of law and that, on this point, Donald Trump was perhaps not entirely wrong when he asked for the dismissal of Jerome Powell. For one cannot be both here and there at the same time. You cannot want to break with monetarism, defend the idea of a re-politicisation of monetary policy, and also simultaneously take offence at a president wanting to have a say in central bank policy. The problem with alternative policies that aim to break with monetarism such as MMT and Helicopter Money is that those who have conceived them do not have a comprehensive theory of how institutions work. As a result, they are

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unable to articulate their proposals within the current framework or to propose a clear narrative on how to transform that framework to make their policies feasible. More broadly speaking, an approach that has not deeply considered the influence of institutions on behaviour is doomed to be relegated to the sidelines. One cannot reason from a blank sheet of paper and on the basis of purely abstract models that do not take into account the pre-existing rules and general functioning of society. In Chapter 3 of Populism and Neoliberalism, I developed a similar critique towards the proposals of Thomas Piketty (2014, 2020) or those of Emmanuel Saez and Gabriel Zucman (2019). Like Emmanuel Saez and Gabriel Zucman, Piketty intends to correct the effects of the distribution of wealth through taxation alone without questioning how resources are organised and distributed in the first place. [...] Indeed, as far as Piketty is concerned, and this is his big difference with Polanyi, the way the market works, the competitive organisation of the economy, the fact that social institutions are subject to market imperatives, do not seem to pose any real problem. (Cayla 2021: 145, 147) What is missing in MMT, and more broadly in alternative monetary policies, is a broader reflection about the place of the market and its role as a social institution. For example, the proposal to issue helicopter money to households and businesses implies increasing the consumption power of private agents. Politically, this promotes market production to the detriment of non-market production. Conversely, if money is issued to support public spending, the exact opposite occurs, and the non-market sector is valued at the expense of the market sector. Finally, if, as Kelton proposes, the level of public spending and employment is adjusted according to the needs of the private sector, non-market production becomes a substitute for market production, which is not without its own political and practical problems. But the fundamental question is that these three proposals, which are profoundly anti-monetarist, are also contradictory to each other in their relationship to the market. If one decides to reintroduce politics and discretionary measures into monetary management, one must also set out the principles according to which such intervention is justified, and ask oneself how these measures will alter major socio-economic equilibria. The great ideological strength of the neoliberals comes from the fact that they have thought about institutions, and that their thinking includes not only reflections on the legal and formal framework within which the markets must operate but have also succeeded in profoundly changing ways of seeing, ideologies, and modes of thinking. In the neoliberal way of thinking, monetarism has a central place. But ultimately, it is only one pillar of a more comprehensive overall approach. Monetarism

Monetarism: One pillar of the neoliberal system  43

is a cog – but it is only a cog – in a much larger machinery. Therefore, if we ­follow the recommendations of the economists that are hostile to monetarism and remove this cog without replacing the whole gear system, we will have caused the whole machine to break down without having an alternative machine to offer as replacement. Having reached this stage of reflection, and before resuming the study of monetarism, it is necessary to take a step aside and study neoliberal machinery in its entirety, to both understand its system of reasoning and the internal logic by which it is driven. We will then look at how neoliberal institutions were set up and infer some of the causes of the current impasse.

The neoliberal way of thinking Contrary to what Joseph Stiglitz and Dani Rodrik write, the neoliberal worldview is not “market fundamentalism”. It is not based on a dogmatic belief in the efficiency of markets, but on the idea of their imperative necessity. In the neoliberal way of thinking, the role of markets is not, as one might naively believe, to facilitate trade and economic exchange within a population, but to allow for the coordination of behaviour between individuals who have specific resources, different needs or conflicting goals. In his book, Economics of the Common Good, published in 2017, French economist Jean Tirole, winner of the 2014 Nobel Memorial Prize in Economic Sciences, summarises how he sees the role of the market: An essential question in organizing societies is how to manage the scarcity of goods and services that we all want to consume or possess, in rivalry with other people’s demands [...]. Historically, scarcity has been managed in many ways: queues when there are shortages of vital goods such as food or gasoline; drawing lots for green cards, concert tickets, or organ transplants; distributing goods administratively to priority groups; fixing prices below the level that would balance demand and supply. Scarcity is also managed by corruption, favoritism, violence, wars, and, finally, by the market. The market, then, is only one of many ways to manage scarcity. (Tirole 2017: 24) The central idea of this quotation is that the role of the market goes beyond the question of the simple organisation of exchange. It is not simply a way for individuals to freely negotiate prices and move goods around; rather it is a way of organising society and a system of resource allocation. Another way of organising the distribution of resources could have been, for example, to let people collectively debate their own objectives and to settle this debate democratically. But this solution, Tirole explains, would not be optimal. Indeed, “the state hardly ever has the information it needs to make allocation

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decisions by itself. That does not mean the state has no room to maneuver, but it has to accept its limits” (Ibid.: 28). The limits, therefore, emerge from a difficulty with having perfect and equitable access to information. The state – and by this is meant the politically organised citizenry – would not be able to decide how to manage and allocate resources in the best possible way. A political choice, even if it is informed by competent experts, even if it is produced through a fully functioning democratic procedure, cannot be optimal. Why not? Well, says Tirole, because such choices would necessarily be based on incomplete information about the needs and resources available to society. Why does Jean Tirole make this statement? Why wouldn’t a democratic decision be more legitimate and more effective in deciding on the distribution of wealth than a process of market exchanges organised in a decentralised manner? To understand this, we need to go back to an important economic controversy that opposed economists during the 1920s and 1930s and that is fundamental to neoliberal thinking: the debate on economic calculation in socialist economies. Initiated by an article published in 1920 by the Austrian economist Ludwig von Mises, the question posed was whether the planned economy of the Soviets, where the allocation of resources is decided in a political and centralised manner, could be efficient or not (Mises 1920). For Mises, the answer was clear: socialism cannot claim economic rationality. Indeed, even before deciding on a form of distribution, an economic system must be able to determine how many and what kinds of resources to produce. To make these choices, it would have to know the preferences of the population. How could this be done? In a market economy, the best way to find out what people need is to observe trade. Thus, explained Mises, if people spontaneously exchange five cigarettes for one cigar, it is easy to measure the relative value between cigars and cigarettes, expressed by their respective prices. It is possible to gauge the trade of consumer goods in a socialist economy because these are resources that households can freely buy and resell. Thus, if it is found that in trade the value of a cigarette is five times lower than that of a cigar, the price ratio between these two products in state shops will have to be one to five. This will make it fairly simple for the central authority to establish a price system that corresponds to the needs of the population. However, Mises continues, this is not the case for productive goods, for machines, raw materials, and factories that manufacture consumer goods, and which in economics are called capital. In the Soviet economy, production units were fully socialised and belonged exclusively to the state. As a result, the exchange of production goods was organised between non-independent enterprises. This means that there was no market exchange for these goods, and therefore their relative values could not be expressed by market prices. Mises believed that the socialist economic system is, in a way, hemiplegic. It can correctly measure social needs by observing purchase and trade behaviour among the population, but it cannot correctly assess the cost of producing these

Monetarism: One pillar of the neoliberal system  45

goods. “In the economic system of private ownership of the means of ­production,” he writes, “the system of computation by value is necessarily employed by each independent member of society. Everybody participates in its emergence in a double way: on the one hand as a consumer and on the other as a producer” (Mises 1920: 20). But in a socialist regime based on state ownership of the means of production, the objective elements that would make it possible to calculate the cost of production do not exist. Yet, “Without economic calculation there can be no economy” (Ibid.: 18). Thus, for Mises, socialist intellectuals do not realize that the bases of economic calculation are removed by the exclusion of exchange and the pricing mechanism, and that something must be substituted in its place, if all economy is not to be abolished and a hopeless chaos is not to result. (Ibid.: 40–1) In response to Mises’ criticism, proponents of socialist planning argued that, in the absence of a market, a socialist administration could make trial-and-error price adjustments or rely on statistics to calculate production costs (Taylor 1929, Dikinson 1933). The question of socialist distribution, they argue, would be to politically organise the balance of supply and demand of all resources, which could very well be done without the natural imperfections of the market subject to the law of monopolies and the irrationality of private agents. This system would have another advantage: unlike market capitalism, in which companies act according to a local and circumscribed vision based on private interests, planning is based on an overarching vision of the economy put at the service of the long run and the general interest. It was in the context of this controversy that Friedrich Hayek raised the issue of information in support of Mises’ position. If the problem of economics were simply to collect data on the socio-economic context in order to plan production and the allocation of resources, then indeed, he explained, this could well be left to the state and all problems could be dealt with by experts capable of solving complex equations, provided this were technically possible. But beyond the technical issue, there is an information issue. Indeed, two kinds of data must be distinguished. The “objective” data – the statistics – are those that economists work with and on which they rely to analyse the economic system. But there is also “subjective” data, which is what households and firms have in mind and which guides their behaviour. Now, “the question why the data in the subjective sense of the term should ever come to correspond to the objective data is one of the main problems we have to answer” (Hayek 1937: 39). In fact, for Hayek, there is no reason to believe that the world viewed from statistics is consistent with the world actually experienced by the people. Thus, the balance between needs and national production that economists seek to resolve may well be different from the balances between means and ends that people who actually participate in economic life wish to achieve. This discrepancy is all the more important because knowledge is dispersed in society

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and only a tiny fraction of it, objective data, is likely to be transmitted to a central authority, while an important part of knowledge which is implicit and only ever inside people’s minds is never recorded. Hayek believes that this situation makes it impossible to calculate the optimal allocation of resources, because no one, neither the state nor individuals within a population, have all the relevant information to make this calculation. It is the dispersed nature of information and the impossibility for any one mind to perfectly access and retain it all which explains why the market becomes absolutely indispensable. Indeed, it is through price changes that information circulates in society. Any change in the price of a resource sends out a signal that modifies the subjective data available to economic agents, which allows them to adapt their behaviour. In short, “we must look at the price system as such a mechanism for communicating information if we want to understand its real function – a function which, of course, it fulfils less perfectly as prices grow more rigid” (Hayek 1945: 526). Let us summarise. Jean Tirole’s claim that the state is not capable of efficiently allocating economic resources because it lacks the necessary information is a corollary of the theory of Hayek and Mises. According to this theory, market prices are essential instruments, as they perform two main functions. The first is to reveal subjective information. In a market, each individual decides to buy, invest or undertake according to his or her perception of economic opportunities. Through their behaviour, these individuals reveal some of the information available to them. The combination of these personal choices is thus transmitted to the economy. If several people simultaneously decide to acquire a resource, this resource will become scarcer, which results in a price increase. This increase signals to other people an increase in scarcity. They may then decide to bring additional units of that resource to the market to take advantage of the price increase, or they may decide to substitute a cheaper resource. In other words, not only does the market convey information, but it rewards those who use this information to adjust their behaviour. The second function of market prices is to create an incentive mechanism that balances supply and demand and benefits the common good. This is precisely what Jean Tirole explains: [P]eople react to the incentives facing them. These material or social incentives, combined with their personal preferences, define their behavior; and this behavior may or may not be in the general interest. The quest for the common good therefore involves constructing institutions to reconcile, as far as possible, the interests of the individual with the general interest. From this perspective, the market economy is not an end in itself. At most, it is an instrument – and an imperfect one at that – when we consider how to align the common interest and the private interests of individuals, social groups, and nations. (Tirole 2017: 3)

Monetarism: One pillar of the neoliberal system  47

The market is an institution that serves to inform and coordinate individual behaviour through the price mechanism. This market is “an imperfect instrument,” writes Tirole. But it is an indispensable instrument for this coordination. We can conclude from this that the state must intervene to complete, supervise, and improve its functioning.

The market as a social institution As we discussed above, a social institution is what enables a group of individuals to coordinate with each other. Institutions are the foundation of societies. Some of these institutions are intentionally established to meet a specific social need. This is the case, for example, of the national education system or the army. ­Others, on the contrary, emerge spontaneously through processes of imitation and learning. This is the case with language, culture, social habits, or the weekend. All institutions are based on rules. Rules that are created specifically for coordination within an organisation or a country are formal rules. Other rules emerge from habits and processes of imitation and are informal rules. For centuries, most economists believed that the market, the place where we negotiate and exchange goods and services, was an institution that emerged spontaneously and whose rules were the product of a spontaneous social mechanism. For example, for Adam Smith (1723–1790), exchange is a natural behaviour unique to human beings. Smith writes: Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by his gesture and natural cries signify to another, this is mine, that yours; I am willing to give you this for that. (1776 [2007]: 15) In the view of Smith and the classical liberals, the market is a natural institution and does not need to be organised by the state. For some liberals, the state’s involvement in the economy should be restricted as much as possible to avoid distorting its functioning. This is the principle of laissez-faire, defended by 19th-century Manchesterian liberalism.21 Neoliberals explicitly broke with this tradition by postulating that the market could only function within a specific legal framework. For neoliberals, the market is not a natural institution. As early as 1936, lawyers and economists of the Freiburg school insisted on the importance of the legal framework for the functioning of markets. In the manifesto they wrote at the time, they put forth the concept of an “economic constitution”, underlined the importance of bankruptcy laws and asserted that it was the responsibility of the state to ensure that competition is not allowed “to degenerate into truly unfair competition” (Böhm et al.: 24). The same idea was at the centre of debates at the Lippmann Colloquium of 1938, which included Hayek, Röpke and Mises. The second principle

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of the “Agenda of Liberalism”, the concluding text of the colloquium, which states the main ideas of neoliberalism, explains that… …the positions of equilibrium that are established in markets are affected, and can be influenced in a decisive manner by the laws of property, contracts, groupings, associations, and collective moral persons, patents, bankruptcy, currency, banks, and the fiscal system. As these laws are the creation of the State, the responsibility is incumbent on the State to determine the legal system that serves as framework for the free development of economic activities. (Reinhoud and Audier 2018: 177–8) It should be emphasised that what unites neoliberals is the rejection of the ­laissez-faire doctrine. Each of the three schools of neoliberalism (the Chicago school, the Freiburg school and the Austrian school) is based on the assumption that the market cannot function naturally, and that the state must intervene to create the institutional framework necessary for its proper functioning. But what exactly does it mean for markets to function well? Is it just the fact that buyers and sellers can freely trade and negotiate at the prices they want? From the neoliberal point of view, a more precise definition of a well-functioning market is one where competition exerts a constraint that reduces the ability of economic actors to influence prices almost down to zero. Therefore, a market is said to be efficient insofar as it brings out relevant prices, prices that reflect all available information and in which everyone participates. Once prices have been established, they act as an incentive system. High prices induce suppliers to offer more goods, while encouraging buyers to withdraw from the market and look for alternative consumption options. Thus, market prices adjust supply and demand by allowing for the decentralised coordination of the behaviour of all individuals and actors in an economy. As long as the state does not disrupt this mechanism and is brought to act only to support, correct, or supplement it, the market institution can take advantage of all available information and eventually succeed in coordinating the wants and needs of all individuals by optimally allocating resources. Figure 2.1 sets out the framework of this neoliberal reasoning. The active role given to the state in organising markets is unique to this view. This role includes, of course, regalian functions, the protection of goods and citizens, the definition of property rights and the management of public goods that cannot be provided by the private sector. But the economic role of the state does not end there for neoliberals. The state must also preserve competition and manage externalities such as pollution.22 Sometimes it may also have to introduce specific regulations to limit practices that may distort the market. In short, if the market is a game, the state is the referee and supervisor. As a referee, it must establish clear rules. But, more importantly, it must avoid playing for the players. Monetarism fits into this general framework of thought since it is ultimately a doctrine that aims to make the state the neutral arbiter of monetary policy.

Monetarism: One pillar of the neoliberal system  49

FIGURE 2.1 

Schematic representation of the neoliberal logic.

Monetarists do not say the state should not be involved in money at all. Even Hayek admits that private currencies introduced under a free banking regime would have to be supervised by the state to prevent fraud and to regulate its proper functioning. In short, it is not possible to move away from monetarism without thinking more broadly about the role of the state, and without considering alternative ways of organising the economy. Once one concedes that the state should not simply be a neutral supervisor of money and that the government may use monetary policy in a discretionary manner to influence the economy, one must also admit that the state could use this right to intervene directly in many other markets. Why should interest rates be decided politically, for instance, but not other prices? And if one accepts that the state could set prices in the place of markets, how far can we follow this logic and how then do we address the problems of economic calculation raised by Mises? This question becomes all the more important given that our institutions and the ways of thinking of experts and economists implicitly take for granted that a market economy is primarily a system in which prices are determined by competing markets, not merely a space that guarantees the free exchange of goods and services. However, this has not always been the case. In fact, it could be argued that before the 1970s this was not the case at all. Many prices then were largely administered by political authorities in a way that seemed perfectly natural for the time. It was not until the 1970s, and even more so in the 1980s and 1990s, that the logic was reversed. It is this history that we must now study.

Notes 1 Laurence Ball and Gregory Mankiw argue that the NAIRU is almost synonymous with the natural rate of unemployment: This concept follows naturally from any theory that says that changes in monetary policy, and aggregate demand more generally, push inflation and unemployment in opposite directions in the short run. Once this short-run tradeoff is admitted, there must be some level of unemployment consistent with stable inflation. (Ball and Mankiw 2002: 115)

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2 “Volcker Asserts US Must Trim Living Standard”, The New York Times, Oct 18, 1979. 3 Interview by Charlie Rose on Dec. 26, 2005, available online at: https://charlierose. com/videos/19192. The quoted passage is at 19’45’’. 4 “Alan Greenspan; Swimming with Sharks”, 60  minutes, season  39, episode  49, ­broadcast on Sep. 17, 2007. 5 Perhaps the most famous case of a questionable study reinforcing the legitimacy of the neoliberal doxa is by American economists Carmen M. Reinhart and Kenneth S. Rogoff. In an article published in 2010 in the prestigious American Economic Review, the authors claimed to have demonstrated, based on statistical and historical analysis, that countries with public debt exceeding 90% of GDP experience a decline in economic growth and an increase in inflation (Reinhart and Rogoff 2010). A few years later, Thomas Herndon, a student at the University of Massachusetts at Amherst, tried to replicate the results and found that the study had significant errors and a selection bias. He and two of his professors published a paper in a much less prestigious journal that concluded: The full extent of their mistakes transforms the reality of modestly diminished ­average GDP growth rates for countries carrying high public debt levels into a false image that high public debt ratios inevitably entail sharp declines in GDP growth. Moreover, as we show, there is a wide range of GDP growth performances at every level of public debt among the 20 advanced economies that RR survey. (Herndon et al. 2014: 277) It is noteworthy that despite this rebuttal, the American Economic Review has not withdrawn the disputed article and has not issued a corrigendum. 6 Apart from Donald Trump, all US presidents have followed this rule for over 40 years. In 1983, Ronald Reagan reappointed Democrat Paul Volcker; Bill Clinton twice confirmed the mandate of Republican Alan Greenspan; Barack Obama reappointed Republican Ben Bernanke. And in 2021, Joe Biden confirmed Republican Jerome Powell as head of the Federal Reserve. 7 “Trump Steps Up Attacks on Fed Chairman Jerome Powell”, The Wall Street Journal, Oct. 23, 2018. 8 “Trump Discusses Firing Fed’s Powell after Latest Rate Hike, Source Says”, Bloomberg, Dec. 21, 2018. 9 “Exasperated Over the Market Plunge, Trump Asks Advisers whether He Can Fire Federal Reserve Chairman Jerome Powell”, The Washington Post, Oct. 22, 2018. 10 “Trump Redoubles Attacks on Fed Chair, Saying ‘I Made Him’”, The New York Times, Jun. 26, 2019. 11 “Trump Calls for Fed’s ‘Boneheads’ to Slash Interest Rates below Zero”, The New York Times, Sep. 11, 2019. 12 “The Unorthodox Theory behind Erdogan’s Monetary Policy”, Al Monitor, May 24, 2018. 13 Central bank money refers to the “monetary base”, the money that circulates in the interbank market. See Figure 1.1. 14 “Cancel the Public Debt Held by the ECB and ‘Take Back Control’ of Our Destiny”, Euractiv, Feb. 8, 2021. 15 “EXCLUSIF. La présidente de la BCE, Christine Lagarde: ‘2021 sera une année de reprise’”, Le Journal du dimanche, Feb. 2, 2021. 16 We shall return to the systemic crisis of 2008 in Chapter 5. 17 According to the French economist Henri Sterdyniak, MMT is an updated version of the functional finance of Abba Lerner (1903–1982). This filiation is recognised by Stephanie Kelton (Sterdyniak 2021). 18 A distinction should be made between the issuing of money, i.e., introducing new banknotes into circulation and refinancing banks, and money creation, which is the introduction of additional money into the real economic sphere.

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19 A similar concept was presented in season 3 of the American series House of Cards, which aired in 2015. 20 We shall see, in Chapters 5 and 6, that even though central bank mandates were not changed, central bank practices have nonetheless changed significantly following the 2008 crisis. We shall see, however, that this new institutional balance remains fragile and contested. 21 It should be noted that Smith is far from being a staunch supporter of laissez-faire and that he accords an important role to the state in maintaining economic equilibrium. On Manchesterian liberalism and the debates within the classical liberal school see Cayla (2021: 64–78). 22 In economic theory, externalities represent the unintended effects of an economic relationship that affect a third party. Externalities can be negative, for example when an activity pollutes; or positive, when they benefit others. An example of a positive externality is when a student invests in his or her education, because firms also ultimately benefit from a qualified labour force. From a neoliberal point of view, these externalities should be regulated by the state, for instance by taxing negative externalities and subsidising the positive ones.

References Ball, Laurence and Gregory N. Mankiw (2002), “The NAIRU in Theory and Practice”, Journal of Economic Perspectives, Vol. 16, No. 4: 115–136. Blanchard, Olivier, Jonathan D. Ostry, Atish R. Ghosh and Marcos Chamon (2015), “Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence”, IMF Working Paper WP/15/226. Böhm, Franz, Walter Eucken and Hans Grossmann-Doerth (1936), “The Ordo M ­ anifesto of 1936”, in Peacock, A. and Willgerodt, H. (eds.), (1989), Germany’s Social Market Economy: Origins and Evolution, London: Palgrave Macmillan: 15–26. Cayla, David (2021), Populism and neoliberalism, London and New York: Routledge. Couppey-Soubeyran, Jezabel (2020), “‘Helicopter Money’ to Combat Economic ­Depression in the Wake of the Covid-19 Crisis”, Veblen Institute for Economic Reforms, May 2020. Dickinson, Henry D. (1933), “Price Formation in a Socialist Economy”, Economic Journal, Vol. 43: 237–250. European Union (1992), “Treaty on European Union” Official Journal of the European Communities No C 191/2, Jul. 29, 1992. Fillieule, Renaud (2013), “The Explanation of the Subprime Crisis According to the Austrian school: A Defense and Illustration”, Journal des Économistes et des Études Humaines, Vol. 19: 101–36. Fitoussi, Jean-Paul, Anthony B. Atkinson, Olivier Blanchard, John Flemming, Edmond Malinvaud, Edmund S. Phelps et Robert Solow (1993), Competitive Disinflation: The Mark and Budgetary Politics in Europe, London: Oxford University Press. Friedman, Milton (1969), “The Optimum Quantity of Money”, in Friedman, Milton (ed.), The Optimum Quantity of Money and Other Essays, London: Macmillan: 1–50. Giles, Chris (2021), “Why Erdogan’s Unorthodox Turkish Economic Experiment Is Not Working”, Financial Times, Dec. 21, 2021. Hayek, Friedrich A. (1937), “Economics of Knowledge”, Economica, Vol. 4: No. 13: 33–54. Hayek, Friedrich A. (1945), “The Use of Knowledge in Society”, The American Economic Review, Vol. 35, No. 4: 519–530.

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Herndon Tomas, Michael Ash and Robert Pollin (2014), “Does High Public Debt ­Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff”, Cambridge Journal of Economics, Vol. 38: 257–279. Kelton, Stephanie (2020), The Deficit Myth. Modern Monetary Theory and the Birth of the People’s Economy, New York: Public Affairs. Mazzucelli, Colette (1997), “Mind over Maastricht: Leadership and Negotiation in the European Council”, in Mazzucelli, C. (ed.), France and Germany at Maastricht Politics and Negotiations to Create the European Union, New York: Routledge: 173–205. Mises, Ludwig von (1920) [1990], Economic Calculation in the Socialist Commonwealth, trans. S. Adler, Auburn, AL: Mises Institute. Piketty, Thomas (2014), Capital in the Twenty-First Century, Cambridge, MA: Harvard University Press. Piketty, Thomas (2020), Capital and Ideology, Cambridge, MA: Harvard University Press. Ravier, Adrian O. and Peter Lewin (2012), “The Subprime Crisis”, Quarterly Journal of Austrian Economics, Vol. 15: 45–74. Reinhart, Carmen M. and Kenneth S. Rogoff (2010), “Growth in a Time of Debt”, American Economic Review, Vol. 100, No. 2: 573–8. Reinhoudt, Jurgen and Serge Audier (2018), The Walter Lippmann Colloquium: The Birth of Neo-Liberalism, London: Palgrave Macmillan. Rodrik, Dani (2015), Economics Rules: The Rights and Wrongs of the Dismal Science. New York: W. W. Norton & Company. Rodrik, Dani (2022), “Inflation Heresies”, Project Syndicate, Jan. 11, 2022. Saez, Emmanuel and Gabriel Zucman (2019), The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, New York: W. W. Norton & Company. Smith, Adam (1776) [2007], An Inquiry into the Nature and Causes of the Wealth of Nations, Amsterdam: Metalibri Digital Edition. Sterdyniak, Henri (2021), “À propos de l’ouvrage de Stephanie Kelton: ‘Le Mythe du déficit’”, available online on: https://blogs.mediapart.fr/henri-sterdyniak/blog (accessed on May 13, 2022). Summers, Lawrence H. “The Great Liberator”, The New York Times, Nov. 19, 2006. Taylor, Fred M. (1929), “The Guidance of Production in a Socialist State”, American Economic Review, Vol. 19, No. 1: 1–8. Tirole, Jean (2017), Economics for the Common Good, trans. S. Rendall, Princeton, NJ: Princeton University Press. Turner, Adair (2015), Between Debt and the Devil: Money, Credit, and Fixing Global Finance, Princeton, NJ: Princeton University Press.

3 A SYSTEM OF REGULATED ECONOMIES

The war economy: a state-directed economy Modern wars are industrial in scale: they are fought as much by the number of soldiers on the ground as by the capacity of the economic system to equip and supply them. It is not therefore surprising to see governments take control of the economy in times of war to direct and plan its production. A war economy is an economy in which all available resources are directed primarily towards the war effort. This means that the allocation of resources can no longer be left to the market, guided by the needs and wants of consumers. In such a system, the state takes what it needs and leaves the little that remains to the market. This reorganisation of the economy can be done in several ways: in a light-touch and incentive-based form through the fiscal system using taxes and subsidies; in a binding form through requisitions and conscription; or in a restrictive form through rationing. During the Second World War, countries occupied by Germany had to resort to requisitions and rationing to pay off the levies imposed upon them. But such arrangements also existed in non-occupied countries during the war. To keep the armaments factories running and to massproduce the Hurricanes and Spitfires that would defend London during the Battle of Britain, the UK had no choice but to mobilise its workforce and resources en masse, which meant rationing ordinary citizens. In this context of widespread deprivation, enforcing price controls and managing resources centrally was crucial to ensuring that the population could continue to meet its basic needs. Even in a country not directly affected by World War II, administrative planning of the economy and price controls were seen to be necessary. In May 1940, more than a year and a half before the attack on Pearl Harbor, US President Franklin Roosevelt revived the National Defense Council created during World War I to include additional agencies such as the National Defense DOI: 10.4324/9781003253297-4

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Advisory Commission. The main objective of this commission was to advise the government on military procurement. But it also had a secondary objective: to maintain price stability and protect households, which implied exercising extensive state control over the economy.1 In April 1941, Roosevelt created the Office of Price Administration and Civilian Supply. The executive order establishing this agency – whose scope of action would grow steadily during the war to the point where it controlled around 90% of prices – stated that it was created... … for the purpose of avoiding profiteering and unwarranted price rises, and of facilitating an adequate supply and the equitable distribution of materials and commodities for civilian use, and finding that the stabilization of prices is in the interest of national defense and that this Order is necessary to increase the efficiency of the defense program.2 In all developed countries, World War II was a unique economic experience during which capitalist societies did not hesitate to implement policies of economic planning and control that combined military imperatives with social considerations. In the United Kingdom, these considerations led political parties to come together in a grand coalition in 1940. The Labour, Liberal and Conservative parties thus agreed to completely overhaul the British social system. The outcome of this effort was the Beveridge Report, published in November 1942, which proposed the introduction of a social security system that went on to form the basis of the British welfare state after the war. This social planning experiment was condemned by neoliberals, who perceived it as a direct assault on economic freedom. With the publication of his book The Road to Serfdom in March 1944, Friedrich Hayek decried the collectivist path he believed the United Kingdom had embarked upon using the war as a pretext. His book begins with a clear warning: It is necessary now to state the unpalatable truth that it is Germany whose fate we are in some danger of repeating. [...] It is not to the Germany of Hitler, the Germany of the present war, that this country bears yet any resemblance. But students of the currents of ideas can hardly fail to see that there is more than a superficial similarity between the trend of thought in Germany during and after the last war and the present current of ideas in this country. There exists now in this country certainly the same determination that the organisation of the nation we have achieved for purposes of defence shall be retained for the purposes of creation. There is the same contempt for nineteenth-century liberalism, the same spurious “realism” and even cynicism, the same fatalistic acceptance of “inevitable trends”. And at least nine out of every ten of the lessons which our most vociferous reformers are so anxious we should learn from this war are precisely the lessons which the Germans did learn from the last war and which have done much to produce the Nazi system (Hayek 1944: 2–3).

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As Hayek had feared, economic dirigisme did not automatically come to an end with the end of the war. The Office of Price Administration was not formally dismantled until 1947, yet much of the economy remained under the supervision of the US government. In France, the programme of the Conseil National de la Résistance (CNR), adopted in March 1944 and entitled “Les Jours heureux” (Happy Days), called for a new economic system based on “the purging of large economic and financial fiefdoms from the higher echelons of economic administration” and providing for “a rational organisation of the economy ensuring the subordination of individual interests to the greater interest.” Upon Liberation, the CNR programme inspired the actions of the Provisional Government, a coalition dominated by the Gaullists and the Communists. Once in power, it put a definitive end to the era of economic liberalism by carrying out numerous nationalisations, establishing the social security system and setting up the Commissariat général au plan (General Planning Commission) in January 1946, which became the state’s main agency for guiding the development of the economy. French-style planning was based, as in the Soviet Union, on five-year plans. But unlike the USSR, whose plans were binding, French planning was mostly indicative, with policies and objectives that were implemented in consultation with private sector industrialists. In the years following the Second World War, most capitalist economies were only partially liberalised and the state continued to play a key role in the organisation of the economy. For Michel Foucault, this dirigisme stemmed from three driving impulses (Foucault 2008: 79–80). First was the need for reconstruction. Resources that had previously been devoted to the war effort had to be redirected towards the civil society again. This demanded a thorough reorganisation of the economy that could not be executed effectively without strong public sector involvement and backing. Secondly, some form of planning was considered necessary to deal with economic shortages that remained an important issue. The third requirement was social reconstruction, which was clearly one of the priorities of post-war governments. Implementing social objectives required building social systems that did not exist prior to the war or existed only in a partial manner. Here again, state interventions proved indispensable. Moreover, governments were forced to become actively involved in the economy for technical reasons, simply because implementing the funds provided by the Marshall Plan for recovery required national and international coordination on the part of recipient countries. One country, however, decided to turn its back on prevailing dirigiste trends and resolutely embark upon a neoliberal path. That country was the Federal Republic of Germany: the new state that emerged from the rubble of the Reich in 1949 when the sectors occupied by the United States, the United Kingdom, and France were merged into one.

The 1948 gamble: how neoliberalism built the New Germany 1945 was “Year Zero” for the German economy. The scale of the reconstruction effort was titanic, but the material difficulties of the task were complicated by a

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requirement specific to the new state, which was denazification. Denazification meant not only replacing the most compromised leaders at the head of the political and economic institutions, but also changing mentalities and ways of doing things, including how economic policy was conducted. Germany had to rebuild itself entirely, and for this it needed new leaders as well as new doctrines. The question of German economic reconstruction did not actually arise in the immediate post-war period. During the Potsdam Conference, the three great allied powers made the strategic decision to dismantle Germany’s military capacity and industrial infrastructure. In the Soviet zone, this strategy was carried out through a systematic looting of factories. For their part, the Americans implemented the Morgenthau Plan in areas under their control, whose aim was to dismantle industrial capacity by turning Germany into a “pastoral state” which would then be forced to be peaceful. This plan was abruptly set aside in 1947, when an alarming report by former President Herbert Hoover estimated that the process of deindustrialisation could only continue if “25,000,000 people were exterminated or driven away” (Hoover 1947: 12, Reinert 2007: Chapters 7 and 8). Hoover rightly understood that manufacturing and agriculture were complementary sectors of the economy and that destroying the former would only weaken the latter. The report also pointed out that if Germany became unable to feed its population as a result of this plan, the cost would have to be borne by the occupying powers, ultimately representing a very expensive burden for taxpayers.3 In the end, tensions with Moscow and the onset of the Cold War prompted the United States to abandon the plan completely and support German economic reconstruction instead. In the new context, turning future West Germany into a model of what a capitalist, democratic and liberal economy could look like became important for obvious political reasons. Fixing Germany’s economy meant that the US would have to extend the support of the Marshall Plan. Properly allocating American funds and organising the reconstruction required the constitution of an economic administration made up of pre-eminent local personalities. However, there were few competent people who had not fled abroad or been compromised by Nazism during the war. In the academic world, the German Historical School of Economics, which had been influential in the early 20th century, was discredited in part because of the support extended to Nazism by its leading figure, the economist and sociologist Werner Sombart. As a result, the occupying authorities had to turn to the young Freiburg school of ordoliberalism to establish an administration with which they could collaborate. A personality quickly emerged from among its members: Ludwig Erhard. Erhard was appointed Minister of Trade and Industry in the Bavarian government by the US administration in 1946. The following year, he headed the expert committee of the Special Bureau for Money and Credit (Sonderstelle Geld und Kredit) of the Anglo-American Bizone. On June 25, 1947, he was elected as a Liberal member of Parliament in a 52-member assembly responsible for economic affairs. Finally, in March 1948, following the resignation of his predecessor,

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this assembly made him Director of Economic Administration (Verwaltung für Wirtschaft) of the unified economic area of West Germany (Bilger 1964: 210–11). A scientific council chaired by ordoliberal economist Erwin von Beckerath had been set up earlier. At Erhard’s request, this council submitted a report on April 18, 1948, on the economic strategy to be followed. In contrast to the dirigiste practices of the time, the report made a radical proposal: “The scientific council is of the opinion that the function of directing the economic process by means of the price mechanism should be carried out to the greatest possible extent” (Bilger 1964: 211). On April 28, Erhard gave his first speech to the Assembly of the Economic Administration. Despite the members of parliament demands to set up a planning policy to coordinate economic reconstruction as was the case in other countries, Erhard decided to follow the recommendations of the report. In front of a stunned assembly, he announced “the liberation of the economy from state constraints.” “Neither anarchy nor the termite state are valid forms of life. Only a state that establishes both the freedom and the responsibility of its citizens can legitimately speak for the people,” he declared (Ibid.). As Michel Foucault points out, the second part of this quote was less an economic project than a political act. What Erhard was proclaiming in essence was that the German state would regain its legitimacy as a political institution by granting economic freedom to all its citizens. This meant that the future German state was founded on the prior establishment of an economic order. It was a matter of finding a juridical expedient in order to ask from an economic regime what could not be directly asked from constitutional law, or from international law, or even quite simply from the political partners. […] In fact, in contemporary Germany, the economy, economic development and economic growth, produces sovereignty […]. The economy produces legitimacy for the state that is its guarantor. In other words, the economy creates public law. (Foucault 2008: 84–5) Preceding the enactment of the German Basic Law which created the Federal Republic by a year, the “economic constitution” that Erhard began to implement in the purest ordoliberal spirit was the substrate from which the legal constitution would later emerge. As Foucault explains: the market order legitimised the political order. One should not conclude from this account that Erhard’s plan to impose rapid market liberalisation in what was to become West Germany did not meet with any opposition. Introduced in June 1948, the liberalisation of prices sparked severe inflation and deep discontent. In August, the opposition demanded Erhard’s dismissal; on 12 November, a call for a general strike was issued. At each demonstration of discontent, Erhard stood his ground, refusing to make any concessions. After a few months, the economic situation improved. Erhard was

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elected as a member of parliament in the first federal elections of 1949. By virtue of his already great influence, he became Minister for Economics under the first Federal Chancellor, Konrad Adenauer. In his capacity as minister, Erhard showed great determination in implementing ordoliberal principles. He succeeded in imposing free trade and lower tariffs in a country and economy previously marked by protectionism. He guaranteed the independence of the Bundesbank, making the Deutschmark a strong and fully convertible currency. Finally, he committed Germany to a progressive policy of regulation of competition by instituting anti-cartelisation and anti-competitive practices. The end of the 1950s was marked by the privatisation of large public groups. Preussag, an industrial conglomerate, was privatised in 1959; Volkswagen opened its capital to private investors in 1960. Moreover, the state hardly intervened in wage policy, leaving its determination to industry or company negotiations. It was not until 2015 that a federal minimum wage was finally introduced. The only feature of the post-war German economic system that can be said to deviate from ordoliberal principles is the unique system of codetermination, which gives employee representatives the right to participate in the management of companies in specific ways. If codetermination became a distinctive feature of the German model, it was not because of any will of Erhard, who was opposed to it, but rather the consequence of concessions made to the unions in the early 1950s. A first law was passed in 1951 under the pressure of a general strike. It provided for the constitution of a supervisory board in the mining and steel industries with an equal representation of shareholders and employees. Another law passed the following year extending codetermination to other sectors of the economy albeit in a way that was less favourable to worker representatives. The German codetermination system had the effect of strengthening the power of trade unions in society as well as in economy. This strong unionism forced companies to take the interests of their employees into account. This is an important component of the German social model. Codetermination, however, remains in apparent contradiction with ordoliberal principles. Most of the intellectuals of the ordoliberal school saw trade union power as an infringement of property rights and an obstacle to the proper functioning of the labour market.4 Others were more lenient and considered codetermination as a lesser evil that would not be incompatible with the spirit of the social market economy. For the American historian James Van Hook, codetermination could even be considered a “pyrrhic victory” for the unions, in the sense that it allowed them to limit their demands by confining them to the internal management of companies, whereas “the primary purpose of establishing an economic democracy had been to coordinate the overall economy with a socialist ethos” (Van Hook 2004: 256). Despite this important concession, Erhard’s commitment to the principles of the Freiburg School is unquestionable. A skilful and pragmatic politician (he worked with all three of the major German parties), Erhard’s beliefs and decisions were marked by a profound consistency. It is clear that the doctrine that enabled

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Germany to rebuild itself economically, politically and above all ideologically was Erhard’s. For the economist François Bilger, if Erhard was not a party man, he was the Turgot5 of an economic doctrine. It is a rare fortune for a scientific school to have an implementer so faithful to its ideas, a statesman who was both so skilful with the masses and so close to the scholars. (Bilger 1964: 215) It should be noted that Erhard himself was conscious of the legacy he was leaving behind. His aim was to build the doctrinal basis for the New Germany. The statement of this can be seen in this speech, given in 1954 at a session of the Society for Political Economy (Volkswirtschaftliche Gesellschaft): If in past years I have defended the principle of a market economy with a toughness verging on obstinacy, there have been good reasons. Yet at the same time I am aware that the theoretical model of pure competition is not entirely valid everywhere […] I believe that it is thanks to this economic model of our economic order which is behind all my actions that we have been successful. This model remains valid even if on occasion we have had to be prepared, and shall have to be prepared, to abandon it. (Ibid.)

The experience of price controls in the post-war economic boom It is important to note that the German model was an isolated and, more importantly, imperfect experiment. German neoliberalism flourished in a global economy that operated in opposition to ordoliberal precepts. It is probably this particularity that explains its success, because this allowed the FRG to set itself apart from other countries and gain the confidence of industrialists while benefiting from a global economic context where prices were stable and regulated. In all other capitalist countries, including the United States, partial state control of the economy continued for decades. This control was achieved by regulating prices, which were no longer left to the arbitration of markets alone. The most important of these controls was arguably exercised over the financial markets. The international monetary system set up following the Bretton Woods Agreement in 1944 was based on a principle of fixed exchange rates. The dollar was convertible into gold at a rate of $35 per ounce, while other currencies were convertible into dollars, and among themselves, at an officially defined exchange rate. This system allowed for some flexibility. For instance, the exchange rate of a currency could be revised, but the approval of other signatory countries was required if the change in par value exceeded 10%. This monetary system imposed many constraints on the market economy. Firstly, maintaining currency parity meant controlling capital movements and

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maintaining a small trade deficit so that financial flows remained more or less balanced between countries. If this was not the case, either the economy in deficit had to reduce its external deficit through a restrictive monetary policy, which was detrimental to its growth, or the government had to devalue its currency, which was often detrimental to the purchasing power of households and perceived as humiliating to national pride. The only country that could afford to run a persistent trade deficit was the United States, since the US dollar was the reserve currency against which all other currencies had pegged their exchange rates. But doing so meant running the risk of having its trading partners demand repayment in gold for the dollars they held, which would diminish its reserves, jeopardise the convertibility of the dollar... and threaten the survival of the monetary system as a whole. In the world of Bretton Woods, financial markets were also strictly regulated. The crisis of the 1930s had led most countries to separate deposit banks – which collect and manage household and corporate savings – from investment banks – which operate in the financial markets. While investment banks were free to take risks, the activity of deposit banks was subject to strict supervision by monetary authorities. The separation of deposit banks from merchant banks (or investment banks) reduced the influence of financial markets by preventing them from directly accessing the pool of bank deposits. In addition, capital controls restricted the geographical reach of financial markets, which were largely confined within state borders. In such a system, financial markets only marginally influenced the cost of capital. Central banks, many of which were not independent of their governments, controlled most interest rates, while states determined the exchange rates of most currencies. Financial market operations were reserved for a small elite and ultimately affected only a small part of the economy. Government price controls were not limited to the financial sector. Wages and the labour market were also highly regulated. States had three levers at their disposal to control wages. The first was the civil service. Post-war welfare states required a much larger civil service machinery than in the pre-war period. As a result, the state became by far the biggest employer in all developed countries. The wages it offered thus directly influenced private sector wages. The second lever for influencing labour compensation was the promulgation of social legislation governing the functioning of the labour market and the state’s responses to trade union demands over time. The federal minimum wage was introduced in the United States in 1933. Its purchasing power increased steadily after the war and helped to raise wages in the private sector. In France, a minimum wage was introduced in 1950. It was raised significantly after the strikes of 1968 in keeping with the increase in blue collar workers’ wages and indexed to take account of inflation. Germany, as we have seen, did not have a minimum wage. This was also the case in the UK until 1998. But this did not prevent wages from rising in both countries through the influence of trade

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unions and collective bargaining. In the United Kingdom, for example, in the 30 years following the Second World War (1946–1976), real wage income grew 4.5 times faster than in the 30 years preceding it (1908–1938).6 The third lever available to governments to impact wages was relatively informal, and consisted of the pressure and influence they exerted on negotiations between employers and unions. In The New Industrial State, the AmericanCanadian economist John Galbraith (1908–2006) recounts how US President John Kennedy came to establish a mechanism for regulating prices and wages in US industry. [I]n September of 1961, the United Steelworkers, then engaged in contract negotiations with the steel companies, were asked by President Kennedy to hold their demands within what could be granted from productivity gains. And the steel companies were asked to keep their prices stable. [...] Thereafter for several years the wage guideposts, as they came to be called, and the counterpart price behavior were a reasonably accepted feature of government policy. Wage negotiations were closely consistent with the guidelines. Prices of manufactured goods were stable. (Galbraith 1985: 316) For Galbraith, state regulatory action on prices and wages was made necessary by the peculiar functioning of what he called the “planning system” of the post-war boom. His thesis was that contrary to standard economic theory, large industrial firms of the time were not really run by shareholders with a profit-maximisation approach. They were, he explains, under the control of a “technostructure” composed of top managers and engineers whose aim was rather to strengthen their position by expanding sales. Galbraith argues that because large-scale industrial production required extensive planning, shareholders, who could not technically manage this task, had to rely on a technocratic management in exchange for a stable and positive profit, not a maximum one. The problem with this system, Galbraith explains, is that “technostructure sets prices not where they maximise profits but where they best contribute to the security of the technostructure and to the growth of the firm” (Ibid.: 307). Since prices were not set at their maximum level, they could be increased to compensate for possible wage rises demanded by the unions. This meant that prices were unstable and a self-sustaining wage-price spiral could be set in motion at any time. Consequently, Galbraith believed that it was up to the state to organise price regulation for the common good. “The planning system must, by its nature, be subject to external restraint on its prices. As the mature corporation evolves, it can accept and possibly even welcome such restraint” (Ibid.: 313). The last sector in which prices were controlled by the state during the 1950s and 1960s was raw materials. However, a distinction must be made between mining and energy commodities on one hand and agricultural commodities on the other, as the two are not subject to the same rules and constraints.

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Until the early 1970s, industrial commodity prices were generally very low. One important reason for this was that consumer countries largely dominated producing countries in their trade relations. In a world still marked by the effects of colonisation, mining was mostly controlled and organised by powerful ­Western companies. The oil industry was emblematic of this semi-colonial system. Until the 1970s, oil was extracted, processed and transported by a few large companies known as the “Seven Sisters” cartel7 in an oligopolistic manner. To this list, one could add French public or semi-public companies such as Total and the companies that were to become Elf Aquitaine, and the Italian public company Eni (Ente Nazionale ­ Idrocarburi) created in 1953 to supply Italy with hydrocarbons. These companies, whether public, mixed capital, or private, received substantial support from their governments. This support was essential for them to obtain exploitation contracts both domestically and abroad. Often, international exploitation contracts were concluded with former colonised countries in a manner that was still marked by neo-colonial practices and in a context characterised by unequal diplomatic relations. Concession prices were thus kept low and environmental considerations were non-existent. Moreover, there was an abundance of oil and gas due to the relative ease of discovery of new deposits and extraction. All these factors contributed to low energy prices, from which industrialists in developed capitalist countries greatly benefitted. A similar situation prevailed in the markets for coal and other industrial raw materials. Meanwhile, electricity production was strongly regulated by the states, either through public companies with a monopoly (often the case in Europe and Canada), or through public regulatory agencies (as in the United States). The Public Utility Holding Company Act of 1935 in the United States provided for a federal agency to grant territorial monopolies to electricity companies and institute a form of state control over rates and practices. This led to the development of public power producers, often run by state or local governments.8 Overall, in the 1950s and 1960s, the global raw materials market resembled a form of neomercantilism. Following in the footsteps of practices that were prevalent in 17th century Western Europe, the market was jointly organised by states and a few large companies. Prices were negotiated at all levels of the system. Producing countries often did not have the necessary resources or skills to extract their resources by and for themselves and thus sold exploitation rights to their deposits for a pittance. Operating companies were dependent on state supervision to protect their investments and negotiate with the governments of producing countries and thus were subservient to their own governments. This supervision ensured that producing companies kept their margins limited and the prices of raw materials low, allowing Western economies to grow unhindered. Within this largely closed market, however, there were a handful of pioneers who managed to develop independent trade channels from the 1950s onwards. They bypassed the oligopolies of the big companies by concluding trade deals with countries of the Eastern Bloc. However, their activity remained marginal

A system of regulated economies  63

until the 1970s, when the energy and commodity markets were gradually opened up through liberalisation (Blas and Farchy 2021: 22–42).

Agricultural price regulation in the United States The main difference between mining and agriculture is the average size of producers. Unlike mining, which is capital-intensive and therefore only accessible to very large companies, agricultural production traditionally involves a multitude of small family-run farms. Because of this structure, it is not possible to control agricultural prices in the same way as one controls the prices of industrial raw materials by negotiating with a few large producers. Yet, such control proved necessary and was undertaken both in Europe and North America. In the United States, agriculture developed at a rapid pace during World War I. Europe, mired in a long and bloody war, had to rely on American agricultural production to feed its people. It was at this time that the first wave of mechanisation appeared in the North American countryside. Strong international demand and high agricultural prices encouraged farmers to invest. However, once peace was declared and soldiers returned to their home countries, European agricultural production picked up again and world prices collapsed. Many American farmers, who had taken on debt during the boom years, found their incomes declining making it difficult for them to meet their loan repayments. The fundamental problem with agricultural production is that it responds to a price-insensitive demand. Human physiological needs respond imperfectly to price incentives because we need to eat no matter the cost. Consumers may substitute one product for another if the price of a single product rises, buying peaches over apricots whose price may have risen, for instance. But when the prices of all farm products rise at the same time and to the same extent, the demand for food products does not change much. It takes a very large increase in prices for consumers to give up some of the more expensive products and switch to other foods. Similarly, a drop in all agricultural prices does little to change consumption patterns. People do not eat more meals because food becomes more affordable. Instead, they spend the money saved on groceries and meals to buy other goods. The terms “rigidity” or “elasticity” describe this responsiveness of demand to price changes. Rigid demand means that there is little adjustment of demand to a change in price; elastic demand means that there is a demand that responds greatly to price changes. Agricultural markets are thus markets where aggregate demand is rigid, as opposed to conventional markets where aggregate demand is elastic. Figure 3.1 shows how supply shifts when demand is rigid (case 1) or when it is normally elastic (case 2). Let us assume that an innovation allows producers to increase their agricultural yield and lower their cost of production. This would push the supply curve downwards and to the right from S1 to S2. When demand is rigid, the market price (from P1 to P2) drops greatly, but this generates only a small increase in the

64  A system of regulated economies

FIGURE 3.1

The effects of a change in supply in markets with high and low elasticity.

quantity sold (Q1 to Q2). Conversely, when demand is normally elastic, the price falls less sharply and there is a greater increase in quantity sold. In the first case, innovation reduces the producer’s revenue (area A1 is greater than area A 2); in the second, it increases it. This schematic reasoning helps us understand the agricultural crisis in the United States in the 1920s and 1930s, when farmers saw a drop in their sales, even as mechanisation costs were rising. Faced with declining incomes, only those who could mechanise their production to lower costs or produce more could avoid bankruptcy. But mechanisation was a cumulative process. The more the countryside was mechanised, the more agricultural prices fell, the more farmers’ revenues fell… and the more mechanisation became necessary. Those who could not afford to modernise found themselves in the position of the tenant farmers in John Steinbeck’s Grapes of Wrath. They were quickly kicked off the land they farmed and replaced by a salaried farmer who could do the work traditionally done by 12–15 families with a single tractor (Steinbeck 1939). Despite the high social and human cost, this process of agricultural job loss could be beneficial to the overall economy if other sectors were growing and needed to recruit. Rural populations who had to leave the countryside could in theory have found work in the cities and factories to compensate for their lost work. However, when the economy as a whole experiences an employment crisis, this becomes near impossible, as indeed was the case in the 1930s. The low industrial and commercial employment rate made it impossible to absorb labour from the countryside, and it became necessary to alleviate the job crisis through legislation. Attempts to regulate American agricultural markets began in the late 1920s. In 1929, Herbert Hoover passed the Agricultural Marketing Act, which tried to respond to collapsing prices by helping farmers to sell and store their surpluses better and improve coordination between them to avoid overproduction. However, it was not until Franklin Roosevelt became President in March 1933 that government regulation of agriculture reached a turning point. Several

A system of regulated economies  65

agricultural laws were passed during his term. The Agricultural Adjustment Act of 1933 provided for subsidies for farmers who voluntarily reduced their production, facilitated price regulation by facilitating direct negotiations between producers’ associations and processors, and encouraged “good practices” by offering tax incentives. The Act also created a public agency to regulate the agricultural sector called the Agricultural Adjustment Administration. The 1938 law went a step forward by strengthening price regulation. In particular, it proposed defining a pricing regime based on the purchasing power parity of agricultural goods with respect to prices from 1909 to 1914. This marked the beginning of the “parity doctrine”, which formed the basis of American agricultural policy in the following decades. After the war, at the end of the period of administered prices, the laws of 1948 and 1949 confirmed the desire of the United States to maintain stable, relatively high and – most importantly, regulated – prices in the agricultural sector.

The guaranteed prices policy in Europe At the end of World War II, agriculture was also a major issue for politicians in continental Europe. European agriculture was lagging far behind Anglo-Saxon countries. Table 3.1 shows the share of agricultural employment in the years immediately following the end of the war. These figures are approximate because of the large number of seasonal jobs and the difficulties of accounting for the labour of women and children who often actively contribute to the work of family farms. Historian Alan Milward gives different figures with similar orders of magnitude.10 The general picture, however, is very clear. In continental Europe, a very large proportion of the workforce was still employed in agriculture. There were a lot of farms with small land holdings, and farmers often could not afford to invest in mechanisation or modern techniques. Despite the fact that the agricultural sector employed a large proportion of the workforce, it was unable to meet the population’s needs in terms of food. In France, ration coupons introduced during the war were maintained until 1949. Germany faced similar difficulties, especially given that it had lost a portion of its territory and received a huge influx of refugees, which considerably increased TABLE 3.1 Share of agricultural employment in total employment

after World War II (United States and Italy: share of active population)9 France (1946)

Germany (1949)

Italy (1951)

United Kingdom (1948)

United States (1945)

35%

22%

45%

5.2%

16%

66  A system of regulated economies

its population density. In 1955, American historian Hubert Schmidt made a pessimistic assessment of post-war German agriculture. It is obvious that a majority of the holdings were too small to be economically sound, even with intensive use, and many were too small to give more than bare subsistence to a farm family. In all West Germany, there were only 10,000 holdings of more than 75 hectares (187 acres) each. The average farm, therefore, was so small as to make it difficult to invest more agricultural capital to advantage or to mechanize operations except on a co-operative basis. (Schmidt 1955: 158) In general, while the war led to a decline in agricultural production in Europe, the first few years of peace did not completely revive it. It was not until 1951 that European agriculture returned to its pre-war levels (Milward 2000: 200). The issue of modernising the countryside was raised in all continental European countries, but it was France that devised the policy that went on to serve as a model for the future Common Agricultural Policy (CAP). At the end of World War II, the country embarked on an ambitious strategy for agriculture in an attempt to respond to both economic imperatives and social expectations. From an economic point of view, reviving the manufacturing sector and reconstruction efforts required labour. It was therefore necessary to set the process of modernisation and mechanisation in motion and thereby free labour from agricultural work in the countryside. To achieve this, the state relied on three major institutions. The National Institute for Agricultural Research (Institut national de la recherche agronomique), created in 1946, was tasked with innovation; the regional Chambers of Agriculture (Chambres d’agricultures) trained and accompanied farmers in their modernisation plans; and finally, the Crédit Agricole, whose regional banks were federated in 1948 and brought largely under the control of the Ministry of Agriculture, helped finance the purchase of machinery and the implementation of new practices. This transformation of the agricultural sector also raised important social issues. Support for the modernisation process came up against a barrier: the reluctance of farmers and their representatives to embrace change. Farmer representatives were aware of the problems posed by mechanisation and the fact that it often contributed to lower prices and revenues in the event of overproduction. The industrial agricultural model of the United States and the United Kingdom was seen by French farmers as the antithesis of the traditional peasant model to which they were historically attached. Founded in 1946, the Fédération nationale des syndicats d’exploitants agricoles (FNSEA) quickly became the leading farmers’ trade union representing the sector. Initially, it was very reluctant to modernise. One of its most influential leaders, agricultural engineer and president of the General Association of Wheat Producers Jean Deleau defended a low-cost, less mechanised, and less input-intensive form of peasant agriculture which was extensive and focused on the domestic market.11 More specifically, the FNSEA deplored the slow growth in prices of agricultural products as compared to those of industrial products. It carried out

A system of regulated economies  67

protest campaigns that were widely supported by the public, eventually becoming an important political force that even sponsored deputy candidates in the 1951 national legislative elections. The FNSEA’s main demand was that the state should institute supportive agricultural prices. This made it clear to the French government that guaranteed prices would be necessary to convince farmers to implement their modernisation strategy. By securing farm incomes through high and stable prices, farmers would feel confident to make the necessary investments. Moreover, the agricultural policy was designed in such a way that prices were guaranteed but not fixed, meaning they would change every year to take into account production costs and the expected increase in agricultural productivity. Journalist Pierre Drouin summarised the philosophy of guaranteed prices as follows: To prevent this guaranteed price from becoming a factor of technical stagnation, to ensure that the farmer will be encouraged to lower his prices in the absence of competition, and so to ensure that the interests of the consumer will also be safeguarded, the standard yield used as a reference to calculate the price was to be increased annually. Fixed at 15 quintals per hectare for the 1947–1948 campaign, at 16 quintals for the 1949 harvest, it went on to reach 19 quintals in 1952.12 Once the principle of guaranteed prices was established, the practice continued to expand in scope. In 1946, only the price of sugar beet was supported. In 1947, guaranteed prices were extended to wheat and cereals; in the next year the price of milk was regulated, and oilseeds were soon to follow. All things considered; the French agricultural policy was a success. Yields and production increased, agricultural employment fell at a steady rate, farms increased in size and modernised. When the Treaty of Rome founded the European Economic Community (EEC) in 1957, the six founding states thus committed to developing a shared agricultural policy inspired by French practices. This was the Common Agricultural Policy (CAP), which was implemented in 1962. The CAP generalised price controls to all agricultural products. Its exorbitant cost came to represent more than 70% of the Community budget in the mid-1980s and was the price continental Europe paid to carry out a successful strategy of modernisation and economic development. In 1990, less than 30 years after the implementation of the CAP, the countries of continental Europe had made up a large part of the gap with Anglo-Saxon countries and agricultural employment had become residual (Table 3.2).

TABLE 3.2 Share of agricultural employment in total employment in 1990

(Bairoch 1997: 383) France

Germany

Italy

United Kingdom

United States

6.8%

4%

9.8%

2.3%

2.9%

68  A system of regulated economies

Is another capitalism possible? It is important to understand the very strong regulatory mechanisms that ­prevailed during the 1950s and 1960s because this aspect of the post-war economic boom is still relatively little known. Rather, the traditional narrative of economists and historians describes this period as the golden age of “Keynesianism” i.e., ­following the principles of the British economist John Maynard Keynes (1883–1946). While the economic growth of the Post–World War II period is rightly associated with strong state intervention in the economy, this interventionism is often reduced to its quantitative dimension: a general increase in taxation, the development of social welfare policies and a growing share of public spending in GDP. These Keynesian-inspired policies did actively support growth, and indeed this type of intervention in the economy owed much to the theory of Keynes and his advocates. It is also equally true that the Bretton Woods system and the policy of financial market control were both inspired by Keynes’ work on money and finance.13 However, neither Keynes nor the economists who further developed his ideas ever suggested that controlling the prices of energy, of unprocessed goods in the agricultural sector, and certain industrial goods was necessary. John Galbraith’s theory that the planning system was mostly exempt from market regulation has largely been forgotten. It was also descriptive rather prescriptive in nature. Galbraith concluded that economists failed to understand what was going on in large industrial firms because they were entrenched in a demand and supply model of thinking. But he did not make a value judgement on the virtues of the planning system and he confined his analysis to large modern firms, not going further to see if it was part of a broader phenomenon. In short, admitting that price controls were an essential feature of the Golden Age raises questions that economic theory has not provided satisfactory answers to thus far. To this end, it is worth making the following three observations. The first is that price controls emerged reactively, to resolve cyclical crises and respond to specific needs. In the United States, agricultural price regulation was a response to the social problems caused by mechanisation at a time when the economy was no longer able to compensate for jobs lost in agriculture. In Europe, guaranteed prices were introduced for exactly the opposite reasons. Their objective was rather to accelerate the process of mechanisation at a time when strong economic growth required the population employed in the countryside to be brought down. In both cases, policy makers arrived at the solution of price regulation through a process of trial and error, trying out things in practice, sometimes failing, often starting over. That they ended up with very similar policies is what is most surprising. Such a disorganised process of convergence can only be explained by an absence of theoretical backing. The second observation is that, in fact, not all prices were regulated. But the question of what was common among the commodities whose prices were

A system of regulated economies  69

regulated by the state bears asking. In the 1950s and 1960s, governments were controlling interest rates and exchange rates, they were strictly regulating the functioning of financial markets, they had a strong influence on wages, on the prices of industrial raw materials and the cost of energy, they guaranteed the prices of agricultural products and influenced the production of certain industrial commodities, such as steel. All these elements have one important thing in common, which is that they are means of production. It is no coincidence that postwar governments focused all their regulatory efforts on this aspect – such was the legacy of the war economy. To be convinced of this, one need only look at the first few actions undertaken by the French agricultural policy. Which products were primarily subject to price controls? Sugar beet, cereals, milk, and oilseeds, not fruit and vegetables sold directly to households. From this, it can be inferred that the state was looking to control the prices of raw farm products, i.e., those agricultural goods which would then serve as inputs in a transformation process. The same is true of energy, raw materials, wages, and interest rates. It is evident that the 1950s and 1960s were a period during which the states deliberately took back control of the prices of the means of production from the market. This observation leads to a third one. If the prices of the means of production were controlled by the state for two and a half decades, how is it that the economy was able to function? Why was growth strong in the most advanced countries? Why was the unemployment rate low and income distribution fairly even? The theory of Mises and Hayek on the socialist calculus that we presented in Chapter 2 quite categorically states that an economy cannot function properly if it is not possible to calculate the costs of production. It also states that it is not possible for the state to make this calculation if the value of the means of production is not determined by competitive markets. Then how can any of this be explained? The problem is that Mises’ theory gained dominance over time and is now widely accepted by most academic economists. It is supposed to have been proven right by the collapse of the Soviet system. Yet, few academics have been interested in explaining how it was invalidated during the Golden Age of contemporary capitalism as we have seen above. This is probably why the state control exercised over the prices of the means of production, so central to the capitalism of the time, is so often neglected in academic work.

Notes

70  A system of regulated economies



References Bairoch, Paul (1997), Victoires et déboires, Vol. 3, Paris: Gallimard, Folio histoire. Bank of England (2017), A Millennium of Macroeconomic Data, Bank of England, version 3.1 of Apr. 30, 2017. Bernier, Aurélien (2018), Les Voleurs d’énergie, Paris: Utopia. Bilger, François (1964), La Pensée économique libérale dans l’Allemagne contemporaine, Paris: Librairie générale de droit et de jurisprudence. Blas, Javier and Jack Farchy (2021), The World for Sale: Money, Power, and the Traders Who Barter the Earth’s Resources, New York: Oxford University Press. Boughton, James M. (1998), “Harry Dexter White and the International Monetary Fund”, Finance and Development, Vol. 35, No. 3: 39–41. Cecil, Robert (1979), The Development of Agriculture in Germany and the UK. 1. German Agriculture 1870–1970, Centre for European Studies, Ashford: WIE College.

A system of regulated economies  71

Dimitri, Carolyn, Anne Effland and Neilson Conklin (2005), “The 20th Century Transformation of U.S. Agriculture and Farm Policy”, Economic Information Bulletin, No 3, United States Department of Agriculture. Foucault, Michel (2008), The Birth of Biopolitics: Lectures at the Collège de France, London: Palgrave Malmillan. Galbraith, John K. (1985) [2007], The New Industrial State. Princeton, NJ: Princeton ­University Press. Hayek, Friedrich (1944) [2001], The Road to Serfdom, London: Routledge. Hoover, Herbert (1947), The President Economic Mission to Germany and Austria, Report No 3. Laurent, Claude (1969), “L’évolution de la population active agricole”, Économie rurale, No. 79–80: 215–234. Malanima, Paolo and Vera Zamagni (2010), “150 Years of the Italian Economy, ­1861–2010”, Journal of Modern Italian Studies, Vol. 15, No. 1: 1–20. Milward, Alan S. (2000), The European Rescue of the Nation-State, 2nd edition, London and New York: Routledge. Reinert, Erik S. (2007), How Rich Countries Got Rich... and Why Poor Countries Stay Poor, London: Constable. Röpke, Wilhelm (1942) [1950], The Social Crisis of our Time, Chicago, IL: The University of Chicago Press. Röpke, Wilhelm (1950), Maß und Mitt, Zurich: Rentsch, Erlenbach. Schmidt, Hubert G. (1955), “Postwar Developments in West German Agriculture, ­1945–1953”, Agricultural History, Vol. 29, No. 4: 147–59. Solchany, Jean (2015), Wilhelm Röpke, l’autre Hayek. Aux origines du néolibéralisme, Paris: Publications de la Sorbonne. Steinbeck, John (1939), The Grapes of Wrath, New York: Viking Press. Van Hook, James (2004), Rebuilding Germany: The Creation of the Social Market Economy, 1945–1957, Cambridge, UK: Cambridge University Press.

4 THE NEOLIBERAL REVOLUTION

The end of the Bretton Woods system The late 1960s and early 1970s marked a major turning point in contemporary economic history. The post-war economic model underwent four different crises which together led to the dismantling of the system of price regulation by the state. The first of these crises was brought about by the end of the Bretton Woods Agreement. The Bretton Woods system was conditioned on maintaining a delicate balance between guaranteeing the convertibility of the dollar into gold on the one hand and the use of the dollar as the reference currency for denominating international transactions and foreign exchange reserves on the other. However, Western European economies grew faster than the US in the decades following the end of the war. As their demand for dollars became proportional to the increase in activity, this growth differential created a structural shortage of dollars in the global economic system. The US initially attempted to ease this shortfall through government loans such as the Marshall Plan or by encouraging US companies to make overseas investments. From the late 1960s onwards, the US trade surplus began to shrink and by the early 1970s it was running a deficit. By importing more than it exported, the US economy was flooding the rest of the world with dollars. Soon, the amount of US currency circulating in the international monetary system began to exceed the funds required for countries to maintain their foreign exchange reserves. Some countries were then tempted to get rid of their excess dollars by demanding their conversion into gold. This temptation was further fuelled by the official conversion rate of $35 per ounce becoming increasingly undervalued over time in the context of rising inflation. Incidentally, France – then led by Charles de Gaulle – was one of the countries most reluctant to maintain a high level of dollar reserves. Much to the DOI: 10.4324/9781003253297-5

The Neoliberal Revolution  73

annoyance of the Americans, France did not hesitate to convert its dollars into gold at the US central bank. These continued demands emerged not just out of a financial calculation but also represented a political desire to do away with the Bretton Woods system, which was seen by the French as favouring the American economy. Questioned at a press conference held at the Élysée Palace in February 1965, de Gaulle made no bones about stating his view on the matter. [T]he fact that many states accept dollars on principle as well as gold for payments [...] leads Americans to indebt themselves and to indebt themselves free of charge to foreigners [...] [T]his sort of unilateral facility which is attributed to America, contributes to the blurring of the idea that the dollar is an impartial and international sign of exchange, whereas it is a means of credit appropriate to a state. [...] But circumstances have changed, and that is why France advocates that the system itself be changed. Let this kind of fundamental imbalance, which is now a fact, cease. [...] We consider it necessary that international exchanges be established as they were before the great misfortunes of the world, on an indisputable monetary basis which does not bear the mark of any particular country. What basis? In truth, we do not see that there can really be any criterion, any standard, other than gold.1 In the early 1970s, confidence in the Bretton Woods system collapsed dramatically when the gap between the excess supply of dollars and the quantity of gold reserves held by the United States became glaringly obvious. Faced with this crisis of confidence, US President Richard Nixon went ahead and unilaterally put an end to the convertibility of the US currency into gold on August 15, 1971. The central pillar around which the Bretton Woods system was built suddenly vanished into thin air. By delinking the value of the dollar from gold, the entire international monetary system found itself disconnected from a reference to a precious metal. This meant that the value of currencies was no longer indexed to any commodity of the real economy. After a series of summit meetings, the Bretton Woods countries finally came to terms with the de facto state of affairs. In 1976, the Jamaica Accords were ratified, confirming the abolition of official exchange rates and removing any reference to gold parity for signatory countries. From a political point of view, the end of the Bretton Woods system meant that exchange rates were no longer a multilateral issue. Each state now became responsible for its own currency, leading to three possible scenarios. A country could choose to retain some control over the exchange rate of its currency by indexing it, for example, to a reference currency. It was then up to the country, and it alone, to pay for the cost of this control. Secondly, it could enter into collective exchange rate agreements with other countries. This is what European countries sought to do with the establishment of the “snake in the tunnel” mechanism (1972–1978) and the European Monetary System (1978–1993), with varying and sometimes unsuccessful results. Finally, a country could choose to

74  The Neoliberal Revolution

let its currency “float”. In this case, it did not have to control exchange rates, since they were left entirely to the financial markets. As a result, the most economically fragile countries, or those that were most open to trade, were often forced either to peg their currency to a stronger currency or to enter into currency agreements with their trading partners to maintain currency stability. Conversely, more powerful countries, or those with a low level of foreign dependence, could let their currencies float freely or negotiate agreements with conditions favourable to them. Thus, we can see that the end of Bretton Woods did not mean the end of fixed exchange rates. On the contrary, the collapse of Bretton Woods paved the way for a new international system based on the simultaneous existence of multiple currency regimes. Above all, this development ushered in a new dynamic in international economic relations based on competition or on partial or unequal cooperation. This is the subtext underlying the famous quote attributed to John Connally, Richard Nixon’s finance minister when he received a European delegation in 1971. When the delegation expressed its concerns about the fluctuations in the dollar, Connally is said to have replied tersely that the dollar was “our currency, but your problem.”

Oil shock and the return of inflation The second crisis of the 1970s was caused by inflation and rising commodity prices. The 1973 oil shock was itself the result of a combination of factors. The immediate short-term driver was, of course, the Yom Kippur War, which was launched in October 1973 by Egypt and Syria to recover the territories they had lost in the Six Day War. In response to the aid given to Israel, the Organization of the Petroleum Exporting Countries (OPEC) imposed an oil embargo on the United States and some of its allies, then gradually lowered the volume of oil production, causing prices to soar. But the 1973 oil price hike was not only caused by the war. The collapse of the Bretton Woods system had already contributed to driving up the prices of all commodities. Commodity prices were negotiated using the dollar, which was still the reference currency for conducting international transactions. To compensate for the dollar’s weakness, producers had obtained price increases even before the outbreak of the war in October 1973. Consequently, oil prices doubled between January and September 1973. The 1973 oil shock also showed the world that commodity-producing countries had largely freed themselves from both Western control and the excessive power exerted over them by the big extractive companies. By founding the OPEC in 1960, oil-producing countries had already signalled their desire to regain control of oil markets. However, the formation of the cartel did not immediately bring about the results they had hoped for. It was not until the early 1970s, when most OPEC members nationalised the oil assets in their territories, that the organisation finally managed to significantly influence world prices.

The Neoliberal Revolution  75

In this respect, the 1973 crisis was more the result of a long-term strategy ­pursued by the governments of oil-producing countries than a one-off phenomenon associated with the Yom Kippur War. In fact, price rises affected all raw materials during the 1970s, when most other resource-producing countries also pursued a similar strategy of state control over their chains of production. The equilibrium inherited from the post-war period was further destabilised by the end of the Galbraithian price control mechanism in the United States. The industrial organisation as described by John Galbraith went through a deep crisis in the 1970s. Profit margins of large industrial firms had been in a steady decline since the late 1960s (Duménil et al. 1987), due to which pre-existing institutional arrangements were revised and transformed. Because managers in the company organisation were no longer able to generate profits that fulfilled capital owners’ expectations, the power of the technostructure gradually diminished and came back into the hands of the shareholders. With the technostructure losing its influence, governments also lost the ability to impose the price and wage guideposts that served to regulate industry. This phenomenon of falling profit rates is not specific to the US and was seen in most developed capitalist economies during the 1970s (Chan-Lee and Sutch 1985). In each of these countries, the decline in profits had similar consequences. First, the institutional power relations within corporate governance were rebalanced in favour of capital owners; second, these reorganisations led to the recruitment of corporate managers who aimed to increase the share of capital in the Economic Value Added of companies in order to maximise profits. In effect, this meant prices rose faster than wages. Figure 4.1 shows the impact that the end of the Bretton Woods system, the increase in commodity and energy prices, and the gradual disappearance of price regulation mechanisms within the industrial system had on inflation. We can see that the period between 1971 and 1985 was one of transition between two regulatory systems. In the 1950s and 1960s, developed capitalist

FIGURE 4.1 

Average inflation level of G7 countries (1956–2010).2

76  The Neoliberal Revolution TABLE 4.1  Evolution of the labour income share in the G7 economies3

Country

1970

1980

1990

2000

2010

Canada France Germany Italy Japan United Kingdom United States G7 Average

67.9% 78.0% 73.1% 80.4% 65.0% 70.9% 69.5% 72.1%

63.2% 80.1% 75.8% 79.5% 73.1% 70.4% 69.6% 73.1%

65.2% 70.4% 69.9% 76.4% 65.2% 70.7% 68.2% 69.4%

61.3% 67.6% 72.0% 66.1% 64.7% 69.1% 67.7% 66.9%

59.8%(2008) 68.6% 67.8% 68.6% 59.1% 69.6% 63.8% 65.3%

economies were run on the basis of regulatory mechanisms supervised by the state resulting in moderate inflation. By intervening in the market, states guaranteed high profits for companies and ensured that wages kept pace with labour productivity. After 1985, economies shifted to a system based on the neoliberal doctrine where Western governments lost their ability to influence prices and where prices were essentially determined by international competition instead. In the neoliberal system, the balance of power became favourable to the owners of capital. Prices and wages were squeezed to the maximum, inflation was generally low, and the share of labour incomes in the economy declined at a steady pace (Table 4.1).

Deindustrialisation of developed countries The third crisis that hit developed economies in the 1970s was due to an industrial phenomenon. In most Western countries, the beginning of the decade was when manufacturing activity in the economy peaked. This was a time when the share of the workforce employed in manufacturing was typically over 30% (Figure 4.2) because of the rapid shift of jobs from agriculture to industry. Unlike agriculture, many industrial markets were not limited by physiological constraints, which could explain why the manufacturing sector grew much faster than other sectors in the previous decades. Indeed, by the end of the 1960s, Fordist mass production had been adopted across the manufacturing sector, leading to the emergence of a mass consumer society. Wage increases led to income increases and gave rise to a middle class hungry to consume manufactured goods. This increase in the share of manufacturing activity in the economy came to a halt in the 1970s and then began to decline. In 2019, the share of industrial jobs in the labour force of G7 countries was below 25%, and in most cases below 20%. These figures include jobs in sectors such as building and construction, mining and electricity generation. The decline in industrial employment was the result of two phenomena. The first is that manufacturing lends itself well to mechanisation, unlike services. Consequently, less and less labour is needed to maintain a constant production of

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FIGURE 4.2 

Share of manufacturing employment in the labour force (1965–2019).4

goods over time. If the production of manufactured goods increases by 6% per year but labour productivity only grows by 4%, recruitment becomes necessary. As production quantities level off and labour productivity rises, employment in the manufacturing industry naturally declines. Thus, if the annual increase in output is only 2% while labour productivity continues to grow at a rate of 4%, employment falls. The second factor of this decline in the G7 countries was the emergence of developing countries and the intensification of international competition. In the early 1970s, international trade was expanding rapidly, driven simultaneously by lower tariffs resulting from multilateral trade agreements5 and by technical innovations such as the development of container use in shipping. As a result, the share of exports in world GDP grew from less than 10% between 1950 and 1972 to more than 20% from the early 2000s (Fouquin and Hugot 2016). Most economically advanced countries lost some of their manufacturing jobs to developing countries, where the cost of labour was lower.

The inexorable disappearance of economic growth This phenomenon of deindustrialisation of the richest countries contributed to the emergence of a final problem, which was that economic growth began to slow down. This was the fourth crisis that emerged in developed countries from the early 1970s. Figure 4.3 below shows the evolution of average growth in the G7 countries. We can see that the average annual growth in GDP per capita in the rich countries was above 4% during the 1950s and 1960s, while from the 2000s onwards it had come down to around 1%. It should be noted that the year 2020, marked by the COVID crisis, is not included in this average.

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FIGURE 4.3 

GDP per capita growth rates in G7 economies (1950–2018).6

There are several reasons for this fourfold decline in economic growth. The first is related to deindustrialisation. As explained above, manufacturing is an activity that lends itself more easily to mechanisation than services. Hairdressers, teachers, musicians, nurse’s assistants or security guards are hardly more productive today than they were 50 years ago. A Mozart symphony cannot be played in less time now than at the end of the 18th century. Similarly, it still takes many months of training for a teacher to teach a class to read and write, and moving from slate and chalk to a tablet does not fundamentally change the learning time of a six-year-old’s brain either. Yet, economic growth fundamentally derives from increasing labour productivity, and this increase in productivity is obtained through mechanisation and automation. However, after the agriculture and manufacturing sectors had been extensively mechanised, developed economies found themselves with fewer jobs in mechanisable activities and more jobs in activities that could not be mechanised. As the share of non-mechanisable jobs increases in an economy, the growth in labour productivity naturally declines. The explanation is obvious: non-mechanisable jobs are often in the interpersonal sector like care, teaching, personal assistance, or security. These are jobs that involve human time. Their very nature makes it absurd to even imagine increasing their productivity. In other words, if all the jobs in an economy were jobs of this type, economic growth would become dependent on population growth, and growth in per capita living standards would disappear.7 The crisis of the model of state regulation of the economy is the second factor behind this decline in growth since the early 1970s. We have seen above that the fall in profit margins led to capital owners reclaiming control of the management of their companies. The increase in international competition also contributed to a greater focus on profit maximisation. This process ultimately led to the stagnation of wages and incomes of the middle and working classes.8 Moreover,

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the intensification of international competition contributed to states lowering the taxation on companies and capital (Saez and Zucman 2019) and constraining growth in public spending. These two dynamics combined to slow down the growth in individual and government consumption expenditure. Since they could no longer count on a strong growth in their sales, the annual production of companies grew less rapidly over time. Is a slowdown in economic growth really such a problem? After all, the mass production/mass consumption model of the 1950s–1970s was probably not sustainable in the long run, if only for environmental reasons. Moreover, one could legitimately argue that an infinite increase in income and the quantity of wealth produced is not necessary for us to enjoy a satisfactory level of well-being. Wise men and philosophers are probably right to see moderation as a virtue and excess as a danger. But growth is a fundamental feature of our social, economic, and political systems. It is probably no coincidence that modern democracies have flourished in societies with rising incomes. It is much easier to peacefully debate the sharing of resources when wealth is growing rather than when it is declining or stagnating. Indeed, if there is growth, society can give more to some without taking from others, which is impossible in an economy where incomes stagnate. Our political systems, which were established to organise the sharing of an increasing amount of wealth production, are undermined when growth slows down. There is no saying if they will withstand its demise. Inequality is a second consequence of this slowdown in growth. Thomas Piketty has demonstrated this phenomenon very well in Capital in the T ­ wenty-First Century (2014). He explains that as long as capital accumulates at a rate close to its rate of return, capital income is bound to grow structurally. However, if national income growth is nil, this means that a smaller and smaller share can be allocated to labour income. This situation ultimately leads to an endless growth in inequality. More precisely, for Piketty, the dynamics of inequality are derived from the comparative evolution of the rate of return on capital r and the growth rate g (Piketty 2014: 350–8). When g > r, the share of labour income increases and income inequality decreases. The opposite is true if g < r. Thus, in the case of a zero growth rate (g = 0), the only way to avoid a continuous decline in labour income would be for the rate of return on capital to also be zero. This is not possible in a capitalist economy based on private ownership of the means of production and where investment is based on profit expectations. As can be seen, the decrease in the growth rate poses structural issues for the economic and political system as a whole, even though the ideals of zero growth with a satisfactory level of wealth distribution might be intellectually more attractive than the idea of infinite growth in a finite world. *** To sum up, it is important to stress that the four crises of the 1970s that we have just described are not, in fact, internal phenomena specific to the state regulation

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system of the 1950s and 1960s. It was not – as it is often believed – the overuse of price control mechanisms by the state or their excessive intervention in markets that led to the breakdown of the system as a whole. Rather, the transformation of political and institutional relationships often brought about by external factors gradually led to the disintegration of the regulatory mechanisms put in place from the 1930s. Clearly, the Bretton Woods system based on a single currency, even if it was that of the world’s leading power, could not last as other countries began to develop and claim their rightful place on the world stage. The economic decolonisation of raw material producing countries was also inevitable. Lastly, the development of international trade and the gradual opening of economies would necessarily make the regulatory power of states less effective. The crises of the 1970s were therefore not the consequence of a post-war economic system based on regulation which some argue prevented necessary economic adjustments. In this sense, history does not validate the theory of Mises and Hayek. The end of the growth boom of the post-war period occurred, in fact, for exactly the opposite reasons to those put forward by neoliberals. The crisis was caused by the inability of states to keep the prices of the means of production under control rather than as the consequence of too much price control.

A new regulatory system Economists have no real theoretical framework to explain the role of the state in price control. As mentioned in the previous chapter, the system of regulated prices was introduced to tackle the effects of the war in a context of economic crises and certain historical power relations. Price controls were implemented pragmatically, within a specific institutional framework and without prior theorising. When inflation accelerated in the early 1970s and it became clear that traditional regulatory mechanisms were not working, economists were called in to help. However, in the absence of theories that could adequately explain the growth of the previous decades, they attempted to study the crisis using the models available to them. The problem was that the then dominant approach – the Philipps curve – was based on the assumption of a trade-off between growth and inflation. It could not therefore explain the phenomenon of “stagflation”, a crisis in which low growth and high inflation occurred simultaneously. This theoretical vacuum led to a shift in economic thinking towards a neoliberal approach. Monetarist theories were also heavily promoted. In the autumn of 1974, one year after the oil crisis, two 75-year-old economists with very different ideas were awarded the Nobel Prize: the Keynesian Gunnar Myrdal and the neoliberal Friedrich Hayek. At the award ceremony, each laureate was invited to give a lecture. While Myrdal gave an extremely political speech touching upon issues such as development aid, peace, and respect for international law, Hayek took the opportunity to reaffirm his anti-Keynesian positions, explicitly accusing economists of having supported policies responsible for the rise in inflation.

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The continuous injection of additional amounts of money […] draws labour and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate – or perhaps even only so long as it continues to accelerate at a given rate. […] The fact is that by a mistaken theoretical view we have been led into a precarious position in which we cannot prevent substantial unemployment from re-appearing; not because, as this view is sometimes misrepresented, this unemployment is deliberately brought about as a means to combat inflation, but because it is now bound to occur as a deeply regrettable but inescapable consequence of the mistaken policies of the past as soon as inflation ceases to accelerate. (Hayek 1974) This shared Nobel Prize, surprisingly awarded to Hayek, a retired economist, for work published in the 1920s and 1930s, and whose influence in the academic world had faded considerably,9 marked the intellectual and academic revival of neoliberalism. Two years later, in 1976, monetarism was once again enshrined when the Nobel jury awarded Milton Friedman the prize for his work in history and monetary theory, this time as the sole recipient. At the age of 64, Friedman was the most influential member of one of the most important economic schools in the academic world, the Chicago School. The Nobel Prize awarded to him would be the first of many: a total of eight economists from the University of Chicago’s economics department were similarly honoured between 1976 and 1995. This enshrinement of monetarism, and more broadly of the neoliberal system of thought, profoundly transformed the nature and meaning of economic policy in the 1970s and 1980s. The political environment also contributed to this change. The first markets to be “liberalised”, i.e. removed from state influence and organised around competitive prices, were the financial markets. In Chapter 2, we discussed how US Federal Reserve monetary policy changed in the late 1970s under the leadership of Paul Volcker. According to monetarists, and the quote from Hayek above illustrates this, high interest rates were the price to pay for returning to price stability in a context of high inflation. The resulting unemployment and recession that naturally resulted from this policy were seen as the inevitable collateral damage of the long process of “getting things right”. The Fed’s interest rate hike did not only impact the US economy. Between 1980 and 1985, higher interest rates on US currency loans triggered an increase of more than 70% in the exchange rate of the dollar against the Deutsche Mark. For ­Germany, but also for all countries whose currency was not the dollar, this led to a sharp increase in the price of raw materials and American imports. The rise of the dollar pushed up imported inflation. To preserve price stability, the central banks of other countries had no choice but to support their currencies, which meant raising their own interest rates. Thus, in response to the Volcker shock of US monetary policy, central bank interest rates rose in most countries in the early 1980s.

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This widespread increase in borrowing rates came at a very high cost to the most fragile economies. Many developing countries, which were indebted in dollars, had to repay their loans in a stronger currency and borrow at higher rates. This provoked financial difficulties and a major loan default by Mexico in 1982. The financial crisis in developing countries pushed the IMF to intervene in Latin America. Under the influence of the new doctrine, the IMF conditioned its aid on the implementation of neoliberal policies as per the policy prescriptions of the “Washington consensus”, as John Williamson (2008) put it. Faced with the high cost of money, many countries embarked on a strategy of attracting foreign investors, which meant following the precepts of neoliberal policy. Standards of good governance changed. The implementation of classical Keynesian policies was impeded by the “external constraint”, i.e. the risk that investors preferred to develop productive capacities outside the country rather than on home soil. Pro-active Keynesian policies implemented in France between 1981 and 1983 worsened the trade balance and forced the government to devalue the Franc three times. From this experience, most politicians from France and indeed many other countries concluded that the economic model of the post-war years no longer corresponded to the requirements of the new world order. As international competition in the financial and trade sectors intensified, leaders of the neoliberal right seemed to emerge as an answer. The elections of Margaret Thatcher in 1979 and Ronald Reagan in 1980 brought to power pro-market leaders willing to cut corporate taxes and free the financial markets of the shackles of the strict regulatory framework inherited from the 1930s crisis. Since the financial centres of London and New York were the most powerful in the world and handled a large share of international financial transactions, most other countries were forced to gradually adjust to the expectations of Anglo-Saxon investors and limit their own regulation of the markets. This is what France did from 1983 onwards, following the failure of its Keynesian policies. Thus, the logic of financial liberalisation gradually spread within developed countries and then to the developing world, driven by the recommendations and demands of international institutions.

Financial and trade globalisation Until the mid-1980s, financial market liberalisation policies were essentially national decisions taken in a context of enhanced global competition. They were not explicitly motivated by a desire to establish a new international economic order to replace the Bretton Woods system. When it came to financial matters, each country adopted the rules that suited it. By 1986, most countries had not fully liberalised. Only four economies had fully opened their borders to transnational capital flows: the US, the UK, Germany, and Japan (Abdelal 2007: 10). In the rest of the world, governments continued to impose some controls on foreign capital movements, particularly to limit speculative flows, but also to prevent strategic

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companies from being taken over by countries or organisations that governments viewed with a measure of suspicion. Here, it is important to make a distinction between globalisation and internationalisation. Internationalisation implies the development of closer economic relations between countries in a context where each state preserves its sovereignty and sets its own rules. Globalisation is primarily a process of harmonisation and unification of trade, financial and economic law to promote an openness to trade, but which also entails the development of interdependencies between different countries. Its objective is to build an integrated global market operating according to a set of common rules. The economic system of planning and regulation that emerged from the ­Bretton Woods agreements was subject to common rules, operated multilaterally and was based on monetary and trade cooperation. However, it was characterised by a relatively low level of openness and financial dependence because the financial markets were for the most part isolated from each other due to the restrictions on capital flows. A new monetary and financial system emerged after 1971, when international financial trade developed. During this process of internationalisation, the structure of the international monetary system became increasingly fragmented and subject to a multitude of rules and norms, illustrating the growth of competition at the expanse of cooperation. Financial globalisation only finally developed in the 1980s. Common rules were progressively instituted in an environment of partial return to multilateralism. This new system confirmed the role of international organisations as generators of standards and norms. This financial globalisation led to a further intensification of competition but also contributed to the development of multilateral frameworks of cooperation. In an intellectually stimulating book published in 2007, British economist and historian Rawi Abdelal chronicles the history of 20th century financial globalisation. The book’s main aim is to understand the evolution in doctrines regarding capital flows. Abdelal begins by pointing out that the very beginning of the 20th century was marked by an absence of controls on capital movements. World War I and the economic crisis of the 1930s brought about a change in this norm, and capital controls became a perfectly acceptable and dominant approach in the post-war years. In the 1980s, this doctrine changed again and the idea that capital flows should be prohibited or controlled became once again unthinkable. The book sets out to explore how such dramatic shifts in policy came about (Abdelal 2007: ix). To answer this question, Abdelal proceeds by proposing a historical typology that distinguishes three different phases in which capital movements were progressively liberalised in the second half of the 20th century. He calls the first phase from 1944 to 1961 “embedded capitalism”. During this period, there was an almost complete control over capital movements: it was only possible to make long-term transnational investments and speculative investments were prohibited. Currency exchange rates were strictly controlled, and financial markets remained confined within their national borders.

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The second phase, the phase of financial internationalisation that Abdelal calls “ad hoc Globalization”, started in 1961, with the development of the ­Eurocurrency markets and the possibility of setting up offshore accounts, often located in the City of London, denominated in a foreign currency. Eurocurrency accounts – mostly in Eurodollars – developed partly because they offered better rates of return and were exempt from regulation,10 and partly to recycle the US dollars held by European companies. The disappearance of the Bretton Woods system in 1971 accelerated the process of internationalisation. Mechanisms and instruments that allowed financial transactions to circumvent or evade national regulatory restrictions grew and developed in this period. Finally, Abdelal identifies a third phase, that of globalisation proper, which began in 1986, when the Single European Act was signed, marking the liberalisation of capital movements in Europe. New rules were written to govern and standardise government practices. While the internationalisation phase was built around liberalisation policies decided unilaterally by the countries of the major financial centres, the globalisation phase aimed to harmonise these rules through multilateral negotiations. It was during this phase that the free movement of capital became a norm that would go on to be adopted by almost every country in the world (Table 4.2). The crux of Abdelal’s book is devoted to distinguishing the internationalisation phase from the globalisation phase. His argument is in fact that these two phases of liberalisation did not emerge from the same logic nor were they promoted by the same actors. Abdelal draws on extensive documentary evidence including a series of interviews with the prominent leaders of the time to make this claim. This meticulous analysis of contemporary history demonstrates two important facts. The first is that, contrary to popular belief, financial globalisation was not driven by the US government or the big Wall Street banks. These actors were comfortable with the pre-existing mode of internationalisation. Rather, the project to align and advance the openness of financial markets was in fact driven by the leaders of three major international institutions: the European Economic Community (EEC), the Organisation for Economic Co-operation and Development (OECD) and the IMF. TABLE 4.2  Overview of the three post-war financial systems

Embedded Capitalism Ad hoc Globalisation Financial Globalisation 1944–1961 1961–1986 1986–… Financial Openness Low Origin of rules Multilateral Operation Cooperation

Source: Adapted from Abdelal (2007).

High Unilateral Competition

Very high Multilateral Competition/ Cooperation

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Abdelal’s second discovery is that the driving impulse of this process of ­ nancial globalisation appears to have come from the senior French officials who fi headed these institutions. These were Jacques Delors, President of the European Commission between 1985 and 1995; Pascal Lamy, Delors’ chief of staff during Delors’ presidency, EU Trade Commissioner between 1999 and 2004 and Director of the World Trade Organisation (WTO) between 2005 and 2013; Henri Chavranski, Chairman of the Committee on Capital Movements and Invisible Transactions at the OECD between 1982 and 1994; and Michel Camdessus, Director of the IMF between 1987 and 2000. More surprisingly, three of these four officials were members of the French Socialist Party and the fourth, Michel Camdessus, came from a Christian-Socialist background and was appointed to head the Banque de France by the President of the time, Socialist François Mitterrand. The remarkable convergence of the views and actions of all these leaders leads Abdelal to conclude that financial globalisation was the object of a true “Paris consensus” that was at least as important in shaping the economic policies of the contemporary world as the famous Washington consensus had been (Abdelal 2005). What is interesting about this discovery is that it challenges the image of how financial globalisation came about. In this analysis, it was not the big bank lobbies that pushed for the opening up and deregulation of the world’s financial markets. Rather, this process was in fact spearheaded and implemented by politicians who were leaders from the Left. The phase of financial internationalisation was indeed driven by US and UK policies. It was also clearly supported by the City and Wall Street establishment, as well as by the neoliberal governments that ruled these two countries in the 1980s. But the subsequent phase of globalisation was rather brought about by French leftist leaders who wanted to promote a rules-based “managed globalisation” (Abdelal 2007: 14). Rawi Abdelal’s book also underscores the fact that financial liberalisation was not introduced for economic reasons. On the one hand, the scientific literature has never clearly demonstrated that the free movement of capital, including the absence of controls on speculative capital, has any positive effect on long-term economic growth (Ibid.: 33), and on the other hand, it has not been demonstrated, according to Abdelal, that the withdrawal of capital controls would have been an inevitable outcome of technological progress that would have rendered state controls ineffective. Overall, financial globalisation was indeed a political project, determined by a specific vision of the world, by actors who were making conscious actions and decisions to this end. So if financial globalisation was a political project, can we say that it was essentially neoliberal in nature? Abdelal gives an ambivalent answer to this question. Even though he concedes that neoliberal ideas had indeed become dominant in most international institutions in the 1980s, especially within European institutions and in the OECD (Ibid.: 31), he immediately hastens

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to add that the process cannot be sufficiently or completely explained as ­“neoliberal” in its approach. It would deprive the word of all meaning to insist that France’s Socialist Party, Delors, Chavranski, Camdessus, and the other authors of the liberal rules of global capital were “neoliberals,” and that the label offers sufficient insight into the choices they made. The formulation of these rules was driven neither by professional economists nor by policymakers trained in U.S.-style economics, neoliberal or otherwise. There is more to the story of how the formal rules of globalization were written. (Ibid.: 32) For Abdelal, the motivations of this group of French socialists can be understood as being partly derived from the ideals of the Left. A Left that had broken with anti-capitalism, but which retained a vision of internationalism and believed in the positive effects of international trade in raising the living standards of people in developing countries. Is the implementation of financial globalisation then a kind of neoliberal project softened by progressive ideals, as Abdelal proposes? In reality, by viewing neoliberalism primarily through the lens of American economists, the author appears to be making two mistakes. The first relates to the nature of neoliberalism. Neoliberalism is not, in fact, the law of laissez-faire. In this respect, the idea that the international financial system should not be the sole domain of large transnational companies and the most economically powerful countries is indeed in the very DNA of neoliberalism. From its very origins, neoliberalism is a response to laissez-faire, an attempt to order the market by rules that are neither discretionary nor the product of a power struggle. As a result, the shift from internationalisation to globalisation can still be said to be a continuation of the neoliberal project. The second error he makes is reducing neoliberalism to the doctrine put forth by the Chicago University economists. Admittedly, this was the dominant school in the mid-1980s, and its economists are still the benchmark for neoliberal analysis. But to do so is to forget that neoliberalism has arisen and evolved within different schools and traditions, and that it is not, at the outset, a purely economic conception of the world. Louis Rougier, when he organised the Walter Lippmann Colloquium, and Friedrich Hayek, when he founded the Mont Pelerin Society, were both keen to organise debates within a multidisciplinary framework that brought together philosophers, legal scholars, and entrepreneurs alongside economists. Lastly, one must not forget that neoliberalism owes a debt to German ordoliberalism, whose ideas played a major role in drafting the rules governing the liberalisation of financial markets. In the 1980s, there clearly existed a European neoliberal school, which also played an active role in the implementation of financial globalisation.

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On this point, Abdelal describes the insistence of German officials that the liberalisation of capital flows, which Delors was trying to realise within the single market, should be extended to all capital, including from third countries outside the common market. The arguments put forward by the President of the Bundesbank, who did not want capital movements hindered by political intervention, seem to be taken straight from a speech by Ludwig Erhard or a book by Wilhelm Röpke. The Germans also insisted on the erga omnes principle for European capital liberalization: all capital flows, no matter the source or direction, would have to be liberalized. The erga omnes principle, according to Bundesbank President Karl Otto Pohl, “was absolutely a prerequisite for monetary union. Germany never would have agreed to a single currency area with the possibility of capital controls on third countries.” For German policymakers the principle of erga omnes was connected to their commitment to the absolute depoliticization of money, which in turn was based on their interpretation of the practice of capital controls during the 1930s and 1940s. Full convertibility removes the temptation, and the possibility, for authorities to serve “other political aims” by influencing the monetary system. (Ibid.: 10–11) In a way, whether or not French socialist leaders were aware that they were participating in the implementation of a neoliberal project is secondary. Just as culture is what remains when all else is forgotten, ideology is what remains when policy measures assumed to be self-evident and reasonable are undertaken without necessarily being conscious of their theoretical foundations.

Expansion and consecration of neoliberalism In the previous chapter we have seen how wartime economics and the experiment with price controls and planning were implemented in capitalist economies. We then saw how economic policies moved towards increasing liberalisation. This overview leads us to a paradoxical conclusion: while the implementation of a controlled economy in times of crisis and war seems to have been unplanned, the establishment of an economic system based on competitive prices and beyond state control was perfectly deliberate and organised. It would be tedious to describe in detail how most countries in the world, having liberalised their financial markets – sometimes under the pressure of international institutions – embarked on the liberalisation of other markets. The collapse of the Soviet system in the early 1990s seemed to signal the triumph of the market over planning. It also marked a shift in the raw materials sector. The number of producer countries increased, new deposits were discovered and exploited, and extractive companies multiplied. Consequently, producer cartels

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gradually lost their ability to control prices over the course of the decade. In addition to the purely competitive dimension brought about by this growth in the number of producers and extraction areas, the commodity sector was also impacted by financial liberalisation. The development of financialisation, which allowed traders to enter into futures contracts11 and resell these contracts on dedicated markets, reinforced the speculative dimension of commodity markets. The emergence of China as an energy and commodity importing power in the early 2000s ended any possibility of international price regulation. In the labour market, the dismantling of union power and flexibilisation policies formed the core of economic strategies from the early 1990s (OECD 1994). The watchword in the OECD and in Europe was “flexicurity”, a portmanteau that advocated for dismantling labour law to promote “flexibility”, while defending public funding for compensation and training of the unemployed as a way to ensure the “security” of workers (Nardo and Rossetti 2013). The Danish labour market was held up as an example and became the new model to follow. The flexicurity strategy appeared to be compatible with neoliberal principles since it simultaneously emphasised the fundamental principle of market prices and the preservation of the social order.12 The 1990s also saw a return to rapid expansion of international trade. The Marrakesh Agreement, signed in 1994, concluded the longest and most ambitious round of GATT negotiations. This led to the creation of the WTO, an international organisation responsible for negotiating new trade agreements and overseeing their implementation. The integration of China into this institution in 2001 completed the process of trade globalisation which succeeded and reinforced the process of financial globalisation. Financial and trade globalisation are in fact two sides of the same coin, as merchandise and financial flows are each the counterpart of the other. Agricultural markets were the last sector to be liberalised, a process that also began in the 1990s. In Europe, the 1992 reform proposed by Ray Mac Sharry, the Irish Commissioner for Agriculture, initiated the gradual process of dismantling the guaranteed price system and replacing it with subsidies paid directly to farmers. The aim of this reform was threefold. Firstly, to reduce the overall cost of the CAP, which constituted the most significant share of the EU budget; secondly, to restore the “price signal” to European farmers as an incentive; and thirdly, to respond to the expectations of developing countries, which felt that the export refunds available to European farmers constituted unfair competition that weakened their own agriculture.13 In the United States, the ­Federal Agriculture Improvement and Reform Act of 1996 implemented a similar reform, abandoning the system of regulated prices and replaced it with a direct subsidy mechanism. Farmers in developed countries thus moved from a system in which their incomes were largely the outcome of negotiations with regulators to a system in which their incomes were partly dependent on subsidies, but also on the vagaries that influenced market prices. As a result, farmers’ incomes no longer depended solely on their labour and investment in their farms, but also now

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became impacted by such external factors as the weather situation in A ­ ustralia, Chinese agricultural output or even a war on another continent. Farmers were no longer able to influence the political balance of power to negotiate the selling price of their produce and became subject to arbitrary prices that made any prospect of productive investment uncertain.14 In sum, in the early 2000s, for the first time since the outbreak of the World War I, the economies of all developed countries came to be organised on the basis of a price system determined by competitive markets in line with the theories put forth by the founders of the neoliberal doctrine. This experiment, however, did not last, as we shall now proceed to study.

Notes 1 Gaulle, Charles de (1965), Press conference of 4 February 1965, available online at the Institut national de l’audiovisuel, www.ina.fr. Translated from the French. 2 Source: OECD, Consumer Price Index (accessed on May 1, 2022). 3 Source: OECD (accessed on May 5, 2022). 4 Manufacturing including construction. OECD, Employment by Activity and OECD, Active Population (accessed on Apr. 29, 2022). 5 The General Agreement on Tariffs and Trade (GATT) was established in 1947 as the multilateral forum for global trade agreements. By the end of the 1960s, the agreement brought together most developed market economies. 6 Source: Maddison Project Database (MPD) 2020 (accessed on Apr. 30, 2022). 7 In fact, advances in mechanisation never completely eliminate employment and it is therefore highly unlikely that the growth in labour productivity will ever fall to zero. 8 This is one of the conclusions of economist Branko Milanović and his famous ­“elephant curve” (Milanivić 2016: 11, Cayla 2021: 120–21). 9 From 1945 onwards, Hayek’s work took a turn towards psychology and political theory. Although he held a chair in social sciences at the University of Chicago, he was not a member of its renowned economics department. In 1962 he left Chicago to teach at the University of Freiburg im Breisgau. He stepped down as president of the Mont Pelerin Society in 1961 and retired in 1968. 10 Introduced in July 1963 by the Kennedy administration, the objective of the Interest Equalization Tax was to tax foreign investments to reduce the balance-of-payment deficit. This tax encouraged the opening of offshore dollar accounts by American banks and the development of the Eurodollar market. 11 Futures are contracts involving the sale or purchase of an asset at a price that is being negotiated today for a transaction that is expected to take place in the future. These contracts were originally designed to protect stakeholders from price fluctuations. However, because they are tradable and can be resold, they also allow for speculation. For example, a six-month contract to buy a raw material at a unit price of $10 will increase in value if the price of that commodity rises above $10. At the time of execution of the contract – six months after it is issued – the owner of the contract, whoever they may be, must honour it. But in the six months of its existence, the contract can change owners hundreds of times. The market price of the contract indicates the expected price of the commodity on the execution date. For example, if the contract is worth $4 in its market, it is anticipated that the price of that commodity will be $14 on the contract execution date. A purchase contract can have a negative value. In this case, the seller of the contract pays the buyer. 12 On the different elements of the neoliberal system and their articulation, see the introduction or Cayla 2021.

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13 The complaints of developing countries were perfectly legitimate. Export refunds allowed for exported agricultural products to be partly paid for by the EU budget, allowing European farmers to sell well below their cost of production. This practice was a threat to agriculture in developing countries whose farmers did not benefit from similar subsidies (Cayla 2018: 27–32). 14 A number of studies show a structural increase in agricultural price volatility since the implementation of liberalisation policies (Ohana and Depeyrot 2017).

References Abdelal, Rawi (2005), “Le consensus de Paris: la France et les règles de la finance ­mondiale”, Critique internationale, No. 28: 87–115. Abdelal, Rawi (2007), Capital Rules, The Construction of Global Finance, Cambridge, MA and London: Harvard University Press. Cayla, David (2021), Populism and Neoliberalism, London and New-York: Routledge. Cayla, David (2018), L’Économie du réel face aux modèles trompeurs, Louvain-la-Neuve: De Boeck Supérieur. Chan-Lee, James H. and Helen Sutch (1985), “Profits and Rates of Return in OECD Countries”, OECD Economics Department Working Papers, No. 20, Paris: OECD Publishing. Duménil, Gérard, Mark Glick and José Rangel (1987), “The Rate of Profit in the United States”, Cambridge Journal of Economics, Vol. 11, No. 4: 331–359. Fouquin, Michel and Jules Hugot (2016), “Two Centuries of Bilateral Trade and Gravity Data: 1827–2014”, CEPII Working Paper, CEPII. Hayek, Friedrich (1974), “The Pretence of Knowledge”, Awards Conference at the Nobel Academy, available online on: www.nobelprize.org. Milanović, Branko (2016), Global Inequality: A New Approach for the Age of Globalization, Cambridge, MA: The Belknap Press. Nardo, Michela and Fiammetta Rossetti (2013), Flexicaurity in Europe. Administrative Agreement JRC N°31962-2010-11 NFP ISP - FLEXICURITY 2, European Union. OECD (1994), The OECD Jobs Study: Facts, Analysis, Strategies, Paris: OECD. Ohana, Steve and Jean-Noël Depeyrot (2017), “Anticipating Agricultural Extreme Price Moves”, LabEx ReFi Working Paper, https://www.researchgate.net/ publication/337907040_Anticipating_Agricultural_Extreme_Price_Moves. Saez, Emmanuel and Gabriel Zucman (2019), The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, New York: W. W. Norton & Company. Williamson, John (2008), “A Short History of the Washington Consensus”, in Serra, Narcís and Joseph E. Stiglitz (eds.), The Washington Consensus Reconsidered: Towards a New Global Governance, Oxford, UK: Oxford University Press: 14–30.

5 MONETARISM IN A TIME OF CRISIS

Why do financial markets exist? A financial market is a place where financial securities, i.e. standardised contracts, are bought and sold, and where prices result from the behaviour of traders participating in the market. Traditionally, two kinds of securities are traded: stocks and bonds. Stocks are shares of a company’s capital and are traded on stock markets. Bonds are debt instruments that are traded on bond markets. When bonds have a short maturity, less than one year, they circulate in the money market, a market that is influenced by the interbank market (see Chapter 1). When bonds have a long maturity (a few years or even a few decades), they are used to finance investment spending by companies or governments. When financial markets were deregulated, new asset classes called derivatives were developed. A derivative is a contract on a pre-existing asset. This can, for example, take the form of a futures contract, i.e. a contract to buy or sell a security at a pre-agreed date and price.1 Another widely used derivative is a contract that provides compensation in the event of a borrower’s default. These insurance-like products are called credit default swaps (CDS) – derivatives on credit events. The ability of the financial system to invent all kinds of derivatives is limitless. Not only can any contract be created, but any number of such contracts can be issued. For example, it is possible to issue more CDSs insuring a bond than there are bonds in circulation. In such a scenario, some bondholders could be insured several times for the same asset. In fact, one does not even have to hold the asset they are insuring to buy CDSs, so one can be insured against a risk to which one is not even subject. In this case, the CDS serves as a speculative instrument and purchasing it essentially amounts to betting on the borrower’s default.

DOI: 10.4324/9781003253297-6

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All derivative contracts are asset based, but they are themselves assets that can be bought and sold like any other. It is therefore possible to create derivatives of derivatives. It is possible, for example, to issue a futures contract on a CDS. Most financial securities are issued by investment banks. Sometimes they are used in response to a company’s request to increase its capital, issue a bond to finance an investment, or simply to insure against a risk. At other times, these securities are created ex nihilo by investment banks when they sense a need or an opportunity. All these issuance operations are, of course, compensated by a commission, usually proportional to the volume of securities created. Financial securities (bonds, shares, derivatives) are traded on trading floors which are essentially virtual in today’s day and age. Each security is listed by the organisation administering the market, which means that its last quoted price is known at all times. Although most transactions take place within the framework of organised markets, it is possible to trade outside this framework in what is called the over-the-counter market (OTC market). This type of transaction occurs, for example, when one or both parties wish to keep the transaction and/or its amount secret. The OTC market is part of what is known as the shadow finance system.2 Figure 5.1 presents a simplified overview of the different financial markets. The darker the colour of the frame, the higher the risk. In the case of organised markets, the risk stems mainly from the nature of the securities that can be purchased. In the case of the OTC market, an added risk resulting from the lack of supervision of the transaction combines with the risk carried by the underlying securities. What is the economic function of financial markets? At first glance, one might think that their role is to organise financing for those who need money to invest. This view is only partially true. Indeed, financial markets are far from being the only way to finance the economy. Most of the time, when a private company or a household needs to find funds, it does so by taking out a bank loan.

FIGURE 5.1

Schematic representation of the different financial markets.

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Historically – and this is still the case today – the development of the economy was fuelled primarily through bank credit and self-financing, even though joint stock companies have existed since the Middle Ages. In other words, capitalism could probably function very well without financial markets. We could even close the stock market without much disruption to the economy. As economist Frédéric Lordon points out, the stock market takes more money from companies than it brings in (Lordon 2010). Moreover, most of the transactions that take place in financial markets concern securities that have already been issued, which means that they change owners without bringing new funds to the real economy. Although they may not be absolutely essential for financing the vast majority of investments, financial markets become especially useful when the amount of funding required for an operation exceeds a certain threshold. If the amount of an investment is considerable, it is easier to find thousands of investors ready to put in small sums than a single investor to finance the whole amount, which may not be possible even for large banks. Financial markets are thus an extremely convenient way for governments to meet their financing needs, as the amounts they need to invest are usually very large. However, one cannot exclude the possibility of exploring other mechanisms of public financing such as using bank deposit resources or allowing central banks to finance public spending directly, as has been done at other times, and as has been proposed by Stephanie Kelton (see Chapter 2). Since financial markets are only marginally used to finance the economy, what are they really used for and why has so much effort been made to develop them over the past decades? To answer this question, it is worth reading what financial economists say about them. For example, Eugene Fama, winner of the Nobel Prize in Economics in 2013, outlines the following vision of financial markets at the very beginning of one of his most famous articles. The primary role of the capital market is allocation of ownership of the economy’s capital stock. In general terms, the ideal is a market in which prices provide accurate signals for resource allocation: that is, a market in which firms can make production-investment decisions, and investors can choose among the securities that represent ownership of firms’ activities under the assumption that security prices at any time “fully reflect” all available information. A market in which prices always “fully reflect” available information is called “efficient.” (Fama 1970: 383) For Fama, the main role of financial markets is therefore not to match financing needs and capacities but to form prices so that decision-makers have information enabling them to correctly assess the value of what they own. Markets are deemed truly efficient when these prices are appropriate, in the sense that they reflect all available information. In this view of markets, the role of prices is to produce a “signal” that informs investors and guides their choices.

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Although Fama’s article does not explicitly refer to the work of Mises or Hayek on economic calculation, the reasoning and logic at work here are not different from their views. The fact that this process of reasoning does not need to be spelled out and is assumed to be self-evident shows how pervasive neoliberal concepts had become in the academic world less than 50 years after they were formulated. However, there is nothing obvious about the idea that one should measure the efficiency of a market by its ability to reveal appropriate prices rather than by its ability to organise transactions efficiently. Why doesn’t one call a market that adjusts its prices according to the characteristics of individual buyers efficient? Indeed, why should the price of a commodity be unique? In traditional societies, prices are not derived from markets, but from a process of inter-personal negotiations in which buyers and sellers gradually reveal their preferences to each other over the course of time. In these traditional markets, a single commodity could have multiple prices based on the individual specificities of the transaction. Does this make them less efficient? Fama and a long line of neoliberal thinkers would claim so. According to them, the existence of multiple prices makes it difficult to determine the value of assets and generate behavioural incentives. However, one could argue that the existence of a single price is not a sine qua non for the optimal organisation of transactions or for resource allocation. It is possible to argue that bargaining processes could increase the number of transactions in an economy by virtue of their ability to facilitate trust and mutual understanding, build customer loyalty, or even reduce some forms of uncertainty by creating a personal attachment between the two parties. These social aspects of economic transactions tend to be overlooked in the neoliberal view of the world. In its framework of analysis, financial markets are efficient, not because transactions take place in ideal conditions, but because they enable the discovery of prices that reflect all available information. Every day, millions of buyers and sellers move securities through organised markets based on the information available to them. These markets are managed by private administrative entities that calculate prices in a way that allows them to balance purchase orders against sell orders. There is nothing natural about this mechanism. Indeed, prices in financial markets do not emerge from a decentralised process of autonomous agents trading freely among themselves but are rather artificially constructed so that the value of the assets being traded can be ascertained and so that investors can make their choices accordingly. Prices constructed in this way have the added advantage of allowing an estimation of the value of assets held by corporations and billionaires. Today, it is standard practice in accounting to assess the value of an asset based on its market price, not its acquisition cost. As a result, if the price of a stock rises, it automatically generates profits for the entities that hold it, even though no real transaction has taken place. Conversely, if the price of a security collapses, it generates losses for its holders. The adage “as long as you don’t sell, you don’t lose (or win)” no longer holds true in the world of contemporary finance. Market valuations are systematically reflected in balance sheets and income statements. This means that

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financial markets not only guide future choices, but also evaluate past choices by determining the value of assets. By doing so, they enable a hierarchical ranking of wealth which informs and determines economic and social power dynamics.

Financial market deregulation and securitisation The rationale behind the financial markets is quite simple. Investors in securities are looking for the highest possible return at the lowest possible risk. We have seen that securities are created and brought to market by investment banks. This means that the ability of an investment bank to generate sales depends on its ability to produce profitable, low-risk securities. In theory, there is no limit to the kinds of securities that can be created. However, the US Glass-Steagall Act of 1933 and similar legislation in other countries around the world had instituted a strict separation between deposit banks and investment banking. As a result of this regulation, investment banks could only manage savings that had been specifically entrusted to them; they could therefore only create securities for a limited number of savers, which considerably limited their room for manoeuvre and scope for innovation in this respect. This is why they actively campaigned to scrap the Glass-Steagall regulation. The deregulation of financial markets was also ideologically motivated. The idea behind the reforms that followed the collapse of the Bretton Woods system was to make them more efficient in the sense of Fama, i.e. to improve their ability to set prices that reflect all available information. The establishment of the continuous quotation system was one such important innovation implemented in the late 1970s. Instead of prices being determined only a few times a day, this system continuously reflects the changes in price at any given moment, thus allowing traders to make capital gains by playing on microvariations in price. This has led to the development of high frequency trading, a method of speculation that involves placing a large number of orders in quick succession in anticipation of price changes. High frequency trading developed considerably in the early 2000s with the use of complex algorithms that were able to detect signals and anticipate market movements very quickly. Liberalisation policies also aimed to increase trading volumes. Financial theorists believe that the more participants there are in a market, the more information they can aggregate, making individual decisions less likely to disrupt prices. Furthermore, increasing the volume of transactions raises the overall liquidity of assets, making it easier to buy and sell them at the market price. Finally, allowing for the introduction of a variety of assets helps generate better arbitrage and fairer prices. In this approach, put forth by Fama (among others), the largest markets i.e. those that include a large number of different securities and involve many participants are more efficient than narrow markets where a smaller number of securities are traded by fewer investors. Historically, financial markets have in fact expanded in a variety of ways. The development of pension funds and insurance companies allowed for a considerable

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growth in the volume of financialised savings. The free movement of capital between financial markets that had remained largely compartmentalised within their national borders until the early 1970s also contributed to increasing the size of markets. In Europe, the creation of the single currency enabled the establishment of a large European capital market that was more liquid and “efficient” than national markets. The last instrument used to enlarge the market was securitisation. This type of operation developed in the United States after the definitive repeal of the GlassSteagall Act in 1999. For a closer and more detailed understanding of securitisation, let’s look at the functioning of the US housing market and how it evolved in the early 2000s. In the traditional banking system, when a bank offers credit to a household, the claim produced by the loan is an asset from the bank’s point of view. Claims carry a risk of borrower default. To minimise this risk, home loans can be mortgaged, which means that the bank then has the right to seize the borrower’s house in the event of their inability to pay back the loan. Foreclosing on a house is itself not without its risks: the house may be difficult to resell at the expected price if it is not in good condition, it often takes a long time to conclude the sale, and transaction costs are usually rather high in the real estate market. For this reason, a bank will only grant a home loan after it has verified that the borrower has the necessary revenue to service the loan and that the property can be easily resold in the event of default. From a neoliberal point of view, one of the problems with bank claims is that they do not have a market price. Indeed, they are assets that cannot be traded on a financial market. Moreover, estimating the value of claims is not easy because each claim is unique, since it depends on the specific characteristics of its debtor. Banks carry out valuations for the purposes of their annual balance sheets, but such valuations do not have the normative force of the markets, as they are not derived from the idealised mechanics of supply and demand. Financial deregulation allowed for the development of another financing model for real estate loans. In this model, the underlying transaction is the same: a deposit bank grants a loan to a household. But once the loan is concluded, an investment bank approaches the deposit bank to buy back its claim. This claim is then sold to an ad hoc financial structure, a special purpose vehicle (SPV) created by the investment bank and often domiciled in a tax haven. Real estate claims from all across the United States are invested in such structures. To finance these purchases, the SPV issues collateralised debt obligations (CDOs) in the financial markets. This allows real estate claims, which previously remained in the accounts of depository banks without a clear market value, to now be transferred to the accounts of an offshore company. This company can then transform them into financial securities and sell them worldwide, thus giving them a clear market value. This securitisation operation – which allows bank claims to be transformed into financial securities – does not, of course, eliminate risk. Rather, it averages out the risk by issuing a standardised asset based on historical statistics. If we

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know that 2% of claims typically suffer losses amounting to roughly half their value, we can easily calculate the average yield of a security comprising these claims. Better still, securitisation allows bonds to be issued with different levels of risk and return. For example, it can be decided that all future losses will be borne by only a portion of the bonds issued, say 5% of them. This first tranche, called the equity tranche, consists of high-risk bonds that are supposed to absorb all losses from eventual credit defaults, but they offer the highest returns, which may attract some risk-taking investors. The second tranche, the mezzanine tranche, represents 15% of the bonds and absorbs losses only in the event of an exceptional real estate crisis that would make the equity tranche insufficient. Finally, the last tranche is the senior tranche and represents about 80% of the bonds. Rated AAA by the rating agencies, this tranche is considered to carry no risk of loss. Because of its low risk, the yield on the securities it contains is also lower than on the other tranches. This system thus allows for the creation of assets that are highly sought after by fund managers around the world: securities that are, in theory, risk-free and yield better returns in comparison to, say, the usual risk-free bonds issued by financially strong governments (such as German government bonds). It is important to note here that CDOs are not the only securitisation systems for real estate loans. Mortgage-backed securities (MBS) are other, older securitisation mechanisms issued by government-sponsored companies specialised in financing mortgage loans.3 Unlike CDOs, MBSs do not allow the bonds issued to be structured, i.e. for the risk to be spread over certain tranches rather than others. In the remainder of this chapter, we shall refer more broadly to “mortgage-backed securities” to encompass real estate CDOs, MBSs and other mortgage-backed securities. Ultimately, securitisation serves two purposes. On the one hand, it expands the market, making it more “efficient” (in the narrow sense of Fama) and allowing for the valuation of assets that previously did not have a market price and could not therefore be traded. On the other hand, it allows investment banks to create new financial products that are very attractive to investors. Thanks to CDOs, investment bank developers were convinced that they had found the elusive philosopher’s stone of finance. Statistically, the default rate on home loans was well known in the US; it had never exceeded 5% in history and was below 2% in the early 2000s (Federal Crisis Inquiry Commission (FCIC) 2011: 216). The model devised by the Wall Street banks and based on these statistics therefore appeared to be very solid. Yet, it was this magical machine transforming US home loan debt into high-yielding and seemingly risk-free securities that collapsed in 2007.

The origins of the subprime crisis In the fall of 2006, numerous economists were puzzling over the strange course the world economy seemed to be taking (Galbraith 2012). The figures on international trade were particularly concerning: it appeared that the US trade deficit

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was growing even beyond normal external constraints. It had been growing steadily since the late 1990s, reaching a record high of $736 billion in 2006, equivalent to about 5.3% of US GDP (Figure 5.2). To be fair, the persistence of the US trade deficit was not an entirely new phenomenon. Since the early 1970s, the US had been running regular trade deficits. During the Reagan era, the trade deficit had grown alongside the budget deficit in a phenomenon known as “twin deficits”. The situation in the 1980s was, however, quite classic and easily explainable from a theoretical point of view. By cutting taxes massively without cutting government spending by the same amount, Ronald Reagan had strengthened the purchasing power of households, causing an increase in consumption and imports. The US trade deficit was thus, in a way, the consequence of this budget deficit, which was itself the result of a deliberate policy action implemented by the government. However, the situation of the US economy in the mid-2000s was very different from the 1980s. After the collapse of the dot-com bubble and the attacks of September 11, 2001, the Federal Reserve had chosen to use expansionary monetary policy to strengthen the economy. The resulting low cost of money had the desired effect, limiting recession by stimulating investment and consumption at the cost of deepening external imbalances. When the risk of recession faded by the end of 2004, Fed Chairman Alan Greenspan opted for a more restrictive policy and began to gradually raise interest rates. The effective management of trade balances is far from being a trivial matter for economists. On a macroeconomic scale, a trade deficit usually means that the country is running on foreign credit. Trade and financial balances are symmetrical, which means that when a country runs a trade deficit, it is selling financial assets to buy goods. These financial assets can be of any kind, but they are mainly securities. The debate remains as to which of these deficits is the consequence of

FIGURE 5.2

Evolution of the trade balance between 1970 and 2020 (2015 dollars).4

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the other. Most often, economists reason from the trade balance, believing that it is the real sector that determines the financial sector. In this line of reasoning, trade deficits are an indicator of an uncompetitive economy that has difficulty exporting and is forced to live on credit from abroad. But there is no need to reason in this way. The reverse is also possible: that it is the financial balance that determines the trade balance. Viewed in this way, economies that are particularly competitive in financial terms, i.e. which manage to export securities on a massive scale, have to buy goods in return for these exports. In the 2000s, many observers did not see the US trade deficit as a sign of economic weakness. For example, French economic journalist Éric Le Boucher saw the US deficit as the result of “the great alliance” between China and the US (Le Boucher 2004). In this alliance, the US agreed to buy Chinese consumer goods in exchange for the Chinese agreeing to finance US spending by purchasing Treasury bonds. Under this arrangement, America benefited from being able to access low-cost consumer goods and low interest rates, while China could tap into the vast US consumer market to develop its economy and exports. Could this situation last? The nature of this “alliance” meant that as the Chinese economy grew, the US economy had to absorb increasing amounts of goods by exporting more and more securities. In a short article published in October 2006, I called attention to the limits of this dynamic and questioned its sustainability (Cayla 2006). I was particularly surprised by the fact that, despite the Fed’s change to a more restrictive monetary policy in 2004, macroeconomic imbalances in the US economy continued to grow. Moreover, the rising cost of capital in the US was forcing other countries around the world to also raise their interest rates in order to secure financing. The US economy seemed to have become a large black hole that was absorbing more and more of the world’s savings every day. Nevertheless, the causes of this financial “achievement” were not very clear to me. The data available to me at the time was not very detailed and my analysis therefore stopped there. It was only a few months later, when I read a book by Paul Jorion explaining the functioning of the American real estate market in detail, that I became aware of one the causes of these imbalances ( Jorion 2007).5 Thanks to the “philosopher’s stone” discovered by Wall Street, the United States had become the world’s leading exporter of securities. And among the most popular securities were those CDOs built from US mortgages, especially those of the senior tranche that promised a good rate of return and were considered safe by rating agencies. Thus, contrary to what Éric Le Boucher had noted, China was not the only one involved in “the great alliance” with the United States. Europe was also buying US securities massively. However, while China was buying low-yielding government securities, European banks and investment funds, driven by competition, had specialised in the purchase of higher-yielding securities backed by US mortgage loans. This was why it was Europe, not China, which was most affected by the subprime crisis when it erupted.

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The subprime mortgage crisis For the European audience, news of the subprime crisis broke on August 9, 2007, with a press release from Europe’s largest bank, BNP-Paribas. The statement was technically formulated and difficult to understand for the uninitiated: The complete evaporation of liquidity in certain market segments of the US securitisation market has made it impossible to value certain assets fairly regardless of their quality or credit rating. The situation is such that it is no longer possible to value fairly the underlying US ABS assets in the three above-mentioned funds. We are therefore unable to calculate a reliable net asset value (“NAV”) for the funds. […] The valuation of these funds and the issue/redemption process will resume as soon as liquidity returns to the market allowing NAV to be calculated. In the continued absence of liquidity, additional information on the envisaged measures will be communicated to investors in these funds within one month of today.6 In plain language, this press release had announced the suspension of three of its investment funds. The decision to freeze these funds was not taken because they were making losses, but because the market had… evaporated. Consequently, it was no longer possible to assess the value of the assets in these funds. Why had the market disappeared? The securities in question (mainly mortgage-backed securities) had suddenly become unsellable, because there was suddenly no demand for these assets. As a result, it was no longer possible to determine their prices. This exodus of buyers, and therefore of transactions, did not actually signify the disappearance of the value of these securities. Rather, it meant that it had become impossible to price them. The problem was that the two mutually reinforced each other to form a loop. Since no buyers wanted mortgage-backed securities, their prices could no longer be determined; and because they no longer had a price, no one wanted them. The fundamental mechanism of securitisation was at the heart of this problem. As we have seen above, securitisation is about buying up and bundling loans into an ad hoc financial structure, the SPV, and spreading out the risk using historical data regarding the likelihood of a default. However, the development of securitisation had itself led to changes in underlying behaviours. As the demand for mortgage-backed securities kept going up, financial institutions had to buy more and more mortgages from lenders. For the lenders, selling their loans to these institutions was also a great way to cover their risks. As a result, banks granting real estate loans had become more tolerant of risk. To satisfy the unquenchable thirst of the institutions generating these securities, they did not hesitate to go to any lengths. Many resorted to hiring unscrupulous brokers to canvas as many households as possible, especially targeting those who could not always afford to borrow, with the promise of becoming homeowners and living

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the American Dream. These behaviours eventually affected the quality of credit and therefore of claims. Poor quality loans are known in the United States as subprime loans. In his book, Paul Jorion gives the following definition: In the United States, there are two distinct markets in the field of consumer credit: the prime market, i.e. top quality, and the subprime market, that is “below-par”. [...] The distinction reflects a spontaneous assessment of the risk incurred by the lender of losing all or part of their stake: the prime consumer is considered from this point of view to represent a negligible risk, while the subprime consumer is seen as representing a high risk of default. ( Jorion 2007: 140) To determine whether a household is prime or subprime, credit agencies use a rating developed by a private organisation, FICO, short for Fair Isaac Corporation; a company specialised in analysing credit data. The FICO rating assesses the risk of a borrower defaulting on his loan. For households, this score ranges from 300 (the riskiest borrowers) to 850. The score of 620 is considered a threshold below which the loan falls into the subprime sector, although other criteria may be taken into account to measure the associated risk, including the type and characteristics of the loan (Demyanyk and Van Hemert 2008: 6). As investment banks, lenders and brokers became confronted with a shortage in the claims needed to back CDOs and other mortgage-backed securities, they became less discerning on the quality of borrowers. This change in behaviour led to a relaxing of credit lending standards and an increase in the number of subprime mortgages. The annual volume of subprime loans increased from about $57 billion in 2001 to almost $455 billion in 2005, an eightfold increase in four years (Ibid.: 7). While the subprime sector accounted for less than 6% of all mortgages in 2000, it accounted for over 20% of the market in 2006 (JCHSHU 2008: 6 and 38). Not only had banks become more lax in properly assessing their borrowers, but some loans were simply fraudulent because the associated mortgage documents had been falsified by brokers or lending banks. Documents such as pay slips were sometimes doctored to overstate borrowers’ income (Mian and Sufi 2017). Another very common practice in subprime lending was to offer hybrid interest rates. This type of interest rate applied to 59.9% of subprime contracts in 2001, 65.3% in 2003, and 76.8% in 2006 (Demyanyk and Van Hemert 2008: 7). Hybrid rates work as follows: during the first two years, the rate paid by the borrower is fixed and the monthly repayment amounts are lowered; after a certain period, usually two or three years, the rate becomes variable and the monthly payments increase over time. Hybrid rates have the effect of generating delayed defaults. Paradoxically, these defaults delayed by two or three years could potentially be lucrative for banks, who could then let households go bankrupt at the end of the fixed-rate period, seize properties and make a capital gain on their resale. This type of operation is particularly profitable when real estate prices

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follow an upward trend, which was the case between 2001 and 2006. However, when the market turned at the beginning of 2006 and housing prices collapsed, many lenders found themselves unable to cover their losses by reselling the homes recovered from borrowers’ defaults in this manner. In 2006, the average default rate for mortgages, which had remained at around 2% since the late 1990s, rose rapidly and steadily, peaking at 9.7% at the end of 2009 (FCIC 2011: 214–5). Obviously, these defaults were much greater in the subprime sector. The Final Report of the FCIC notes that the proportion of defaults on subprime loans with variable or hybrid interest rates rose from around 5% at the beginning of 2006 to more than 20% at the end of 2007, and then to more than 40% in 2009 (Ibid.: 217). The commission also notes that at the beginning of 2007, more than 1.5% of mortgages did not offer any payment at all (Ibid.: 215). These were, presumably, fraudulent contracts. From 2006 onwards, when mortgage companies were faced with an increasing number of defaults on the one hand, and an increasing number of properties that could no longer be resold on the other, losses began to mount. All these losses were, of course, traced back to the institutions issuing securities, especially the offshore companies that had issued CDOs. These losses were first absorbed by the equity tranche; then by the mezzanine tranche; soon enough, however, it turned out that only the senior tranche was left to absorb the endless stream of credit defaults. In the end, these securities, which were deemed risk-free, were not as risk-free as expected because the actual default rates had exceeded all predictions. The problem with these models were that they were based on historical statistics. But it is a well-accepted principle that as soon as one builds a system based on the regularity of a behaviour (in this case, the default rate) that system – precisely because it works so well – contributes to changing those very behaviours, making its eventual collapse an almost certain eventuality. In short, hundreds of billions of claims from dubious – and sometimes fraudulent – subprime mortgages had been spread across financial structures which had in turn issued trillions of dollars’ worth of mortgage-backed securities. All the banks in the world had invested in these securities, and this was particularly the case in Europe. The issue was that because these claims had been securitised, it was no longer possible to exactly locate the origins of these subprime loans. The image used at the time to explain the crisis was that of an omelette. Amongst the US mortgage-backed claims, there were many fresh eggs and a few rotten ones. With securitisation, all these eggs were mixed together and turned into an omelette which was then cut and served to investors. At first, when there was one rotten egg for every 20 fresh eggs, those who purchased this omelette didn’t see anything wrong and everything was hunky-dory. But once it emerged that one in five eggs was actually rotten, no one wanted the omelette anymore, even though it was still made up mostly of fresh eggs. Not only did no one want them anymore, but because they had been thrown in together, then cooked and packed, it became extremely difficult to separate the good eggs from the bad.

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Banking panic and systemic crisis The BNP press release tells the rest of this story. The bank had realised that it was holding pieces of an omelette that nobody wanted. Nobody wanted them, because nobody, not even the BNP fund managers, really knew what was in them. But bankers were also worried because they knew that the entire banking sector had consumed a whole lot of omelettes. Eventually, as mortgage defaults increased – and they were often delayed – some of them would be sure to see losses. The problem was that no one knew who would be affected, who would be spared, or when exactly this would happen. In order to cover themselves, some investors came up with the idea of buying insurance in the form of CDS, as we have described above. Many of these insurances had been issued by the largest US insurer, AIG (American International Group), at a time when it was confident that it was insuring a virtually non-existent risk. As the subprime crisis unfolded, the CDSs traded at increasingly high prices, until it became clear that AIG and other CDS issuers would not have the financial means to cover all of the anticipated losses. The insurer was no longer insuring. When an entity which owes money to another cannot fulfil its contractual obligation of repayment without going bankrupt, it is called counterparty risk. A financial crisis escalates in two ways. Through the direct losses of the entities that have taken on risk, and through the indirect losses of those that have not taken on risk but are linked by financial obligations to those who have taken on risk. In today’s economies, the banking and financial sector are made up of a multitude of such interrelated debts. Everyone owes something to the other. As a result, when a bank fails, everyone to whom it owed money suffers losses. And if the bank that fails happens to be a large bank, the whole financial sector suffers significant losses, with the risk of a perpetuating chain reaction in which bank failures cause losses, and losses cause failures… until all banks ultimately fail. This risk is called systemic risk. This is what happened in Ireland, Iceland, and Cyprus a few years later, when their countries’ banking and financial systems totally collapsed. In the summer of 2007, most banks had a sword of Damocles hanging over their heads: those that had invested in US real estate securities were evidently likely to be the first affected; but the others were also worried that they could be affected by counterparty risk. Almost all banks stopped lending to each other as a precautionary measure. As a result, transactions on the interbank market froze. As we saw in the first chapter, the interbank market allows banks to refinance themselves. When banks can no longer borrow from their counterparts, they have no choice but to turn to the central bank in order to shore up their liquidity. As a result of this hiatus in the interbank market, banks stopped lending to real economy agents. Since they all stopped lending at the same time, they collectively generated a credit crunch – a widespread collapse of bank credit. The difficulties in borrowing that had until then impacted only banks now began to affect households and

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businesses as well. Thus, the financial crisis spread from the financial sector to the real sector of the economy. Moreover, international trade flows were also disrupted by banks imposing restrictions on their trade finance, which hit large exporting companies hard. As losses emerged, the sword of Damocles hanging over the financial sector came down and one bank after another failed, setting a domino effect into motion. The government-sponsored enterprises Freddie Mac and Fannie Mae, which had heavily invested in the securitisation of mortgages, received their first bailout from the US government in early 2008. In March 2008, Bear Stearns, the fifth-largest US investment bank by capitalisation, was bailed out and subsequently bought out. As losses mounted, public authorities in the US and elsewhere in the world were called upon to intervene and avert the risk of systemic failure. However, the increasing number of bailouts already implemented by the US government had begun to give people the impression that the wrongdoers were being rewarded. Faced with this tricky situation, it became urgent for governments to show that it was not their role or intention to save all the banks that had made dubious investments. This is certainly one of the reasons why the US government decided not to bail out Lehman Brothers when it too had to declare bankruptcy on September 15, 2008. By choosing to let Lehman Brothers fail, the US administration was probably operating on the assumption that because the bank did not manage deposit accounts, its collapse would not cause a systemic shock. Although it was the fourth largest US investment bank with offices in New York, London and Tokyo, the total assets it managed, over $600 billion, seemed almost modest compared to the assets managed by the world’s largest insurers or deposit banks (Lioudis 2021). A bank like BNP, for instance, has a balance sheet of more than 3 trillion euros. And even though $600 billion represents a huge sum of money, only the difference between the total value of assets and liabilities actually needs to be settled in the event of bankruptcy. At the end of the process, the final losses usually are of a much lower amount than the total liabilities, because many assets will retain at least part of their value. However, what the US government likely did not appreciate was how long the bankruptcy proceedings would take: by the time Lehman Brothers’ accounts were valued and settled, uncertainty was being added to uncertainty. Lehman Brothers was itself a big omelette made up of both rotten and fresh eggs. Adding this new risk to an already fragile financial system was the final nail in the coffin, setting the much-feared slide into systemic crisis in motion. The day after the announcement of Lehman Brothers filing for bankruptcy, leading US insurer AIG warned of its financial difficulties. AIG had nearly $1 trillion in assets that added to potential losses in the system (McDonald and Paulson 2015). The chain reaction had started. A systemic crisis had to be prevented at all costs and the contagion of bankruptcies had to be nipped in the bud. In a few days, US Treasury Secretary Henry

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Paulson announced a rescue plan amounting to $700 billion intended to reassure the public in a single, grand gesture. Initially, the plan consisted of setting up a “bad bank” fund that would buy up dubious assets such as real estate securities held by financial institutions and thereby clean up their balance sheets. But how could their prices be determined? These securities still did not have a market price because nobody wanted them. To save the financial system and limit the cost to the taxpayer, prices therefore had to be invented out of thin air, through negotiations with the companies concerned. A few weeks later, the rescue package was implemented in the form of direct equity investments and share buybacks. Again, even though the value of the equity investments remained unclear, the federal government and the financial institutions had been able to find common ground. Ultimately, more than 700 financial institutions were bailed out in this way, at a total cost of $313 billion (Swagel 2021: 2). Interestingly, the prices negotiated in this emergency scenario turned out to be rather fair, because the US federal government made a total profit of $9 billion through this operation, resulting in a slightly positive balance sheet for the rescue plan in the federal budget (Ibid.).7

The new mission of central banks Monetarism is one of the pillars of neoliberalism. As we have seen, monetarism consists of depoliticising the management of money, i.e. transforming central banks into technical institutions which are independent of political power and whose sole ambit is to control the money supply and stave off inflation. This conception of the role of central banks was shattered by the financial crises that followed one after the other from the year 2007. At the beginning of the subprime crisis in the summer of 2007, most monetary authorities put on a show of confidence. In October 2007, only the US Federal Reserve lowered its bank rate from 5.25% to 4.5%. All the other central banks chose either to leave their interest rates unchanged (Bank of Japan) or to raise them slightly (ECB, Bank of England, Bank of Canada, etc.). Although such decisions may seem surprising in hindsight, they demonstrate that central bankers were confident in their belief that the US housing market crisis would not lead to a global economic and financial crisis. Their main objective thus remained confined to deflating the housing bubble by keeping interest rates rather high in order to limit an increase in household and corporate debt. Even so, the paralysis of the interbank market and the resulting shortage of bank liquidity boded a financially turbulent summer. Central bankers reacted swiftly by lending to banks the liquidity that was needed to prevent the complete blockage of payment systems. Within two days after the BNP announcement, central banks in Europe, America and Asia injected nearly $300 billion in shortterm loans to financial institutions.8 They also eased borrowing conditions by

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deciding to extend the lending periods on their discount windows, so that banks could borrow funds from the central bank to meet their operational requirements. These kinds of actions remained well within the traditional role of the central bank, which is to provide commercial banks with liquidity. Between September 2007 and August 2008, most central banks did not change their strategy, because monetary authorities simply had no idea of the type of dramatic consequences the subprime crisis would have on their economies. It was widely believed that the US economy would be slightly affected, but that other economies in the world would be spared. Thus, only the Federal Reserve initiated a policy of cutting rates from 5.25% to 2%. The ECB chose a wait-and-see approach, focusing its attention on curbing inflationary risks. This is why it did not implement a rate cut, but rather raised interest rates slightly from 4% to 4.25% in July 2008. As for the Bank of England, it gradually lowered its bank rate in stages from 5.75% in July 2007 to 5% in spring 2008 (Figure 5.3). The collapse of Lehman Brothers in September and the ensuing systemic crisis forced monetary authorities to review their strategies completely. Their first reaction was to initiate a policy of lowering interest rates to strengthen the financing of banks and the economy. But these measures soon revealed themselves to be insufficient. Central bankers could use the traditional tools of monetary policy as long as it was simply a question of tinkering with interest rates or supplying the banking sector with liquidity. But when it appeared that the entire banking and financial system was on the verge of collapse, Federal Reserve Chairman Ben Bernanke was forced to come up with new modes of intervention. In theory, the role of a central bank is to provide banks with liquidity, in other words, to lend money in the short-term to enable them to make payments. But

FIGURE 5.3

Changes in the bank rates of the main central banks (2007–2009).

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unlike the crisis of the summer of 2007, the crisis of September 2008 was not a liquidity crisis that could be tided over with short-term loans; it was a solvency crisis. Many banks were close to failing because they had incurred large losses due to the sudden evaporation in the value of the assets they held. This brought the fundamental problem back to the surface. What is an asset worth if it has no market price because there is no longer any demand for it? The Troubled Asset Relief Program (TARP) put in place by the Bush administration in September 2008 had begun to address this problem by having the federal government buy back some of the risky financial assets at a negotiated price. However, protest from several prominent voices, particularly regarding the high cost incurred by the government (Blodget 2008), led the federal authorities to revise their strategy and opt for an equity investment rather than an asset purchase programme. But it was also possible for the US central bank to directly buy up these dubious assets. This would cost the taxpayer nothing and have the intended effect of cleaning up the balance sheet of the banks affected by the crisis. This operation was called “quantitative easing” (QE). Generally speaking, quantitative easing is a policy whereby the central bank buys back financial assets held by the banks it supervises. The first round of QE was launched on November 25, 2008, when the Federal Reserve announced that it was introducing a plan to buy back “the direct obligations of housing-related government-sponsored enterprises (GSEs) […] and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae.”9 In doing so, the Fed was stepping out of its traditional role as an issuer of money by acquiring, not risk-free securities as collateral for refinancing – which it traditionally does – but securities that were risky, of uncertain value, and that it would have to keep on its balance sheet for several years. Was there any particular economic or financial risk to undertaking such a measure? Not for the Federal Reserve itself, because a central bank cannot fail. Rather, the risk was primarily ideological and moral. The moral hazard arose from a question: by buying back bad loans from banks, were they not encouraging their irresponsible behaviour? The ideological risk was that such an action was profoundly against the monetarist principles that had guided central bank management until then. Monetarists argued that money returned to banks through these buybacks could only increase the money supply and fuel inflation. Moreover, it represented an unacceptable political intervention in the management of money. We have seen in the first chapter that the dynamics of inflation are more complex than in the monetarist understanding. When the central bank buys assets, this does not spontaneously result in an increase in the money supply as long as such financing remains within the banking sector. Money supply only increases when an agent from the real economy borrows from a bank. Without this credit operation, money issued into the system remains confined to the top level and does not directly affect the real economy (see Figure 1.1).

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FIGURE 5.4

Financial assets held by the Federal Reserve from August 1, 2007 to May 18, 2022 (USD billion).

The moral question, on the other hand, did indeed arise. In order to respond to it, the Federal Reserve conditioned its QE policy on the following criteria • • • •

The total amount of repurchases was limited to a predetermined envelope. The QE operation was limited in time. The types of assets involved were specified. Only banks subject to Federal Reserve regulation could participate in the buybacks.

Figure 5.4 shows the impact of the four QE programmes on the balance sheet of the Federal Reserve. In 13 years, there was a ninefold increase in the total assets held by the US central bank. At the beginning of 2022, its balance sheet was equivalent to just under half the annual GDP of the US economy. As the financial crisis receded, QE was repurposed towards supporting economic recovery. The credit crunch that came on the heels of the Lehman Brothers’ collapse had led to a deep recession in the US, the worst of its kind since the 1930s. To revive activity and stimulate growth, it was necessary to go beyond measures aimed simply at supporting the financial sector. It became clear that real economy agents (governments, businesses, households) would need to be encouraged to increase their spending and investment. One way to do this was to reduce the cost of borrowing. The problem is that the interest rate fixed by the central bank – the bank rate – is not the interest rate at which agents in the real economy borrow. As we saw in Chapter 1, a low bank rate can indirectly encourage commercial banks to lend more at lower rates. But Fed rates were already close to zero at the beginning of 2009. And despite the extremely accommodative policy in force, the US economy remained in the doldrums. It was necessary to find a way to act directly on long-term rates. Bernanke redirected QE to this purpose.

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The mainstreaming of quantitative easing policies Three categories of borrowers need to be distinguished. •

•

•

Banking institutions are subject to central bank supervision. As such, they can borrow short-term from the central bank or on the interbank market at an interest rate set by the central bank as per the established monetary policy. Governments borrow long-term on the public bond market. When governments are considered solvent, these public bonds are seen to be risk-free. Their rate is determined on the bond market according to the bond price (see box at the end of this section). Finally, the rates at which households and businesses borrow are set either in the private bond market or by credit institutions in the bank lending market. In general, these rates are calculated by adding a risk premium to the risk-free rate of government bonds. This risk is itself assessed by the market or by commercial banks.

Table 5.1 presents an overview of the different interest rates and how they are determined. This presentation makes it clear that the rates at which agents in the real economy borrow, the long-term rates, are not determined by the central bank but by the financial markets. If a household or company wants to borrow from a bank for a period of ten years, the bank looks at the ten-year risk-free interest rate (that of public bonds) to which it adds a risk premium that depends on the type of the loan and the characteristics of the borrower. To revive economic activity, it is therefore necessary to lower the shortterm rates determined by the central bank, but also to lower the long-term rates which are determined on the bond markets. It was to achieve this objective that the Federal Reserve redirected its QE programmes towards the purchase of Treasury bonds. Indeed, one of the special features of government bonds is that, as they are considered free of risk, they are often used as collateral – that is, as a guarantee – in many transactions. This makes them indispensable for financial institutions. When central banks buy up these securities on a massive scale, they reduce the supply of government bonds and thus boost their price. In

TABLE 5.1 Interest rates by borrower

Borrowers

What?

Who?

How?

Deposit banks

Refinancing rate of interest Risk-free longterm rates Risky long-term rates

Central bank, interbank market Public bond markets

Monetary policy

Governments Firms and households

Supply and demand of treasury bonds Commercial banks, Risk-free long rates + Private bonds markets risk premium

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doing so, they help to keep all long-term interest rates low (see box). In addition, they help governments find buyers easily when issuing new bonds. Quantitative Easing by the Fed allowed the US government to borrow cheaply to finance Obama’s massive $800 billion plan and “save or create as many as three to four million jobs by the end of 2010” (Obama 2009). At the time it was implemented by the Federal Reserve, the idea of allowing the central bank to buy back government securities was not entirely new. It was, in fact, first tried out by the Bank of Japan in 2001. The Japanese economy was then suffering from deflation – a general decline in prices – and its level of public debt exceeded 130% of GDP. This situation was particularly worrying for the management of public finances, as the Japanese government could not rely on inflation to reduce its debt burden. This led the Bank of Japan to buy treasury bills from banking institutions in the hope of fighting deflation and keeping government borrowing rates close to zero. In the United Kingdom, a QE operation was also initiated from March 2009, following the US QE programme. Unlike the Fed, the Bank of England’s stated aim was not to improve the solvency of banks but “to ease financial conditions, boost aggregate demand and thereby prevent inflation from being below the 2% target on a sustained basis” (Buseto et al. 2022) Consequently, the Bank of England bought mainly good quality public and private securities. The size of UK QE was nonetheless considerable. By the end of 2021, the total assets held by the Bank of England amounted to £895 billion, or more than $1 trillion (Ibid.). The European Central Bank only embarked on QE policies with great caution and, at first, with relative discretion. The reason for this reluctance was that the ECB’s statutes formally prohibit it from participating in government financing. Moreover, as a supranational institution, it is not subject to any political checks and balances and enjoys a great degree of autonomy (see Chapter 2). It is probably to preserve this independence that it did not wish to intervene in the bond markets by buying up public securities.10 Moreover, its very strict mandate, centred on the objective of price stability, cast a doubt on the legality of such an operation. The ECB nevertheless carried out a very limited asset purchase programme – 60 billion euros in total – between July 2009 and the end of June 2010. This first foray into quantitative easing was too small to have macroeconomic effects and seems to have served more to solve the liquidity problems of banks than to facilitate government financing.11 It was therefore not contested. When the programme ended, the ECB attempted to stay within the bounds of conventional monetary policy without initiating a new QE operation. However, with inflation very low and economic activity sluggish, the ECB lowered its interest rate sharply to 1% from May 2009 and continued to assist banks by providing them with short-term loans.

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It was not until early 2015 that the European Central Bank really decided to undertake what was then called “unconventional monetary policy.” At that time, the debt crisis in the Eurozone (2010–2015) had led European authorities to devise emergency rescue plans for Greece, Ireland, Portugal, and Cyprus.12 Two of these countries, Ireland and Cyprus, had seen their banking systems collapse within a few days. The other two were collateral victims of the global recession in a context of high public debt and loss of confidence in the solvency of their states. A fifth country, Spain, was also in serious trouble. It was forced to ask for 100 billion euros in aid to revive its banking system on the verge of collapse. In each of these countries, government bond prices had collapsed due to the perceived risk of non-repayment. For these states, but also for most agents in the real economy, interest rates started to soar to extremely high levels, which severely affected the entire economy. It is not possible for a state, or any debtor, to borrow in the long run when real interest rates are above 10%, because this would most certainly create a snowball effect leading to bankruptcy or sovereign default.13 To get the countries struggling with such exorbitant interest rates out of this deadlock and bring down their rates, other European countries set up alternative financing mechanisms to collectively guarantee their government debt. The ECB was also called upon to help.14 The countries in crisis were thus able to borrow at preferential rates that were more financially sustainable. However, in exchange for these loans, European authorities demanded that beneficiary states undertake structural adjustment policies – in other words, austerity policies – under the supervision of representatives of a “troika” made up of the European Commission, the ECB, and the IMF. This policy turned out to be a failure. In 2012 and 2013, after two years of sluggish recovery, the Eurozone went back into recession. The supervision of the Troika and the adoption of the European Fiscal Compact in March 2012 had pushed all European countries to expand austerity measures, which had stifled growth.15 In January 2013, Olivier Blanchard, the IMF’s chief economist, admitted that the experts who had recommended these fiscal consolidation measures had misjudged the economic situation and that the austerity plans had been carried out in too drastic a manner (Blanchard and Leigh 2013). The consequence of these errors was that the recession in the countries receiving assistance turned into a depression, preventing the states in crisis from returning to a state of solvency and affecting their ability to borrow on the financial markets. In Greece, Italy, and Spain, the political situation became explosive. The election of a populist party that could push for refusing to repay part of the public debt became a possible scenario that would have led to further losses for financial and banking institutions throughout the Eurozone. French and German banks held many securities issued by these countries. A sovereign default by a Southern European country was likely to cause a systemic crisis in the Eurozone, if not threaten the

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integrity of the Eurozone itself. Under these circumstances, it was inconceivable not to act. It was these considerations that led the European Central Bank to finally take the plunge into quantitative easing.

How financial markets determine risk-free interest rates Risk-free interest rates are the rates at which governments deemed to be creditworthy borrow. For a government, borrowing takes place by issuing bonds (also called Treasury bills). Once issued, these bonds are traded in financial markets, and their prices are determined by the forces of supply and demand. These price variations determine the interest rates at which governments can then issue new bonds. Here is an example of how this works. Let’s say a government wishes to borrow $10 billion. To do so, it issues $1 billion Treasury bonds at a price of $10 each. This bond has a ten-year maturity and an annual interest rate of 2%. In other words, the contract states that at the end of ten years, the bondholder will have received the total sum of 10 × 1.0210 = $12.19, or $10 in principal redeemed plus $2.19 in interest. For bonds without an annual coupon and in the absence of any particular financial event, the interest is repaid at maturity. The price of this bond will thus gradually increase over time until it reaches $12.19 at the time of repayment. Suppose that three years after its issue, the price of the bond has fallen and it is now being traded at $9. Since the value of the contract remains unchanged, the holder is still supposed to receive $12.19 in seven years’ time. But because the bond is now worth $9 instead of $10, the $12.19 pay-out due in seven years must now be split as follows: $9 in principal plus $3.19 in interest. In this way, when the price falls to $9 the implicit interest rate of the bond goes up to about 4.43% (9 × 1.04437 = 12.19). However, if after three years the price of the bond increases to $12.19, buyers do not expect any return and the interest rate is zero. Finally, if the price exceeds $12.19, this implies that the bond has a negative interest rate, which means that buyers must be willing to pay to hold the security. Thus, long-term interest rates vary according to the prices at which bonds are traded. When this price rises, rates fall, and vice versa. These rates also determine the rates that are offered when issuing new bonds. For instance, if the interest rate on seven-year Treasury bills is 4.43%, an issuing agency will not be able to issue new securities of the same maturity if it does not promise a rate at least equal to 4.43%.

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FIGURE 5.5

Ten-year government bond market rates in Europe (2007–2017).16

The decline and fall of monetarism Before he embarked on a career as a central banker through his appointment as governor of the Bank of Italy in 2006, Mario Draghi had been Vice President for Europe of the world’s largest investment bank, Goldman Sachs between 2002 and 2005. Thus, when he was appointed head of the European Central Bank in November 2011, this former economics professor knew the world of banking and finance inside out. As an investment banker, he had become keenly familiar with trading floor culture and as director of the Italian Treasury in the 1990s, he had also overseen the privatisation of more than 700 public companies. It is therefore no coincidence that Draghi chose to make use of an invitation by the British government to an event organised at the 2012 Olympic Games to speak directly to the financial community in London. He understood that financial markets follow their own logic and have a distinct psychology. If they have the slightest impression that an authority is unable to defend a costly decision, they will readily bet against it and usually win in the end. In 1992, the markets, under the influence of Hungarian-born investor George Soros, had bet that the British government would eventually take the pound out of the European Monetary System (EMS). After a fierce battle of a few days, the Bank of England proved unable to defend its currency against the forces of speculation and had to concede defeat. The markets had won. Could something similar play out with the euro? Could speculators attack the European single currency? Would they launch attacks on the weakest states and force them out of the Eurozone in the same dynamic that had forced the UK to leave the EMS 20 years earlier? It was to prevent such a scenario that Draghi spoke to the major fund managers in London in the following address: When people talk about the fragility of the euro and the increasing fragility of the euro, and perhaps the crisis of the euro, very often non-euro area

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member states or leaders, underestimate the amount of political capital that is being invested in the euro. And so we view this, and I do not think we are unbiased observers, we think the euro is irreversible. And it’s not an empty word now, because I preceded saying exactly what actions have been made, are being made to make it irreversible. But there is another message I want to tell you. Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.17 The now-famous expression “whatever it takes” was a deliberately vague phrase employed as a kind of nuclear deterrent. Although it was never explicitly specified what exactly would be done in the event of an attack, Draghi’s speech was intended to quash any aggressive market tendencies, and its meaning was more than clear to the gathered listeners. However, the most remarkable feature of this speech was the fact that Draghi voluntarily chose to step out of his technical role as manager of the ECB and assume the role of a fully-fledged European leader by defending the single currency, not as a tool, but as a political project. In a sense, this speech constituted a first break with the spirit of monetarism. It paved the way for the quantitative easing that would be implemented two and a half years later. The euro had to be saved “whatever it takes”. To do this, it was necessary to reduce the spreads, i.e. the interest rate differentials between European countries (Figure 5.5). As we have seen above, long-term interest rates are determined by the bond markets. To lower these rates, government bonds would have to be bought up in large numbers on the financial markets. This is exactly what the ECB proceeded to do in early 2015. Unlike the 2009 programme, this new operation was not limited to buying €60 billion worth of assets over one year, but €60 billion per month for one year; an envelope that rose to €80 billion the following year, then €60 billion again between April and December 2017. From January 2018 onwards, the ECB gradually began reducing its asset purchases, but the programme was restarted again in November 2019. In December 2021, the ECB once again pledged to buy between €20 billion and €40 billion of assets per month over the year 2022, specifying that it would do so “for as long as necessary.”18 In 2020, the COVID-19 pandemic forced governments to incur considerable expenditure to meet the cost of lockdowns. In this context, quantitative easing policies were revived. The Federal Reserve doubled the size of its balance sheet in a few months (Figure 5.4), while the ECB implemented a new programme that grew steadily throughout 2020, finally reaching €1,850 billion by the end of the year.19 Ultimately, the European Central Bank made total net asset purchases of €2,708 billion between March 2015 and April 2022 and another €1,718 billion under

Monetarism in a time of crisis  115

the Pandemic Plan, bringing the total figure to €4,426 billion, the vast m ajority of which were government bonds. With these purchases, the Eurosystem – the network of central banks under the aegis of the ECB – became by far the largest creditor of European governments. As of 31 December 2021, it held 39% of total outstanding government bonds, compared with only 16.1% for all eurozone monetary and financial institutions from the Eurozone (MFIs). The share of MFIs in the holding of government bonds was thus almost halved between 2004 and 2022 (Figure 5.6). The massive intervention of central banks through the purchase of public securities constitutes a break with monetarist principles. Firstly, it reflects a very elastic conception of the notion of “price stability”. Indeed, the justification put forward by the monetary authorities for initiating QE was that inflation was too low, i.e. below the 2% target, and that it had to be raised to bring it back to its ideal level. Indeed, when the ECB implemented its QE programme in 2015, the level of inflation in the Eurozone was around 0.2%. However, by the time it decided to extend the programme in December 2021, the inflation rate in the Eurozone had risen to 2.6% and was accelerating. It therefore seems paradoxical, and quite mystifying, to continue to pursue a policy aimed at raising inflation to 2%, when this threshold is well past. Moreover, the official 2% inflation target is simply a rule of thumb whose theoretical basis is fragile, although it is widely used by most central banks in the world (ECB 2021a: 55). Monetarism as advocated by Milton Friedman did not defend the idea of low inflation, but rather zero or even negative inflation.21 American economists Roberto Billi and George Kahn who specialise in monetary issues estimated, just before the financial crisis, that the optimal rate of inflation to aim for lay between 0.7% and 1.4% (Billi and Kahn 2008), a level

FIGURE 5.6

Share of government bonds of Eurozone countries held by the Eurosystem and monetary and financial institutions respectively (Q1 2014–Q4 2021).20

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well below 2%. So how do central banks justify the 2% inflation target? On its website, the Federal Reserve is laconic in its answer to this question. It simply states that 2% inflation is the level most “consistent” with its mandate based on employment and price stability. The European Central Bank, for its part, has since 1998 defended the idea that the objective of price stability meant inflation close to but below 2%. On 8 July 2021, it officially revised its inflation target strategy to achieving a 2% objective in the medium term (ECB 2021b). This was a clever manoeuvre, since with this new definition, cyclical inflation slightly above 2% – as the Eurozone had been experiencing in late 2021 – would no longer be considered contrary to its objectives. This made it possible for the ECB Governing Council to maintain QE measures in 2022 without appearing to betray the institution’s mandate. Since QE was put in place with the official aim of increasing the level of inflation to 2%, the implementation of such unconventional monetary policy in times of high inflation is indeed questionable. It is becoming increasingly clear that central banks are not using QE as a means to achieve their inflation targets, but are rather adjusting their inflation targets in order to maintain QE measures. This gives the impression that their primary objective is not to control inflation but to justify their continuation of unconventional monetary policies. This reading is not without merit. The objective of quantitative easing was arguably never to address inflation. As we have seen above, the real aim of these policies was to lower long-term interest rates and thus help governments finance themselves at low cost. The fact that central banks are helping governments to finance themselves would not necessarily pose an issue as such if these actions had not been explicitly excluded – following the monetarist approach – from their mandates, with the aim of preserving their ability to conduct monetary policy independent of political power. In practice, however, central banks are indeed acting pragmatically, which is a good thing. Monetary policies in the US, Europe and the rest of the world have moved away from monetarism. They are no longer simply managing the money supply to control inflation, as economics textbooks claim; but are rather working to save the economy in close coordination with government authorities. The problem is that central bankers have been in a state of cognitive dissonance since 2009. They are continuing to state one thing publicly, but acting according to another, without clearly explaining their objectives. From a democratic point of view, this is problematic, because central banks are not real political actors. Their legitimacy is not derived from universal suffrage and they do not have the same sweeping scope of action that elected officials might have. Instead, their actions operate in the framework of a mandate that has been entrusted to them and whose scope of action is limited. What would happen, for instance, if an unelected, and therefore politically unaccountable person took the liberty of going beyond their remit? Indeed, this would threaten the rule of law. The depoliticised management of monetary policy thus constitutes a real democratic problem in the sense that it allows important choices to be made without there being a political leader behind them.

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The solution to this problem would be to admit that the traditional doctrine that frames the action of central banks has become obsolete. If this is acknowledged, the mandate of central bankers could be extended, and they could be made the executors of a policy decided in concert with political authorities. Or one could – why not? – even decide that central bank governors should be fully responsible to the people, i.e. elected and transparently accountable. The current configuration, in which central bankers essentially act as funders of governments while exempting themselves from any responsibility or accountability to an elected authority, is not acceptable in a democracy. For instance, the governor of a central bank could hypothetically decide to financially strangle a government due to a political disagreement. This is not a purely theoretical situation either, because this is exactly what happened to the government of Alexis Tsipras in 2015 when it tried to renegotiate the austerity measures imposed by the Troika. The ECB used all its influence to force the Greek government to accept the conditions imposed by Greece’s creditors, even if this meant choking the Greek banks and economy. The episode was well documented by former Greek Finance Minister Yanis Varoufakis, as well as by other independent observers (Varoufakis 2017, Delaume 2015, Mounk 2018: 11–3). In fact, the way in which the question of the rule of law is posed is very different from the one formulated by Senator Mark Warner when he took offence at the fact that the President of the United States wanted to impose his policy on the chairman of the Federal Reserve (see Chapter 2). To assume, as Warner does, that central bank independence is a condition of the rule of law is to implicitly assert a superiority of the economic order over the democratic order. This is a principle found among ordoliberals and stems from the neoliberal vision of the relationship between economy and society. But it is contradictory to democratic principles which, on the contrary, state that it is up to the people and their representatives to determine the fundamental choices that face their societies. In any case, the current setup – which forces central bankers to be creative in interpreting their mandate in order to prevent the collapse of the economy while simultaneously pretending to respect the monetarist framework that has been imposed on them – is untenable in the long run. Admittedly, in the short run, maintaining ambiguity about the objectives of monetary policies may have some advantages: it allows them to avoid a clarification that could potentially be the source of conflict. However, this strategy does raise legal questions. The situation of the ECB is especially unique from this standpoint. In all other countries in the world, central banks are backed by a state, and therefore face political checks and balances. The governments of these countries can therefore, with a little willpower, reform their central banks and change their mandates. This is not the case in Europe, where the ECB derives its legitimacy from treaties that are not backed by a true federal political power and are particularly difficult to amend. So even though monetarism no longer exists in practice in continental Europe, the ideas of monetarism continue to dominate Europe’s institutions. German citizens have, for instance, contested the legality of QE measures.

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In May 2020, the case was brought before the Constitutional Court in Karlsruhe, who officially asked the ECB to justify the legality of its practices on behalf of the German people.22 This court decision brought about a conflict between the European authorities and Germany, as the ECB claimed that, as a supranational entity, it was not subject to German law and was therefore only accountable to the European Court of Justice, which had already authorised its quantitative easing measures. This anecdote goes to show how powerful ordo- or neoliberal principles remain in Germany. The idea of breaking with central bank independence or asking it to contribute to financing government spending remains unthinkable in the country. A reform in the current monetarist framework is thus not only impeded by the texts of the treaties and regulations, but also by the beliefs and concepts that are deeply rooted in the political histories of these countries which continue to inform their citizens’ approach to these matters. In addition to these institutional issues, there are also differences of interest. Germany is a creditor economy with large foreign trade surpluses and the current monetary policy hurts its savers by bringing real interest rates down, sometimes even into the negative. It is therefore not wrong or unfounded for Germans to feel cheated. However, giving up control of interest rates and letting them increase could reignite the sovereign debt crisis and cause the single currency to explode. Will Christine Lagarde, who took over from Mario Draghi in November 2019, be able to pursue the “whatever it takes” approach to the point of risking coming into conflict with Germany? Or is there a way to reconcile the current needs of the economy with the principles of neoliberalism?

Notes

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References Billi, Roberto M. and George A. Kahn (2008), “What is the optimal inflation rate?”, Economic Review, Federal Reserve Bank of Kansas City, Vol. 93: 5–28. Blanchard, Olivier and Daniel Leigh (2013), “Growth Forecast Errors and Fiscal ­Multipliers”, American Economic Review, Vol. 103, No. 3: 117–120. Blodget, Henry (2008), “Warren Buffett Reveals Bailout’s Dirty Little Secret”, Business Insider, Sept. 24, 2008. Busetto, Filippo, Matthieu Chavaz, Maren Froemel, Michael Joyce, Iryna Kaminska and Jack Worlidge (2022), “QE at the Bank of England: a perspective on its functioning and effectiveness”, Quarterly Bulletin, Q1. Cayla, David (2006), “Où nous entraine l’économie américaine?”, Parti Pris, No. 27, Oct. 2006. Cayla, David (2021), Populism and Neoliberalism, London and New-York: Routledge. Delaume, Coralie (2015), “Où va la Banque centrale européenne?”, Le Débat, No 187, Paris: Gallimard: 75–87. Demyanyk, Yuliya. and Otto Van Hemert (2008), “Understanding the Subprime Mortgage Crisis”, Working Paper 2007-05, Federal Reserve Bank of St. Louis. European Central Bank (2010), “Covered bond purchase programme completed”, June 30, 2010, https://www.ecb.europa.eu/press/pr/date/2010/html/pr100630.en. html (accessed on May 23, 2022). European Central Bank (2021a), “The ECB’s price stability framework: past experience, and current and future challenges”, Occasional Paper Series, No. 269, Sept. 2021. European Central Bank (2021b), “ECB’s Governing Council Approves Its New Monetary Policy Strategy”, Press release of July 8, 2021. Fama, Eugene (1970), “Efficient Capital Markets: A Review of Theory and Empirical Work”, The Journal of Finance, Vol. 25, No. 2: 383–417. Financial Crisis Inquiry Commission (2011), The Financial Crisis Inquiry Report: The Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, Official Government Edition. Friedman, Milton (1969), “The Optimum Quantity of Money”, in Friedman, Milton (ed.), The Optimum Quantity of Money and Other Essays, London: Macmillan, 1–50. Galbraith, James (2012), “Who Are These Economists, Anyway? A Response to Paul Krugman”, Working Paper, Veblen Institute, Jan. 28, 2012. Joint Center for Housing Studies of Harvard University (2008), The State of the Nation’s Housing 2008, Harvard University. Jorion, Paul (2007), Vers la crise du capitalisme américain?, Paris: La Découverte. Le Boucher, Éric (2004), “La très grande alliance entre les Etats-Unis et la Chine contre le reste du monde”, Le Monde, Jan. 24, 2004. Lioudis, Nick (2021), “The Collapse of Lehman Brothers: A Case Study”, Investopedia, https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp (accessed on Jan. 7, 2023). Lordon, Frédéric (2010), “Et si on fermait la Bourse?”, Le Monde diplomatique, No. 671, Feb. 2010. McDonald, Robert and Anna Paulson (2015), “AIG in Hindsight”, Journal of Economic Perspectives, Vol. 29, No. 2: 81–106. Mian, Atif and Amir Sufi (2017), “Fraudulent Income Overstatement on Mortgage Applications during the Credit Expansion of 2002 to 2005”, The Review of Financial Studies, Vol. 30, No. 6: 1832–1864.

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Mounk, Yascha (2018), The People vs. Democracy, Why Our Freedom Is in Danger and How to Save It, Cambridge, MA: Harvard University Press. Obama, Barack (2009), Statement on Signing the American Recovery and Reinvestment Act of 2009, Washington, DC: The White House, Feb. 17, 2009. Swagel, Phillip L. (2021), Report on the Troubled Asset Relief Program – July 2021, Congresional Budget Office. Varoufakis, Yanis (2017), Adults in the Room: My Battle with Europe’s Deep Establishment, London: Bodley Head.

6 DOXA AND PRAXIS

A return to normal? Since the recent rise in inflation, neoliberal voices have once again called for monetary policy to be normalised by phasing out quantitative easing. In the summer of 2021, British economist Mervyn King, who was Governor of the Bank of England from 2003 to 2013 and had in this capacity spearheaded his country’s adoption of unconventional monetary policies, worried, in the now usual rhetoric of monetarists, about the “dangerous addiction” that he believed the continuation of QE policies could generate (King 2021). In a report published a few days earlier, the House of Lords Economic Affairs Committee (EAC), of which he is a member, had pointed out the risks of continuing to pursue the monetary policy currently in place. Though the report did not question the legitimacy of its use in the face of crises that “have involved shocks and great uncertainty of the kind outside standard models” (EAC 2021: 3), it nevertheless insisted on the urgency of rethinking this approach in a context that was very different to the time when quantitative easing measures were first implemented. The Lords were more specifically concerned about the weakness of monetary authorities’ justifications for continuing to maintain QE programmes. They noted that the Bank of England’s claim that the inflationary effects were transitory had not been demonstrated and that QE was likely to have an impact on the price level. They were also concerned about the cost to public finances of continuing to pursue QE policies if interest rates rose.1 Thirdly, the Lords felt that QE operations had been perceived as “at least partially motivated to finance the Government’s fiscal policy” (Ibid.: 4). This perception could, in their view, have discredited the Bank of England’s reputation as an independent institution and impaired its credibility in implementing anti-inflationary DOI: 10.4324/9781003253297-7

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policies. Finally, the report questioned the macroeconomic benefits and impact of QE measures. The Bank of England has not engaged sufficiently with debate on tradeoffs created by the sustained use of quantitative easing. It should publish an accessible overview of the distributional effects of the policy, which includes a clear outline of the range of views as well as the Bank’s view. (Ibid.: 5) Indeed, the main cause of concern for the authors of the report as it appears throughout the text is the need to find a an exit strategy from heterodox monetary policy. Quantitative easing would, in their view, constitute an “addiction” from which it would become increasingly difficult to escape the longer it was maintained. There is an increasing risk that central banks are facing a “no-exit paradigm” from quantitative easing. No central bank has managed successfully to reverse its asset purchases over the medium to long term, and the key issue facing central banks as they look to halt or reverse quantitative easing is whether it will trigger panic in financial markets that spills over into the real economy. [...] The Bank of England needs to set out a short-term plan for restoring policy to sustainable levels. We recommend that it expedites its review as a matter of urgency. As part of the review, the Bank should outline a roadmap which demonstrates how it intends to unwind quantitative easing in different economic scenarios. (Ibid.: 52) The question of the normalisation of monetary policy was posed in similar terms on the other side of the Atlantic. In an opinion piece published in Time ­Magazine in March 2022, economist Lawrence Summers expressed concern about the inadequacy of measures undertaken by the Federal Reserve to bring down inflation. He said the economic situation was reminiscent of the 1970s and expressed the fear that the mistakes of that era would be repeated. “If there is a single clear lesson from the 1970s,” writes Summers, “it is that Richard Nixon’s price controls were a disaster that actually exacerbated the build-up in inflation by reducing the pressure for needed monetary restriction” (Summers 2022). Although he welcomed the Fed’s change of direction in announcing that it would disengage from QE and raise its interest rates, Summers was concerned about the tendency of the monetary authority to underestimate inflation by treating it as a transitory phenomenon. In his view, it was very likely that inflation would continue to accelerate due to what he called “unsustainable” levels of demand. He therefore believed that the only possible strategy would be to achieve a “soft landing” for the economy but warned that there were “no easy and painless ways” to go about this. Summers offered only two possible remedies to

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combat inflation. Fiscal and monetary austerity measures could be i mplemented to prevent the economy from overheating and reduce demand. Tariff reductions, he explained, could also be used to spur free trade, help exporters to be more competitive by keeping their input costs down and thus directly reduce prices for consumers. Summers also criticised the policies of the Biden administration. “A more constructive agenda would focus on cost reduction for the benefit of consumers by letting market forces work,” he suggested. The speed with which mainstream economists have moved from support for government spending and expansive monetary policy back to the most orthodox monetarism should not be surprising. At the time of the 2008 crisis, and then during the COVID crisis, many observers – depending on their political and economic views – were either ecstatic or worried about the “return to Keynesianism” in the form of strong state intervention in the economy. The reality though is that there was never a return to Keynesianism, nor did these actions constitute a break with neoliberal principles. Rather, governmental practice simply adapted itself to respond to crises that, because of their magnitude, demanded strong and determined economic intervention from the state. It should be remembered that neoliberalism is not at all hostile to state intervention. Unlike Manchesterian liberalism, neoliberal thinking was founded in opposition to laissez-faire and in response to the collapse of the 1930s (Cayla 2021: 64–100). The early neoliberals believed neither in the perfection of markets nor in the abolition of states. On the contrary, they believed that markets can only function in the long run through sustained and determined public intervention. There are two opposing ways of interpreting the involvement of governments and central banks in the economy since 2008. Most commentators frame government action as a pragmatic response to managing the crisis at hand, for which they have had to put neoliberalism on hold. But the more accurate interpretation would be to see that the aim of government intervention was rather to save the markets than to circumvent them. In doing so, they did not abandon or betray neoliberal principles. A cursory overview of the measures that were implemented and a look at the measures that were never debated or even considered should suffice to underline this point. It is striking, for instance, that almost no bank was nationalised in response to the financial crisis. While efforts were made to better regulate the financial system, the strict separation that had once existed between investment banks and deposit-taking banks was not re-imposed. Similarly, the free movement of capital was never really threatened, nor was the competitive logic that drives banks to take risks ever questioned. In fact, free trade was reaffirmed after 2008 as one of the major objectives of international cooperation policies. As long as inflation levels were kept low and the central bank’s independence was maintained, quantitative easing measures were tolerated, because they allowed the economic and financial system to be saved from total collapse. Let us now look at state interventions during the pandemic. As with the financial crisis, the pharmaceutical industry was massively subsidised, but at no

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time did governments attempt to further control the pharmaceutical sector. State authorities preferred to subsidise dozens of competing vaccine projects, including those based on the same technologies, rather than impose cooperation between manufacturers. In most Western countries, vaccine prices were set through a process of competitive bidding, just like for any other public contract, which meant that governments had to out-bid each other to be the first recipients. While some pharmaceutical companies made soaring profits, there was no reflection or debate on the possibility of an exceptional tax on them. Similarly, no measures were taken to force producers of vaccines or medical equipment to charge reasonable prices amidst a shortage, and no public takeover of these companies was carried out. While the US and UK imposed export restrictions on medical supplies at the outset of the health crisis, the EU found itself in the paradoxical position of producing and exporting Pfizer vaccines to Israel while its own members were under-supplied. Finally, despite the vast majority of the world’s countries expressly demanding for the patents necessary for the production of messenger RNA vaccines to be lifted, most producer countries refused, putting intellectual property rights above public health imperatives. Faced with the multiple shocks caused by the pandemic, two broad public policy strategies can be identified. In less wealthy countries, governments tried to avoid lockdowns to preserve their economies. In wealthier countries, lockdowns were more often imposed, but compensated for by direct allowances or subsidies to citizens based on their previous income. At no time was there any question of suspending or deferring the application of contracts such as rent payments or loan repayments. Rather than re-examining the relationship between landlords and tenants, money was directly given to households and businesses to ensure that rents were paid and contracts honoured. In short, whenever financially possible, states substituted themselves for the markets on an ad hoc basis to prevent market distortion or a change in their equilibrium. When they did not have the means to compensate the people, they minimised containment measures to save the markets at the expense of public health, with the result that recent research has shown that COVID has been twice as deadly in the poorest countries as in the richest (Guglielmi 2022).2 These strategies seem to illustrate an adherence rather than a break with the neoliberal doctrine.

Government at the service of the market: Jean Tirole’s contemporary Neoliberalism One may object to this reasoning by pointing out that neoliberals have not ignored the crises or their severity. But the question remains: what conclusions have they drawn from recent crises and what solutions have they to offer to help prevent another financial crisis from breaking out? More broadly, how can it be explained, from a neoliberal perspective, that financial markets have collapsed to a point where the value of a whole range of assets can no longer be determined?

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Neoliberalism boils down to a simple idea: the state must be at the service of the proper functioning of markets. The assertion of this principle implies that markets are likely to dysfunction, if, for example, there is insufficient competition or due to externalities such as pollution, which can lead to price distortions. 3 When there is insufficient competition, prices are overly influenced by producers. The existence of externalities implies that prices are not taking into account certain costs or benefits to society. In these scenarios, prices must be adjusted. Thus, neoliberals believe that the role of the state is to “fix” the markets. This is where they differ from ultra-liberals, who argue for governments to totally disengage from the economy and for the functions of the state to be limited to maintaining law and order and preserving property rights. Neoliberals, on the other hand, believe that the economic role of the state is complementary to that of the market. Its role is to provide a framework within which the forces of supply and demand can properly interact for appropriate price formation. Milton Friedman summarised his view of the role of the state as follows: A government which maintained law and order, defined property rights, served as a means whereby we could modify property rights and other rules of the economic game, adjudicated disputes about the interpretation of the rules, enforced contracts, promoted competition, provided a monetary framework, engaged in activities to counter technical monopolies and to overcome neighborhood effects widely regarded as sufficiently important to justify government intervention, and which supplemented private charity and the private family in protecting the irresponsible, whether madman or child – such a government would clearly have important functions to perform. The consistent liberal is not an anarchist. (Friedman 1962: 34) Most contemporary economists hardly ever explicitly refer to Friedman, who is too political a figure. Nevertheless, they share some of his ideas, often completely unconsciously. This is the case, for example, of French economist Jean Tirole. Examining the work of an economist such as Tirole is all the more interesting because he is a renowned researcher who has a much less controversial image than Friedman or Hayek. Moreover, unlike Friedman and Hayek, who were politically involved economists, Tirole has always maintained his political neutrality and his role as an academic expert. A resident of France, Tirole is regularly solicited by governments of both the Left and the Right to coordinate and write reports aimed at informing public policy. His latest report, co-led with economist Olivier Blanchard and featuring contributions from economists from around the world, is an example of academic expertise claiming false neutrality (Blanchard and Tirole 2021).4

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In his 2017 book, written after receiving the Nobel Prize, Tirole formulates his view of the role of the state as follows: The concept of the state has changed. Formerly conceived in many countries as a provider of jobs through the civil service and a producer of goods and services through public enterprises, in its modern form the state ideally sets the rules and intervenes to correct market failures, rather than substituting itself for the market as a mediocre manager of enterprises. When markets are failing, the modern state regulates. It assumes the responsibility for creating equality of opportunity, healthy competition, and a financial system not dependent on bailouts using public money. It finds a way of making economic actors act responsibly with regard to the environment, of establishing equality in health insurance coverage, of ensuring protection for employees who do not have the information that would empower them (safety in the workplace, the right to high-quality training), and so on. In its operations, it is nimble and reactive. (Tirole 2017: 169–70) The attentive reader may note here that Tirole’s vision is not fundamentally different from Friedman’s. In both cases, the producer state is delegitimised in favour of the regulator state, in other words, it is responsible for monitoring the “rules of the game” by compensating for “market failures” in Tirole’s case, or “neighborhood effects” in Friedman’s case, two expressions that cover the problem of externalities in particular. The state must also “promote competition” (Friedman) or create “healthy competition” (Tirole); finally, it must guarantee the “equality of opportunity” and “protection for employees who do not have the information that would empower them” (Tirole) or complement “private charity” by “protecting the irresponsible” (Friedman). There are, of course, some differences that can be attributed to the very different environments and times in which these extracts were written. Friedman insists on the role of the state in establishing a monetary framework, this element is absent in Tirole; indeed, in EU countries, the management of monetary policy is delegated to the ECB and no longer falls within the remit of states. The norms and recommendations expressed by Tirole in his book offer an excellent synthesis of contemporary neoliberal thinking. “The proper functioning of the market depends on the proper functioning of the state,” he asserts (Ibid.: 162). But this complementarity between the two institutions implies that each remains in its own place without impinging on the functions of the other. The state establishes the framework that allows everyone to freely maximise their own utility in the market space. Friedman explained in a famous opinion column in the New York Times that the social responsibility of corporations should be limited to maximising their profits (Friedman 1970). Similarly, for Tirole, “the state defines the rules of the game and the agents’ responsibilities; they then may (and even must!) pursue their own self-interest” (Ibid.: 161).

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According to Tirole, the pursuit of the maximisation of individual interest is of course only possible if the state agrees to relinquish the bulk of productive tasks to the market or to specialised and independent agencies operating on its behalf. For instance, he recommends that the size of the state be reduced by adopting the Swedish model, pointing out that “Sweden decreased its public expenditure by 10 percent of GDP. Thanks to private contracting, the number of government officials fell from 400,000 to 250,000 in the 1990s” (Ibid.: 170). Another reason for the state to do less, according to him, is that this would counteract “the dangers of politicization” (Ibid.: 166) which pushes politicians to make incendiary choices to the detriment of the common good. Thus, Tirole believes that the economic management of the state as a whole should be largely depoliticised. To achieve this, he recommends the “creation of independent authorities [...] that allows democracies to respond to considerations other than short-term polls and to limit pandering to interest groups” (Ibid.: 168). For him, the more sensitive the decisions are and the more they affect important economic interests, the more they should be taken out of the hands of elected officials. This is the case with money, which should be managed by a politically independent authority. He writes: All over the world central banks have gained independence as a result of politicians’ habit of ‘pump priming’ – increasing public spending before an election to create a short-run boom while triggering future inflation, to the detriment of the long-run health of the economy. (Ibid.: 165) Finally, while Tirole admits that the idea of entrusting power to politically unaccountable agencies can provoke a certain “hostility”, he believes that these expressions of discontent are “in some ways political posturing” and that they have few direct consequences, since the bank’s independence is written into multilateral international agreements, and no member country has much chance of convincing its European partners to put the ECB under political supervision. (Ibid.: 169) Even so, Jean Tirole recognises that the threats to central bank independence have not entirely disappeared and expresses his concerns about these dangers. In a footnote, he points out that due to the Eurozone crisis “states have been offloading their problems onto the ECB, which, in addition to its normal role as a supplier of liquid assets, has been drawn despite itself onto political terrain (support of a state)” (Ibid.: 506). He also worries about some US senators, including Bernie Sanders, he points out, expressing a wish for the government to regain control of the Federal Reserve. “[F]ortunately, the Democrats at that stage prevented the Fed from being put under political control,” he concludes (Ibid.). What is particularly striking about Tirole’s book is that it is written by a Nobel Prize winner in economics a few years after the financial crisis, but before the

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resurgence of inflation, precisely at the time when the vast majority of economists were calling for governments to undertake measures that have been described as a “return to Keynesianism”. These extracts show that even though considerable changes were made to economic policy in a pragmatic manner to respond to the crisis, the doctrine behind it seems to have emerged unscathed from the collapse of 2008 and the massive interventions of central banks to save financial systems from systemic failure. It is worth examining why. First of all, it is important to note that Tirole is well aware of the causes and consequences of the financial crisis. He even writes highly of Charles Ferguson’s documentary film Inside Job, which he believes “shows the dangers of complicity between researchers and the subjects of their research” (Ibid.: 352).5 However, Tirole is far from sharing the conclusions of the film, which exposes the dark underbelly of finance. He does not directly indict the financial system, nor does he blame excessive liberalisation. While Tirole admits that “the issuer of a securitized bundle of loans loses its incentive to monitor the quality of the underlying loans,” he reasserts his belief that securitisation remains “a very useful practice if it is used prudently. [...] Securitization makes it possible to bring ‘dead capital’ back to life,” he writes, because it facilitates the refinancing of credit institutions (Ibid.: 302). Another reason why securitisation contributes to making capital “alive” is that it allows assets to be priced. Neoliberalism, as we have seen, is based on the principle that value emerges from market prices. The problem with non-securitised claims is that they remain on the accounts of credit institutions. As they are not traded, they do not have a market price and their real value is difficult to determine. In contrast, the process of securitisation allows these claims to be backed by securities that can then be traded in financial markets, which makes it possible to objectively assess their value. What purpose does this system of valuation serve? Well, in the first place, it sets appropriate incentive mechanisms. In a short essay published after the financial crisis, Tirole explains why, in his view, Mark To Market (MTM) accounting helps to better evaluate the performance of company managers and thereby limits the opacity of the financial system and prevents certain malpractices. Market value accounting, on the other hand, does have a clear economic logic. First, ex post, it allows those monitoring the firm […] to form a clear idea of the losses incurred. They thereby acquire information about the performance of the firm’s managers and also can prevent behaviors harmful to the firm. […] Market value accounting also provides ex ante incentives to make good investments. Knowing that the firm will be obliged to reduce the size of its balance sheet in case of loss, its managers will necessarily pay more attention to the return on assets. (Tirole 2011: 56–7) Tirole acknowledges that MTM can have perverse effects, as it generates pro-cyclical effects. For example, a financial crisis could force a bank to recapitalise in a hurry to

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cope with accounting losses, compelling the bank to reduce its supply of credit even when its losses might only be temporary. Similarly, a financial bubble could lead to an overvaluation of assets and promote risk-taking. All said and done, Tirole still believes the benefits outweigh the drawbacks. “My current view on this matter is that, in spite of some important defects, market value accounting is vital to an accurate understanding of the state of a firm’s balance sheet” (Ibid.: 59). As a result, Tirole does not hold the financial system responsible for the financial crisis. Indeed, the French economist does not ever question the excessive innovation in financial speculation or the unbridled quest for profits that it often sets in motion. No financial instrument or transaction is bad in itself [...]. Properly used, financial instruments contribute to the dynamism of the economy. It is more constructive to engage in the inevitably technical debate about market failures and regulation than to reject wholesale the achievements of modern finance. (Tirole 2017: 303). How then could such a problem have arisen? How could a global financial crisis – the worst ever since the Great Depression of the 1930s – have hit the world economy? The neoliberal answer to this question is quite simple: the state is to blame. It is the state, and those who run it, that have not been able to provide a sufficiently robust framework to prevent market failures. In the end, the financial crisis of 2008 was also a crisis of the state, which had been disinclined to do its work as a regulator. Like the euro crisis […] the 2008 crisis had its origin in the failure of regulatory institutions: failure in prudential supervision in the case of the financial crisis, and failures of state supervision in the case of the euro crisis. In both cases, lax supervision prevailed as long as everything was going well. Risk taking on the part of financial institutions and countries was tolerated until the danger became obvious. Contrary to what many people think, these crises were not technically market crises – the economic agents were reacting to the incentives they faced, and the least scrupulous among them exploited gaps in the regulation to swindle investors and take advantage of the public safety net. Rather, the crises were symptoms of a failure of national and supranational state institutions. (Ibid.: 350)

The mystique of market prices When beliefs are strongly held or continue to prevail despite events that contradict their representation of reality, it is usually because they emerge from a logically coherent system that is hard to fault. No experience can invalidate a dogmatic belief. The same is true of neoliberalism. For its followers, either

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markets work and produce a satisfactory order that maximises social welfare, and this is proof of their efficiency (although one would have to be able to quantify this welfare and demonstrate that it is maximised), or economic crises emerge and proliferate, and this is proof of the failure of the state to produce the appropriate institutional environment in which markets can work effectively. In order to counter such beliefs, no amount of factual evidence can suffice. Instead, one needs to go right back to the root of the dogma, that is to the fundamental belief from which the others flow. In the case of neoliberalism, this belief is the one that was presented in Chapter 2, namely that markets determine appropriate prices by aggregating scattered information. Markets can be relied upon to determine prices because it is assumed that individuals behave in a way as to maximise their utility. Each individual has certain information, preferences and goals. Based on these factors, they decide whether or not to participate in a transaction and, if they choose to participate, whether as a buyer or a seller. In essence, the basic underlying concept is that the market functions as an information processor. When participating in the market, agents have good reasons to be on the supply or demand side. They have good reasons to decide that a price is too high for buying or too low for selling. If they decide to enter into a transaction, it is because, given the information available to them, and given their preferences, they believe that this transaction will improve their welfare. Thus, by accepting the price, they are legitimising it; they are, in a way, carrying out a “validation vote”. The aggregation of all these disparate choices sends a signal to other participants in the market that there are good reasons to buy and sell at this price. If prices go up from one day to the next, sellers will deduce from this information that they can sell for more, while buyers will need to pay more. Thus, there must be good reasons for prices to rise and everyone then adjusts their plans accordingly. In other words, the private information that economic agents have determines their behaviour in the market and this behaviour contributes to the formation of market prices. These prices act to aggregate all the private information of agents and constitute new public information in themselves. This vision of a market as an information processor is admittedly tremendously appealing. Indeed, the idea is all the more intellectually attractive in the age we live in because it depicts markets as natural algorithms that exploit dispersed data – personal experiences, preferences, and the knowledge that each individual has – to determine a price system that constitutes a coherent system of incentives which helps to coordinate behaviour. This is the principle of Hayek’s “catallaxy”, i.e., the market mechanism by which a “spontaneous order” emerges and builds social order (Hayek 1976). French legal scholar Alain Supiot has perfectly described how this “cybernetic imaginary” contributes to legitimising the market as a social institution (Supiot 2017). This representation of the market nevertheless poses problems of internal consistency that have sparked numerous debates among economists. Let us now list the main ones among these.

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We can first note that the information-processing market is a self-sufficient system of coordination: as such, it excludes any other competing system of behavioural coordination. In this vision, each agent is supposed to act in isolation and without communicating with other agents in the economy. If coalitions are formed, or if information is exchanged other than through prices, this affects their ability to appropriately aggregate and reflect information. This is why public institutions are said to “disrupt” the market mechanism, as they tend to alter the relationship between information and prices and between prices and behaviour. Let us now consider Eugene Fama’s “efficient market hypothesis” (see Chapter 5), in which an efficient market is one in which prices integrate all available information. Two scenarios emerge from this. In the first, the acquisition of information is costless, in which case prices do not provide any additional information, since all participants already have access to all the available information. In the second, more realistic scenario, information access comes at a cost. If this is the case, then individuals are not incentivised to improve upon this information, since prices are already supposed to reflect all the information available for no cost. The consequence of this reasoning is that the assumption of efficient markets is impossible, or rather it is contradictory to the assumption which asserts that individuals seek to maximise their interest. As Sanford Grossman and Joseph Stiglitz explain in a famous 1980 article, because information is costly, prices cannot perfectly reflect the information which is available, since if it did, those who spent resources to obtain it would receive no compensation. There is a fundamental conflict between the efficiency with which markets spread information and the incentives to acquire information. (Grossman and Stiglitz 1980: 405) The assumption that markets are efficient is further undermined if one accepts that the quality of information can be uncertain. Indeed, for markets to be efficient information processors, everyone must behave as if their own information is certain. If this is not the case, agents might think that the information conveyed by the price is more reliable than their own, thus favouring market price information to the detriment of their own. But if everyone does this, no new information will be added to the market and the information processor mechanism will run dry. As economist Alan Kirman notes, “in this case any price system could be an equilibrium even if it were, in fact, totally in contradiction with the price system obtaining, since nobody would ever realise that there was any contradiction” (Kirman 2001: 65). Another fundamental problem with this conception of the market is that information is not something that can be measured objectively. Individual behaviour is not simply the consequence of observed reality but is also based on perceptions

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and beliefs. As a result, the same event can give rise to different interpretations. In this case, what is aggregated by the markets is not so much information that faithfully reflects economic reality as a system of conceptions. This question becomes even more acute when one examines expectations. French economist André Orléan notes, for example, that in financial markets, “the future is, by nature, opaque and subject to radical uncertainty [...]. It is never more than an opinion, a pure gamble expressing personal convictions, grounded on a basis, which is always fragile” (Orléan 2001: 84). Thus, the nature of the information that markets aggregate and process does not represent an objective reality but interpretations of this reality, interpretations that are based on belief systems. These beliefs are usually socially constructed and can change at any time, even in the absence of any new events. The conclusion that can be drawn from these reflections is that the individualistic assumption on which the standard market model is based is not tenable. Market prices are less the consequence of a neutral algorithm that aggregates dispersed information produced by isolated individuals than the result of social phenomena that generate collective beliefs, which are likely to be detached from economic reality. Kirman explains: In standard models, information is only transmitted through prices to anonymous and passive agents. In reality, agents communicate with each other and pass information in a number of ways. They trade with each other, they influence each others’ expectations. (Kirman 2001: 61) The idea that beliefs modify market equilibria is not new in economics. There is a whole literature devoted to the “sunspot hypothesis” (Shell 1977, Cass and Shell 1983, Woodford 1990), which considers whether or not solar cycles can influence economic activity. Of course, we have known for a long time that there is no correlation between the two and that there is no objective reason why sunspot numbers should influence market prices. But models show that if a part of the population believes in the influence of the solar cycle on the economy, this can lead to a change in behaviour that will indirectly mean that sunspots do indeed help determine prices. In short, a false belief can have real economic effects if it is widely held. One way to illustrate this is to look at what has happened recently in the cryptocurrency markets. Blockchain, the new technology that allows for secure transactions without the backing of a central authority, has generated a lot of interest and fascination among libertarian and technophile communities. This sparked a race to buy cryptoassets, often spurred by ideological beliefs, which led to their prices being driven up beyond normal expectations. The rise in crypto prices fed into their credibility and drew the attention of investors, thus spreading far beyond the original investor groups to become one of the most popular types of financial assets in the world. Yet most economists have questioned the value of

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cryptoassets by pointing out that they cannot generate income on their own. On paper, their fundamental value is zero. Yet the price of bitcoin has soared to over $60,000. The theories put forth by economists have thus been invalidated by a collective and widespread belief generated over the value of these assets. One might claim that such events prove that the agents participating in these markets are irrational. The reality, however, is more nuanced. It is not irrational to buy a commodity considered worthless as long as there are other people who think it has value and are willing to buy it for more. British economist John Maynard Keynes had already shown in Chapter 12 of the General Theory, in 1936, that the rational investment technique in financial markets is not to follow one’s own judgement but to anticipate that of others (Keynes 1936). More fundamentally, the Keynesian view of the functioning of markets is marked by the idea that those who participate in the formation of prices have almost no reliable information to establish the value of what they buy or sell. This is particularly true of the means of production, whose value depends on expectations of return, unlike consumer goods whose value is linked to use. Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible. If we speak frankly, we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing; or even five years hence. In fact, those who seriously attempt to make any such estimate are often so much in the minority that their behaviour does not govern the market. (Ibid.: 131) The poor information available to investors when they trade explains why prices are volatile and unreliable. There is therefore no evidence that the price system resulting from this process is truly optimal or pertinent. The valuation arrived at by the markets is what Keynes calls “a convention” that “lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change” (Ibid.: 133). This is an assumption that everyone knows is false, since events will inevitably occur that will cause investors to change their valuations. But while waiting for these new events, prices help to construct a reality that allows everyone to adapt their behaviour, even if nobody perceives this reality to be true.

An institutionalist approach to markets The key point we must note from this analysis is that, while markets do generate prices, there is little reason to believe that the mechanism by which these prices are constructed functions as described by neoliberals. The idea that purely factual, neutral information informs behaviour, and this behaviour then determines prices

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which incorporate all available information appears to carry the mystical power of a belief with little evidence in its favour. In reality, the process of creating market prices is inevitably influenced by beliefs and interpretations, which are themselves shaped by populations whose members interact and communicate with each other. In other words, markets are the product of social institutions. As such, any change in these institutions must alter the valuations of the market. Therefore, the needs and preferences of individuals cannot be the only factors responsible for price determination. In fact, markets reflect the institutional and social power relations that exist within society itself. Thus, we can conclude that the market is not an autonomous institution which can govern society merely by coordinating individual behaviour, but rather is a product of the society it represents. Figure 6.1 above depicts this institutionalist view of the functioning of markets. It can be compared with the neoliberal view represented in Figure 2.1. The main difference between these two diagrams is that here the market and society influence each other in a feedback loop. Thus, the market is no longer a “neutral” institution operating extraneously to society, but a social institution almost like any other, subject to the influence and power dynamics of existing social and political relationships. Unlike the neoliberal view, the institutionalist approach does not view markets as driven by isolated individuals seeking only to maximise their own interest, but rather sees the market as being shaped by social institutions and power struggles. It would then be unrealistic to believe that prices are perfect signals generated by an efficient mechanism for processing information. At the very least, market prices reflect the internal dynamics of a society as much as they do the trade-off between the different uses of available resources. Moreover, there are many reasons to believe that markets do not necessarily assess value better than a competent political authority that is sufficiently aware of the intricacies of complex social choices. The corollary of this reasoning is that markets and societies operate in a kind of symbiotic relationship. If one accepts that social relationships participate in the creation of prices, one must conclude that each society is bound to generate a specific price system, suited to its own institutions. Just as bargaining leads to the development of individual prices for each transaction in a traditional market,

FIGURE 6.1

Schematic representation of the institutionalist logic.

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we should find different price systems emerging in different societies due to the different social institutions they have. Redefining our view of the market in these terms reveals the fundamental problem posed by globalisation. As globalisation unifies all markets and pushes them to converge towards the same prices, it weakens local and national institutions and contributes to fracturing the very societies it is attempting to integrate into a single economy. This institutional breakdown explains the rise of mistrust and the development of populist movements in recent years (Cayla 2021). We can thus see that the assumption that price convergence determines the efficiency of a market can be called into question yet again, if one were to interpret the word “efficiency” more holistically. In the end, is it fair to say that the subprime crisis illustrates the failures of the regulatory state as Jean Tirole argues? This would be the case if market prices were the product of an objective reality and if these prices were absolutely essential for the efficient allocation of resources. If we admit instead that prices are socially constructed, that they are influenced by beliefs, institutions, and balances of power and are the consequence of a socially constructed reality, the question of state failure presents itself in a very different light. If the objective of markets is simply to establish prices, then they are in no way an infallible representation of reality before which we must necessarily submit ourselves. The subprime crisis has shown us that there are conditions in which markets become unable to converge on prices, and that in these circumstances, it is usually representatives of the government that take the place of the markets and re-establish prices based on the imperatives of the time. Are these prices necessarily less appropriate than market prices? There is no way to tell. What we do know is that they worked effectively to ease the crisis in 2008. “Black cat or white cat; if it can catch mice, it’s a good cat.” This magnificent ode to pragmatism by Deng Xiaoping in 1962 should provide useful inspiration to contemporary neoliberals, who seem to be vainly lunging about for solutions to build the perfect institutional framework that would make the markets work properly.6 But in many ways this attempt is a form of fetishism which is not based on any established scientific truth. It is understood today that socialist economies, based on a fully planned and centralised allocation of resources, were deeply inefficient. Free enterprise is a necessary condition for collective prosperity and requires a minimum of economic liberalism. However, respect for free enterprise does not necessarily mean that all prices should emerge from competitive markets. In fact, the experience of the post-war period in Europe shows that it is quite possible to approach the management of the economy in a pragmatic way, and that the intervention of a society’s elected representatives in price formation is not always a bad thing.

The return of supervised finance The fact is that we are already there. For more than a decade now, the financial sector has operated on the basis of controlled prices.

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We saw in the first chapter that neoliberals admit – albeit only subject to certain conditions – that a public institution like the central bank can set the refinancing rates of banks. However, since 2008, not only are short interest rates, those of the money market, established in accordance with political authorities and based on aims that are no longer limited to price stability, but, in addition, central banks have begun to control long interest rates by means of quantitative easing policies as well. As a result, the most important price of all, i.e. the price of money and the cost of financial capital, has been largely taken out of the hands of markets and been controlled by public authorities for more than a decade. Yet the world has not descended into chaos. In fact, the opposite is true. There have been no major financial crises since 2008 and despite the shock of the pandemic, the G7 countries have since experienced the longest periods of relative financial stability since the late 1970s. One should not be misled by the current rhetoric about the need to normalise monetary policy, to urgently raise interest rates and end QE measures. Not only will the process of exiting from accommodative policies be very gradual, but it is evident that at the next economic or financial eruption, central banks will not fail to intervene again “for as long as necessary,” in the words of the ECB. Loosening the reins is not the same as letting go of them, and it is now well understood that short or long interest rates will continue to remain under the close watch of central banks for decades to come. Besides, the return of inflation gives central banks some room for manoeuvre, as they can raise interest rates without worrying about weakening the economy while being able to claim that monetary policy is finally moving away from crisis mode. But this increase in rates will only have a limited effect because inflation is itself rising at a much faster rate. A true monetarist policy would not be to set bank rates at 3% or 4% with inflation above 5%, but to set interest rates well above the inflation rate for several years, as Paul Volcker did in 1979 (see Chapter 2). Is such a scenario possible? In January 2023, at the time of writing of this book, this approach is not at all what central banks seem to be heading towards. The interest rate hike announced in 2022 is much lower than one that would be advocated by a monetarist from the 1980s. The phasing out of QE policies also seems very gradual. As a result, there is every reason to believe that nominal interest rates will remain below the level of inflation for a long time to come, which implies that the period of negative real rates is by no means over. Table 6.1 shows the interest rate and inflation environment in November 2022. We can see that there is a very large gap between short- and long-term interest rates on the one hand and the annual inflation level on the other. This extremely high level of inflation is of course the consequence of a very particular combination of historical factors such as the effects of post-COVID economic recovery and the war in Ukraine, with its consequences on energy and grain. There is therefore every reason to believe that at least some of this inflation is cyclical and will quickly subside over time. Central bankers put forth this reasoning to explain their relative wait-and-watch approach.

138  Doxa and praxis TABLE 6.1 Level of annual inflation (November 2021–November 2022) and interest

rates (November 2022)7

Bank rate Long-term rates Inflation

Canada

France

Germany

Italy

Japan

United Kingdom

United States

3.76% 3.17% 6.80%

2.00% 2.58% 6.15%

2.00% 2.07% 10.05%

2.00% 4.24% 11.77%

−0.10% 0.25% 3.80%

3.00% 3.42% 9.30%

3.83% 3.89% 7.11%

There is another reason why central banks are reluctant to pursue an overly restrictive monetary policy, which is that the economic situation is not at all the same as in the 1980s. Since the 2008 financial crisis, many economists have questioned the structurally low levels of growth in rich countries. Some of them argue that the developed world is going through an episode of “secular stagnation” characterised by low inflation, near-zero interest rates, and sluggish growth. This term, which dates back to the Great Depression, was brought back into the jargon in 2013 in a speech by Larry Summers at the IMF (Summers 2013) of which Paul Krugman presents an excellent analysis on his blog (Krugman 2013). On paper, economic growth can be accelerated or slowed down by monetary policy. However, the low interest rate policy initiated by central banks in the 2010s has never succeeded in boosting activity sufficiently. According to the theory of secular stagnation, this is because of a structural inadequacy of demand, which remains below the production capacity of the economy. Weak demand then reflects in a low level of employment, a high savings rate, and an inflation level which is close to zero. Theoretically, the way out of this slump would be to lower interest rates to boost investment and consumption. But when interest rates are already at zero, such a policy becomes impossible to implement. This is called the “liquidity trap”: if interest rates are too low, savers no longer have an incentive to invest their savings productively, by lending to a company for example, and prefer to leave their money in their bank accounts. Secular stagnation has affected the Japanese economy since the mid-1990s. Theorists have explained the phenomenon in Japan by pointing to its demographic roots. Japan has an ageing population, which increases the need for savings and decreases the rate of investment, and therefore demand. Japan, whose birth rate has been low for decades, was logically the first to be affected by secular stagnation (Summers 2020). Theorists now think it could be Europe’s and – to a lesser extent – the United States’ turn to be hit by a period of low growth. Theoretically, since there is no longer much leeway for monetary policy to act, stagnation could be addressed by boosting inflation. Higher inflation would lower real interest rates, encourage consumption (when prices rise, people prefer to buy sooner rather than later), and reduce savings. Economist Jean-Baptiste Michau, for example, believes that the inflation generated by a return to activity after the COVID crisis could actually be used to provide a positive shock

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to the economy (Michau 2021). Achieving this would require maintaining an expansionary monetary policy and tolerating a relatively high – but not excessive – level of inflation. This is the second reason why central banks are not overly restricting their monetary policy. The third reason for central bankers relucance to raise their interest rates has to do with the very high level of indebtedness that economies around the world now find themselves facing. In 1980, when Volcker raised the Fed’s bank rate to 20%, he caused a debt crisis in Mexico. Implementing such a policy today would undoubtedly be financially unsustainable for all developed countries. Indeed, it is not only governments that are reeling under the burden of debt. Most developed countries have seen a sharp rise in private debt across all sectors of the economy, including the financial sector, since the mid-1980s. As a result, an excessive increase in interest rates would certainly lead to rendering whole sectors of the world economy insolvent and risk generating a new systemic crisis. Figure 6.2 shows the change in outstanding debt by economic sector in the US economy, expressed as a share of GDP. It highlights the fact that the phase of financial neoliberalism, which began in the 1970s, unfolded in the 1980s and 1990s and ended in 2009, was a period of strong growth in overall debt. Contrary to popular belief, neoliberalism is not inimical to debt. By deregulating financial markets, neoliberal reforms unleashed the herd behaviour that drove investors to follow the prevailing view of the moment, leading to the creation of financial bubbles which are followed by sudden collapses like in 2008. Each bubble was based on the growth of debt, which in the long run has grown faster than GDP, leading to an increase in the debt-to-GDP ratio. This dynamic threatens the solvency of agents and makes them extremely sensitive to any rise in interest rates. It should also be noted that, even since monetary policy started to exert a dominant

FIGURE 6.2

Change in US sectoral debt as % of GDP (1953–2022).8

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influence over the financial sector, overall indebtedness has not increased, despite historically low interest rates. If the 2008 crisis marks the end of monetarist practices, the 2020s is sure to herald the death of the doctrine itself. As long as inflation remained low, central bankers could justify expansive monetary policies in the name of “fixing” the markets. Now that inflation has resurfaced, they will have to choose between pursuing a Volcker-like policy – and causing economic and financial chaos – or admitting that monetarism can no longer be used as a compass to guide their actions – in which case they will continue to fumble around in their attempts to deploy monetary policy in a less ideological manner. Let us be cautiously optimistic and say that there might be some chance that central banks will abandon their monetary dogmatism. Choosing to do so will surely pose other issues, for monetarism is an essential cog in the neoliberal machine. If we are truly entering a phase where the cost of financial capital is permanently removed from the arbitration of the markets and entrusted to monetary authorities, how can one justify the prices of raw materials, agricultural products, and wages continuing to be determined by markets? Would it not be legitimate to argue that if a public institution can govern the prices that determine the income of banks and the rate of return on capital, then states can also have a say in the prices of other means of production? In the early 1970s, financial markets were the first to emerge from a system where prices were tightly controlled by states. The 1980s and 1990s saw neoliberalism gradually spread to other markets. However, the financial sector has evidently moved backwards by half a century and may well remain there for several decades. If everything were then to return to how it was 50 years ago, then logically speaking, after finance, it would be the turn of raw materials, energy, labour, and agricultural products to no longer be governed solely by the market and come under the purview of political authorities once more. This would mark the definitive end of the neoliberal experiment and usher in a new era in the relationship between societies and markets. However, there are still many uncertainties as to how neoliberal practices will recede and social institutions will adjust in reality. The end of neoliberalism will probably not be a return to the Golden Age. Some scenarios may even have unpleasant surprises in store for us.

Notes

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2

3 4 5 6 7 8

higher than the rate of return on bonds, QE represents a cost for the central bank and therefore for public finances. China is a notable exception. It imposed very harsh lockdowns without direct monetary compensation, opting to set up a public food distribution system instead. The Chinese regime is extremely authoritarian in nature and represents one of the current counter-models to neoliberalism. This does not make it an enviable model. We shall discuss the counter-models to neoliberalism in the conclusion. See note 22, Chapter 2. Les Économistes atterrés, a collective of French heterodox economists, has produced a critical analysis of this report (Harribey, Rotillon and Sterdyniak 2021). In the French edition of his book, Tirole recommends showing this documentary to students. This recommendation does not appear in the English edition. This saying is actually taken from a traditional proverb from Sichuan, the province where Deng Xiaoping was born. Sources: Long-term interest rates (ten-year government bonds) and inflation (CPI): OECD, https://data.oecd.org (accessed on Jan. 7, 2023). Bank rates: official websites of central banks (accessed on Jan. 7, 2023). Sources: Financial Accounts of the United States, Debt Outstanding by Sector, Federal Reserve(accessed on Jan. 7, 2023).

References Blanchard, Olivier and Jean Tirole (2021), Les Grands défis économiques, France Stratégie, Jun. 2021. Cass, David and Karl Shell (1983), “Do Sunspots Matter?”, Journal of Political Economy, Vol. 91: 193–227. Cayla, David (2021), Populism and Neoliberalism, London and New-York: Routledge. Economic Affairs Committee (2021), “Quantitative Easing: A Dangerous Addiction?”, House of Lords, 1st Report of Session 2021–22. Friedman, Milton (1962) [2002], Capitalism and Freedom: Fortieth Anniversary Edition, Chicago: University of Chicago Press. Friedman, Milton (1970), “The Social Responsibility Of Business Is to Increase Its ­Profits”, The New York Times, Sept. 13, 1970. Grossman, S. J. et J. E. Stiglitz (1980), “On the Impossibility of Informationally Efficient Markets”, The American Economic Review, Vol. 70, No. 3: 393–408. Guglielmi, Giorgia (2022), “COVID Was Twice as Deadly in Poorer Countries”, Nature, June 28, 2022, online news article. Harribey, Jean-Marie, Gilles Rotillon and Henri Sterdyniak (2021), “Réponses au rapport Blanchard-Tirole, Les Economistes atterrés”, Sept. 2021, available online on: www.atterres.org. Hayek, Friedrich (1976) [1982], “The Market Order or Callaxy”, in Hayek, F. (ed.), Law, Legislation and Liberty: Volume 2 The Mirage of Social Justice, London: Routlege: 107–32. Keynes, John Maynard (1936) [2018], The General Theory of Employment, Interest, and Money, London: Palgrave Macmillan. King, Mervyn (2021), “Quantitative Easing Is a ‘Dangerous Addiction’”, Bloomberg, Jul. 20, 2021. Kirman, Alan (2001), “Information and Price”, in Petit, Pascal (ed.), Economics and Information, Boston, MA: Springer: 61–81. Krugman, Paul (2013), “Secular Stagnation, Coalmines, Bubbles, and Larry Summers”, Nov. 16, 2013, available online on: https://krugman.blogs.nytimes.com.

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Michau, Jean-Baptiste (2021), “Understanding Secular Stagnation”, Institut des Politiques Publiques, IPP Policy Brief No 73, Jul. 2021, available online on: www.ipp.eu. Orléan, André (2001), “The Self Centred Logic of Financial Markets”, in Petit, Pascal (ed.), Economics and Information, Boston, MA: Springer, 83–92. Shell, Karl (1977), “Monnaie et Allocation Intertemporelle”, CNRS Séminaire d’économétrie d’Edmond Malinvaud, Nov. 11, 1977, Paris. Summers, Lawrence H. (2013), “IMF Fourteenth Annual Research Conference in Honor of Stanley Fischer”, Nov. 8, 2013. A transcript is available online on Larry Summers’ personal website: http://larrysummers.com. Summers, Lawrence H. (2020), “Accepting the Reality of Secular Stagnation”, Finance & Développement, Mar. 2020: 17–19. Summers, Lawrence H. (2022), “The Fed Must Do Much More to Fight Inflation – And Fast”, Time, Mar. 17, 2022. Supiot, Alain (2017), Governance by Numbers: The Making of a Legal Model of Allegiance, London: Hart Publishing. Tirole, Jean (2011), “Lessons from the Crisis”, translated by Keith Tribe, in Dewatripont, Mathias, Rochet, Jean-Charles and Tirole, Jean (eds.), Balancing the Banks, Global Lessons from the Financial Crisis, Princeton, NJ: Princeton University Press. Tirole, Jean (2017), Economics for the Common Good, translated by Steven Rendall, Princeton and Oxford: Princeton University Press. Woodford, Michael (1990), “Learning to Believe in Sunspots”, Econometrica, Vol. 58: 277–307.

CONCLUSION What could a post-neoliberal world look like?

Managing shortages The end of one world is sure to mark the beginning of a new one. The fall of neoliberalism will inevitably bring a new system to rise. Can we predict what the characteristics of this new system will be? Probably not precisely just yet. But one can perhaps outline a few likely scenarios, with the hope that this will help guide action towards the most desirable among these. Let us start by considering the state of the world. Between 1971 and 2021, the world’s population more than doubled, from 3.78 billion to 7.87 billion; the monetary value of the total output produced by humanity (GDP) quadrupled; annual CO2 emissions rose from 15.5 billion tonnes to over 35 billion. This makes one thing clear: the pressure we exert on our planet has steadily risen. Our consumption of energy and natural resources and our production of emissions and waste is at an all-time high since our species first appeared on Earth some 300,000 years ago. It is unlikely that we will go completely backwards from here. Humans will continue to produce and consume, and our economies will continue to have an impact on the planet. This raises the question of whether the neoliberal model offers a suitable response to the constraints of the future. The market-based system of resource allocation has guided and legitimised certain types of social and economic choices. Far from being optimal, as the theory claims, these collective choices have resulted in a rise in inequality, reinforced the deindustrialisation of developed countries and caused a slowdown in their economic growth. They have not prevented the proliferation of economic and financial crises. Even though the neoliberal model of governance has not directly caused any major global conflicts, it has contributed to destabilising societies by fuelling populist movements. Indeed, neoliberalism’s principal claim to success is its triumph over its rival model, i.e. the centrally planned economy. But this triumph, which marked the DOI: 10.4324/9781003253297-8

144  Conclusion: What could a post-neoliberal world look like?

beginning of neoliberal hegemony, has prevented its considerable shortcomings from being taken seriously and an alternative model from being proposed. The future will have to be built on a new relationship between society and markets. The boom years of neoliberalism from the mid-1970s to the early 2000s were never marked by serious structural shortages. Yet there are compelling reasons to believe that these conditions of abundance are nearing their end. Firstly, a number of countries, especially those with the most productive industrial capital, will see their working populations decline, or at best stagnate, even as the world’s population and its needs continue to grow. The Chinese situation is particularly worrying in this respect. But Europe, North America, and East Asia will also see a decline in their working age populations. Secondly, humanity’s capacity to extract ever-more mineral resources to meet its energy needs is reaching its limits. The Club of Rome’s Meadows Report published in 1972 discussed the possibility of an economic collapse in the first half of the 21st century, mostly due to the increasing difficulties we will encounter in extracting the resources needed to maintain exponential growth in a world of finite resources (Meadows et al. 1972). The most recent follow-up studies update the data in the initial report and demonstrate that it is still consistent with the original predictions. The last 50 years have not resolved the fundamental contradictions posed by continued industrial and agricultural growth in a resource-constrained world ( Jackson and Weber 2016, Herrington 2021). Finally, the issues raised by climate change will require economies to make a huge paradigm shift to a more sustainable model, which will also bring with it multiple constraints. All human activities consume energy. Although energy is still relatively abundant on earth, much of it, especially coal, oil, and gas, can no longer be extracted, if global climate objectives are to be met. Uranium is not abundant enough to be used as an alternative energy source. All other sources of energy, especially when they are renewable, pose problems of density,1 storage, transport, and control that we are only partially able to solve. It is likely that we will have to learn to live in a world where energy is less abundant and more expensive. Managing shortages is not a problem for tomorrow; it is a problem of today. For instance, it is already evident that supply chain disruptions have become more widespread in the wake of the Covid-19 pandemic. By early 2022, the manufacturing sector faced a general shortage of semiconductors. Accelerating our production of electric vehicles has been inhibited by the interruption in the supply of batteries, which require metals that are difficult to extract for their manufacture. Finally, a number of businesses had to cope with a shortfall in manpower for their most physically demanding tasks. The dominant practice of just-in-time manufacturing means that the shutdown of a single factory can destabilise an entire sector. In spring 2022, for example, there was a severe shortage of baby formula in the US. In response, US authorities had to call in the army to ensure supplies to shops and were forced to invoke the Defense Production Act passed in 1950 at the start of the Korean War, which allows the president to direct private producers to prioritise orders from the federal government.2

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In early 2022, shortages also began to hit Europe. The war in Ukraine and the sanctions imposed on Russia provoked a deep and severe energy crisis. Faced with gas shortages, some EU countries had to restart their coal-fired power stations. Electricity production was also severely affected by the reduction in the supply of gas. As a result of chronic under-investment due to ill-conceived liberalisation in the 2000s, European electricity producers were no longer able to assure sufficient supply at a reasonable cost. The President of the European Commission, Ursula von der Leyen, was forced to admit to members of the European Parliament that the European electricity market “does not work anymore” and that reform was on the agenda.3 These incidents, taken from current events at the time of writing, illustrate an important point. Leaving the production and distribution of goods as fundamental as electricity or baby formula to the markets means that states need to be prepared to step in at the slightest malfunction. It is of course inconceivable to let babies develop nutritional deficiencies or to leave Europeans in the dark. Thus, a shortage in essential goods very quickly becomes a matter for the state. To say this is to say something more. A society in which shortages proliferate can no longer be a society ruled by competing markets. Impersonal market forces cannot be entrusted with the allocation of essential goods now that most of the world’s population has seen how easily manufacturing failures, logistical disruptions, or difficulties in recruitment can derail entire supply chains and cause shortages. There is a fundamental asymmetry between what the market can theoretically do – allocate resources efficiently – and what a society needs to function: secure access to certain food products, energy, and other essential items. This is not unlike what happens in a financial crisis. The failure of a systemically important financial institution is not just a private cost: it is a global shock that threatens the entire financial and economic system. As a result, the state cannot ignore it and is forced to intervene. The collapse in the production and distribution of essential goods poses a similar threat to the economy so that the state can no longer afford to stand idle. With the subprime shock and the risk of systemic collapse, monetary authorities were forced to abandon the principle of market prices and exert direct control over interest rates themselves. If supply shocks were to continue to accumulate in the future, they would appear to the public to be of the same magnitude as the subprime crisis. Removing the allocation of resources that are indispensable to the preservation of the social order from the sole forces of the market will then become necessary.

Towards a neo-feudal capitalism? For the reasons outlined in the previous chapters, the future will not herald a return to the Golden Age of capitalism. The 1950s and 1960s were decades marked by an abundance of natural resources, rising industrial employment, and strong economic growth. The existence of an opposing model represented by the planned

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economy helped to make state control of the economy acceptable and to ensure a more equitable distribution of the fruits of growth. These features were essential to the prevailing regime of accumulation of the time and are absent today. At this point, it is important to emphasise one observation. Capitalism admits many forms of regulation. Neoliberalism is the product of a consistent doctrine that has been informed by a great deal of academic debate and was implemented by politicians of both the Right and the Left trained in its tenets. In contrast, the regulation of the 1950s and 1960s was the result of pragmatic responses to a number of crises that arose in the previous decades. It was only theorised a posteriori by Keynesian economists, whose work remained incomplete because no coherent economic model of price control was established. So, it is not always true that theory shapes history; sometimes it is history that shapes theory. Because there is still no alternative theory to replace the neoliberal model, the regime of regulation before us is thus also likely to be the product of pragmatic solutions devised in the context of urgency. The limits of the market have been clearly demonstrated by academic research, both in terms of efficiency and social acceptability, but this is also true of discretionary state intervention. It is important to recognise that the state does not always act as a neutral institution and defender of the general interest. Even so, it is difficult to imagine the “neither state nor market” solution, which consists of organising society around small autonomous communities that collectively manage their resources, so far removed is such a vision from our modern world. Conversely, establishing a global government that would force the different countries of the world to share and manage the planet’s resources collectively seems equally far-fetched. Thus, despite their respective shortcomings, both the market and the state will remain indispensable in the near future. These two institutions will continue to be the essential building blocks of the sustainable – in every respect – society that we need. This calls for a careful examination of how to structure the interaction of the democratic model of governance with the neoliberal model of competing markets. Let us take an example to illustrate this problem clearly. As we saw in Chapter 6, monetary authorities reclaiming their control over short- and long-term interest rates has ushered in an unprecedented – and likely lasting – period of negative real interest rates. When interest rates are negative, the value of money redeemed is essentially less than its value when it was borrowed. In other words, it is the lender who pays for the service provided by the borrower, which is of holding on to a liquid and secure asset like a treasury bond issued by a solvent state. This situation poses a problem. When interest rates are negative, the cost of capital disappears from the equation. In such a context, any project with an expected profitability greater than or equal to zero would be potentially profitable, making it difficult to efficiently allocate savings and make appropriate investments. This brings us back to Mises’ problem of economic calculation. If money no longer has a cost, does this not open the door to greater financial indiscipline likely to cause more financial bubbles and socially unproductive investment? The high

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indebtedness of most economies has forced central banks to take back control of interest rates from the market to prevent further systemic crises, but this has only partially solved the difficulties posed by the financial crisis. To solve them fully, it would be necessary to simultaneously develop decision-making frameworks to efficiently direct savings towards economic sectors that are seen as priorities, such as the energy transition or the production of socially useful goods and services. The end of monetarism marks the first step in a more general dismantling of neoliberal practices based on price signals. It also marks the return of public management over a part of the economy, guided by higher principles and politically determined objectives. The end of the model in which the state was the impartial arbiter of an autonomous system of competing markets implies the rise of a model in which the state itself will have to regulate entire sections of the economy. How far should this regulation go? This is exactly what remains unclear. Political authorities will undoubtedly have to play a more active role in the management of the economy, combining their supervisory functions with direct intervention, some of which will likely disrupt the market order. Such a situation inevitably raises some concerns. The examples of Donald Trump and Recep Tayyip Erdoğan have shown that just because states reclaim control of economic policy, it does not necessarily mean that they make policy decisions that are appropriate and in the general interest. In fact, by moving from the state as referee to the state as active player in the game, there is a greater scope for arbitrary or inappropriate policy decisions. This may mean that we risk moving from a government of impersonal rules to a government of personal discretion. In other words, the return of public authorities in the management of economic affairs could result in a new form of government based on power dynamics where favours and privileges are granted, nepotism develops, and the affairs of the state and the economy as a whole are managed in a quasi-feudal manner. This post-neoliberal form of government already exists in China and Russia, and to a lesser extent in India, Turkey, and Hungary. In these countries, authoritarian or semi-authoritarian regimes threaten the principles of the rule of law in the name of efficiency, national pride, or a warped form of democracy.4 These regimes, sometimes referred to as “illiberal” (Mounk 2018), represent a possible outlook for a post-neoliberal world, especially given that the emergence of shortages, the disappearance of growth and the stagnation of the purchasing power of the middle classes are likely to exacerbate social tensions and undermine democratic principles. The idea that neoliberal capitalism could lead to a form of neo-feudal capitalism is not a new one. In Governance by Numbers, legal scholar Alain Supiot identifies the Chinese model as one of the possible outcomes of our current model of governance. He argues that by weakening social institutions, neoliberalism is distorting legal systems and the functioning of the state. Today, with the withering-away of the state and the new forms of alienation this brings, a typically feudal legal structure is re-emerging, consisting

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of networks of allegiance within which each person seeks the protection of someone stronger than he is, or the support of someone weaker. (Supiot 2017: 10) American anthropologist David Graeber has also identified a resurgence of feudal relationships in large companies and administrations. He suggests that, under the guise of protecting the neutrality and rationality of organisations, contemporary bureaucracies in fact perpetuate structures of domination (Graeber 2015). More broadly, Graeber shows that control and power dynamics within private and public bureaucracies drive managers to create jobs that have almost no economic or social utility. These “bullshit jobs” are said to fulfil a feudal role that serves to reorganise internal power relations and maintain systems of allegiance (Graeber 2018). Lastly, a new form of feudalism can be found – paradoxically – in the most technologically advanced sectors of the economy. In a book published in 2019, American sociologist Shoshana Zuboff analyses the economic model of digital giants like Google and worries about their growing hold on our lives. This “surveillance capitalism”, as she calls it, tracks the behaviour of Internet users in order to extract data, which is then sold and exploited, to influence our behaviour. For Zuboff, this practice represents a threat to autonomy. “We are the means to others’ ends,” she writes. Industrial capitalism transformed nature’s raw materials into commodities, and surveillance capitalism lays its claims to the stuff of human nature for a new commodity invention. Now it is human nature that is scraped, torn, and taken for another century’s market project. (Zuboff 2019: Chapter 3) In a similarly critical analysis of the digital economy, French economist Cédric Durand is less troubled by the perceived danger of this loss of autonomy, but questions the way in which socio-economic relationships are being transformed by the strategies implemented by digital platforms (Durand 2020). For Durand, these platforms have a predatory relationship with their environment. Their economic model is based on closed systems whose intellectual property is protected. Thus, their role is not so much to offer a service as to lock providers and users into a relationship based on algorithms instead of markets (Cayla 2022). In this way, digital giants transform an open and neutral space, the market, into a private space whose operation they control, allowing them to exercise their dominance. “The major digital services are fiefdoms from which there is no escape,” writes Durand. “This situation of dependence […] is essential because it determines the ability of the dominant companies to capture the economic surplus” (Durand 2020: 218). Thus, digital companies exert a power that goes far beyond that enjoyed by the traditional monopolists of industrial capitalism. According to Durand, this new regulatory regime has elements of a feudal framework, based not on

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an unlimited accumulation of capital – as with traditional capitalism – but on restricted access to primary data generated by internet users that pushes companies to keep expanding their digital fiefdoms. Just as serfs were tied to the land, platform users find themselves locked into an algorithmic environment over which they have no control. Like the lords of the Middle Ages who sought to expand their power by conquering territories held by their rivals and increasing the number of serfs under them, Durand believes that digital giants are looking to control a growing proportion of the “digital glebe” in order to accumulate and mine ever more data within their algorithmic frameworks. The idea that the end of neoliberalism could lead to a shift in some societies towards neo-feudal regimes needs to be examined very seriously. For one, such regimes already exist in some places and could be expected to develop in others if economic and social uncertainty continues to rise and a sense of economic insecurity grows in the population. In addition, the weakening of the rule of law, as identified by Supiot, could cause the emergence, even in traditionally democratic and economically developed countries, of political systems in which individual freedoms are no longer guaranteed and everyone is required to prove his or her loyalty to the state, to his or her superior, or to a powerful company. Moreover, nothing fundamentally new would need to be implemented for such a systemic change to take place: it could very well unfold gradually through a series of incremental shifts. This new regime would undoubtedly constitute a major social and political setback on all fronts. Far from ensuring prosperity, this neo-feudal form of capitalism could risk the permanent collapse of the legal frameworks that partially contain predatory forces today.

Institutional collapse? In a collection of essays published in 2016, German sociologist Wolfgang Streeck, trained at the Frankfurt School of Sociology, puts forth another scenario for the post-neoliberal world (Streeck 2016). Before describing the characteristics of this scenario, it is worth briefly discussing the author’s ideas and his view of the functioning of neoliberal capitalism. Streeck’s analysis of the present day is partly in line with the one I have presented in this book. Streeck dates the onset of the crisis of capitalism to the early 1970s. From an economic point of view, this crisis was precipitated by growing currency instability and the end of the Bretton Woods system. From a social perspective, it followed a series of workers’ strikes and protest movements that had been building up in the late 1960s. Streeck argues that this shift was caused by a crisis of legitimacy of post-war capitalism. But, according to Streeck, this crisis of legitimacy did not come from the workforce. On the contrary, because women were entering the labour market in huge numbers at the time, wage labour was rehabilitated in the eyes of the people. In contrast to the previous period when wage labour was seen as a source of alienation, being gainfully employed was considered emancipatory, especially for women who were looking to free themselves from domestic work. Indeed, “it was not the masses that refused allegiance

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to postwar capitalism and thereby put an end to it, but rather capital in the shape of its organizations, its organizers and its owners” (Streeck 2014: 16). Thus, according to Streeck, the crisis of capitalism began in the 1970s with what he calls the “revolt of capital” (Ibid.: 3). In response to the economic and social disorders of the late 1960s, capital – embodied by its representatives in the political, economic, and intellectual sphere – attempted to escape from the regulation that had been imposed on it at the end of World War II. As a result, companies preferred to increase their investment in developing countries, causing unemployment to rise in their home countries, a choice that Streeck frames as “investment strikes” on the part of the representatives of capital (Ibid.: 23). This “revolt” of capital profoundly transformed institutional arrangements within companies in order to restore corporate profitability and reassert shareholder power. Meanwhile, the resulting decline in employment in developed countries led governments to initiate stimulus policies in an attempt to keep social tensions in check. The deployment of expansionary monetary policy in a time marked by supply constraints had the effect of accelerating inflation without creating sufficient employment. For Streeck, this marks the beginning of the first crisis of contemporary capitalism, in which inflation is the unanticipated consequence of a first attempt by governments to prevent an inevitable crisis arising from the contradictions inherent to democratic capitalism. Streeck’s central thesis, which is largely inspired by the work of Karl Polanyi (1944), is that there is a fundamental tension between democracy and capitalism. This central conflict can be summarised as follows: the domination of capital inevitably causes a deterioration of the social conditions of the working and middle classes, and this breakdown poses a threat to democracy. Streeck argues that this tension was contained as long as capitalism was embedded in democratic institutions and its disruptive forces were constrained by them. Once capital managed to throw off state supervision and regained its full freedom of action, this fundamental tension reared its head in full force. To compensate for the disastrous social effects of unfettered capitalism, governments were forced to find palliative measures. As a result, they spent money and “bought time”, according to Streeck. In the 1970s, this took the form of stimulus packages that caused a rise in inflation, which then had to be fought. In the 1980s and 1990s, rising public debt helped avert a democratic crisis. Then measures had to be undertaken to bring down public debt. In the late 1990s, private debt was used to replace public debt, buying some more time. But this eventually led to the US housing bubble and the subprime crisis. Since 2009, asset purchase programmes by central banks have yet again helped governments buy more time, who have succeeded in pushing back the clock again. In short, democratic capitalism postponed an overt expression of the fundamental conflict between its two component systems by resorting to inflationary measures, public indebtedness, private indebtedness, and quantitative easing policies. This process came at a cost. Streeck argues that it led to a profound weakening of both the state and democratic principles. For example, the

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transformation of the state over the decades first from a fiscal state to a debtor state and then to a state in the process of permanent budgetary consolidation has greatly weakened its institutional legitimacy. When the state finances itself through debt rather than taxation, its nature changes. Instead of being accountable to its citizens, it is forced to inspire confidence in the financial markets on which it becomes dependent. The “consolidation state” must constantly walk a tightrope between addressing the needs of its population and generating a positive primary balance to repay its creditors. Consequently, the consolidation state no longer represents an institution at the service of its citizens but works as a predatory entity that must extract from its taxpayers the means necessary for its financial survival. The result of these successive transformations has brought about a general development of mistrust in states and an inexorable rise in protest movements of all kinds. Is the current situation, in which central banks buy up public debt securities, preferable from a political point of view? Streeck doubts it: the time to be bought in this way will be all too brief. By pouring in ECB money as a final confidence-building measure in relation to the – rising – debt mountains, the state runs the risk that this too will fail, that state self-financing will be seen as internal trading – an attempt worthy of Baron Münchhausen to pull itself up by its own bootstraps – and that the ECB will become one huge ‘bad bank’ with an electronic printing press attached. (Streeck 2014: 166) What is clear is that these policies reflect the decline of our democracies. The role played by central banks in the aftermath of the 2008 crisis marked, as we have already pointed out, by a shift of power from democratic to technocratic authorities. In the wake of the crisis, central banks have thus acquired a level of political influence that they have never had in the past. In practice, this makes them more powerful than governments without having been democratically elected or being accountable to any elected authority. This situation leads Streeck to conclude that the crisis of democratic capitalism, i.e. the crisis generated by the contradiction between neoliberal capitalism and the democratic process, is in fact being resolved. My conclusion will be that, unlike the 1970s, we may now really be near the end of the postwar political-economic formation – an end which, albeit in a different way, was foretold and even wished for in the crisis theories of “late capitalism”. What I feel sure about is that the clock is ticking for democracy as we have come to know it, as it is about to be sterilized as redistributive mass democracy and reduced to a combination of the rule of law and public entertainment. This splitting of democracy from capitalism through the splitting of the economy from democracy – a process of de-democratization of

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capitalism through the de-economization of democracy – has come a long way since the crisis of 2008, in Europe just as elsewhere. (Streeck 2014: 5) Unlike those who see the resurgence of feudal dynamics arising from the current situation, Streeck presents a strikingly different perspective through his analysis. Feudalism requires the backing of strong institutions and, in a way, implies a reassertion of political power over civil society. Conversely, Streeck presents the possibility of a “de-institutionalised” society in which no single force would be able to orchestrate a renewed organisation of social relations in the long term. What comes after capitalism in its final crisis, now under way, is, I suggest, not socialism or some other defined social order, but a lasting [...] a prolonged period of social entropy, or disorder (and precisely for this reason a period of uncertainty and indeterminacy). It is an interesting problem for sociological theory whether and how a society can turn for a significant length of time into less than a society, a post-social society as it was, or a society lite, until it may or may not recover and again become a society in the full meaning of the term. (Streeck 2016: 13–14) To sum up, the thesis put forward by Streeck is that by attempting to postpone the conflict arising from the fundamental contradictions of democratic capitalism, governments have prolonged the crisis by using various measures to buy time, weakening its institutions in the process. Along with neoliberalism, these institutions may therefore also be on the decline. Without their capacity for unification, societies are likely to become populated by “individualised individuals” (Ibid.: 14), driven by opportunism, where protecting oneself from a hostile and precarious environment becomes the primary aim.

An agenda for a democratic economy For any right-minded person committed to the preservation of individual freedoms and the defence of the weak, the feudalisation of society or its complete collapse are not acceptable perspectives. At the same time, it is difficult to imagine that neoliberalism can continue to prevail over the coming decades when its fundamental principles no longer allow for consistent policy-making. It is therefore important that we find a desirable alternative to neoliberalism, one that is suitable for and feasible in the current social context and that can also preserve the foundations of our democracies. If we accept Streeck’s view that there is a fundamental contradiction between neoliberal capitalism and democracy, the solution must, in one way or another, consist in reaffirming the superiority of democratic values over market values. This is the point Streeck makes, and it is worth emphasising.

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If democracy means that social justice must not be reduced to market justice, then the main task of democratic politics should be to reverse the institutional devastation wrought by four decades of neoliberal progress, and as far as possible to defend and repair what is left of the institutions with whose help social justice might be able to modify or even replace market justice. (Streeck 2014: 173–4) However valid and meaningful this injunction for the return of democratic control of the economy may be, it remains abstract and is insufficient to guide political action in a tangible manner. It is not enough to agree that capitalism must now be embedded in democratic institutions when the measures necessary to achieve this objective are not clear. In the following pages, I will therefore try to propose some elements of what might constitute an agenda for a democratic economy, as a response to the agenda of liberalism adopted in the late summer of 1938 at the Walter Lippmann Colloquium (Reinhoudt and Audier 2018). This response will be divided into four parts: (1) responding to the climate emergency and the scarcity of natural resources; (2) determining the role of the market in the economy and society; (3) rethinking the economic role of the state; (4) re-embedding the economy in democracy. 1 Responding to the climate emergency and the scarcity of natural resources Our first task is to respond to the climate emergency. Meeting this challenge means, first and foremost, moving away from fossil fuels for our energy needs. However, the climate problem is much wider-ranging than this energy issue. A complete overhaul of our extractive economy is needed. The model we have followed until now – extracting raw materials, transforming them, producing waste, then starting a new cycle – is not sustainable. Besides, this is not an issue which can be resolved by producing less. By halving GDP without changing this model – which also means halving everybody’s income – we would only be putting off the deadline without addressing the core problem. Only a profound transformation of our productive system from an extractive economy to a circular economy can pave the way to a truly sustainable future. Implementing a circular economy means finding a way to turn our waste into resources. Other living beings have functioned in this way for hundreds of millions of years. Ecosystems help sustain life by regenerating waste matter, perpetually recycling organic matter using the energy of the sun. We must take inspiration from this incredible ability of the biosphere to function in a circular manner by using renewable energy, which is available in abundance. Moreover, a circular economy is not inherently incompatible with growth. GDP measures a flow, and a flow can be increased by accelerating its speed of circulation. Making GDP grow in a circular way would mean increasing the number of productive cycles over a unit of time or, in other words, shortening the duration of each cycle. Thus, it would theoretically be possible to satisfy the insatiable human appetite while also saving the planet.

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There are three major limitations to moving from theory to practice. The first is technological. We simply do not know how to recycle all our waste. The second is energetic. Every transformation, every recycling operation, and every acceleration in our production cycles will consume energy. Setting up a productive system based on recycling all our waste would thus necessarily consume more energy than our current model which is extractive. The third limitation is economic. Even for the waste we know how to recycle, the cost of recycling is often so high as to be prohibitive in our current economic system. Let us assume we manage to resolve these technology and energy constraints. Even if our societies had abundant energy, even if it were possible to recycle all our waste, it would still be impossible to build a circular economy in the world as it functions today. As explained in the previous chapters, the principle of market prices is at the heart of the neoliberal system. These prices, determined by an interaction between supply and demand, generate a system of incentives that is then supposed to coordinate economic and social behaviour. Neoliberalism accepts state intervention in the market for prices to take account of externalities and ecological costs. This intervention can take the form of subsidies, taxes or the creation of a pollution rights market similar to the one introduced by the European Union in 2005.5 The question that then arises is as follows. Is it possible for a circular economy to be built upon a market structure in which the price mechanism – possibly adjusted by a public institution to take account of ecological costs – conditions our behaviour? There are several ways to answer this question. The first is to imagine what kinds of behaviour such incentive mechanisms would bring about. Here, the main obstacle we would come up against is the single price principle. In neoliberal thinking, the market price is, by design, a public price that is attached to the commodity and does not distinguish between buyers and uses. We have seen, in the previous pages, that this principle of a single price does not exist in traditional markets where each price is negotiated according to the context and individual characteristics of those who participate in the transaction. In contrast, the primary function of the market in the neoliberal system is to quantify value. Taxing or subsidising goods does not fundamentally alter this logic, in which prices are indifferent to uses and buyers. However, this principle poses a fundamental problem. If, in order to take account of its environmental impact, we decided to tax oil in such a way as to increase the price of a barrel to, say, 1,000 dollars, this would mean that the prices of all uses of oil, for all consumers, would be ten times higher than prices post the Russian invasion of Ukraine. However, not all uses and not all buyers are equal in terms of their social needs. If a large part of the population can no longer travel, and therefore cannot get to work because the cost of fuel has increased tenfold, this will pose a real problem to the functioning of our societies and lead to great disruptions. In contrast, if Elon Musk were to abandon his space tourism ventures because of the high cost of fossil fuels,

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this would not have much impact on the way our societies function. In other words, not all uses of resources are equal. On the one hand, because they do not meet the same social needs, and on the other, because they do not move society in the same direction. A resource use that enables society to move towards a circular economy is not equivalent to a resource use that would take us further away from this objective. Differentiating between uses would require a planning logic to be imposed above the market logic. However, such a mechanism would contradict the fundamental neoliberal principle of price determination and behaviour coordination by the markets. In short, in a general context of scarcity and faced with serious environmental constraints, it becomes impossible to maintain neutrality with regard to the uses, context and characteristics of buyers. A multibillionaire will never be constrained by a market price. But is it justifiable to allow him or her to consume the non-renewable resources of our planet at will? Is it politically and socially sustainable? The second way of answering the question of whether it is possible to organise a resource-constrained society while respecting neoliberal principles is to look at our own historical precedents. When a war economy had to be set up in an emergency, all capitalist countries chose not to let their societies operate on an incentive mechanism based on market prices. The US set up a system of rationing and price controls even before the war was declared. It did so within a framework that allowed for negotiation with all stakeholders to ensure the acceptability of the measures to households and by limiting the working hours of workers in the defence industry.6 In all countries at war, market-based resource allocation mechanisms were partially suspended. This suspension seems to have worked well, as can be seen by the fact that governments continued to maintain control over the prices of the means of production for more than two decades after peace was restored. There are good reasons to believe that transforming our economies into circular economies requires a sustained effort on a scale comparable to that needed to move from a peace-time economy to a war economy. If we believe such an effort is needed, then there is no reason to cast aside solutions that have worked in the past solely to maintain a dogmatic belief in the superiority of the neoliberal model. To this we must add that the technological elements of the solution will require a massive redirection of human and natural resources towards research. During WWII when the race to develop the atomic bomb presented a major scientific challenge to both sides, it did not take long for the United States to invent the devastating weapon. If we were to collectively devote as much effort and resources to developing fusion energy sources as countries did to perfecting weapons during WWII, we could make much greater strides towards solving our energy challenges than we are today. These considerations lead me to formulate the first principle of the democratic economy agenda as follows.

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First principle: Making the paradigm shift to a sustainable economy requires a profound reorientation of our productive system. This reorientation will only be possible if it is based on more effective mechanisms than the price signal alone. States will have to invest massively in technological research to find new sources of decarbonised energy. They will also have to reorient the economy along the lines of a war economy by differentiating between the uses of non-renewable resources and energy in their allocation mechanisms.

The market is a place for exchange based on individual autonomy, with private property as its natural corollary. It constitutes a space for freely concluding contracts and transactions and is essential to a democratic society. Being able to conduct business, produce, exchange, and negotiate freely with others is a fundamental feature of human nature. As opposed to this, systems in which the economy is centrally planned have proven to not only be economically inefficient, but also – and perhaps more significantly – contrary to the values of democracy. The market is necessary for economic efficiency, human liberty and for our social life. A free society cannot exist without a space for free trade. Even during WWII, when shortages and rationing conditioned social life, markets never stopped functioning. In 1944, the prices and the use of resources were regulated by the UK state, meaning that coffee, cocoa and petrol were often in short supply. London was regularly attacked by V1 and V2 missiles, but none of this could stop Hayek from publishing The Road to Serfdom or filmmaker Laurence Olivier from making Henry V. The restrictions imposed by the war did not diminish entrepreneurship or creativity. In London, in the summer of 1944, people continued to go to the cinema and buy books, and the market continued to be a space for exchange and creation. The problem is precisely this: neoliberals do not see the market as a space for socialisation and creation, but as a giant algorithm for setting prices and determining incentives. This neoliberal conception of the market constitutes a distortion. A distinction must be made between the defence of free enterprise and a conception of the market as a means for determining value. A definition of value that does not incorporate the social and cultural aspects of a product or a service can hardly be acceptable to society. Thus, the determination of value cannot simply be reduced to an aggregation of individual choices made on the principle of self-interest. As such, two very different functions of the market need to be distinguished. The individual freedom to do business and trade is one matter; the fact that this freedom, when exercised, participates in the definition of a social choice is a different matter altogether. Accepting that the market is

Conclusion: What could a post-neoliberal world look like?  157

a space in which fundamental freedoms are expressed does not necessarily mean that we want the exercise of these freedoms to determine the organisation of the whole of society. In other words, buying is not the same as voting. Making a choice for oneself is not the same as deciding for everyone else. This line of thought is similar to the one proposed by Karl Polanyi (1944). In the vast majority of societies, the fact that there are markets in which everyone can negotiate, exchange, do business, and, of course, agree on prices, is not in itself a problem, because these societies are not governed by markets. The problem arises when one sets out to create a market society, i.e. when one decides to treat things that are not commodities as if they were commodities in order to give them a price and then use these prices to guide collective behaviour. Polanyi reminds us that this is exactly what happened with the labour market reorganisation at the beginning of the 19th century. In order to reorganise social relations within companies on the basis of the principle of competition, it was necessary to destroy the laws of guilds as well as all the institutions that regulated relations between employers and employees, including the systems of assistance and charity that protected the poor. Moreover, it became necessary to commercialise land and natural resources so that they could be freely bought and sold and to base the value of money on commodities such as gold and silver so that there could be no political intervention in its management. The constitution of a market society, Polanyi explains, required the dilution or destruction of the many competing institutions that helped to organise social life. They were replaced by a system of self-regulating markets, responsible for determining the value of all things and thereby guiding all our social choices. Viewed in this light, the idea that it would “cost too much” to provide care for the elderly, increase the number of teachers or recruit police officers is downright absurd. Nobody ever says that it “costs too much” to organise a music festival, open a clothes shop, or create a telemarketing platform. Yet, the question should be applicable to both cases and framed in this way: a choice has to be made collectively between whether a person should become a carer and look after the elderly or whether he or she should sell consumer credit on a telephone platform. If this choice is made on the basis of a price system determined by supply and demand, there is a greater chance that a job selling bank contracts will emerge as the answer rather than a retirement home for the less fortunate elderly. Yet it is evident that the two functions do not fulfil the same social role and that one is probably more important than the other in a civilised society. Ultimately, the idea that a market can determine the value of everything around us by being indifferent to the uses and characteristics of buyers is utterly absurd. Value is a social construct that must be consistent with the values – in the plural – that are inscribed in the cultural traits and history of societies. By allowing markets to generate prices that determine our social

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choices without taking into account what we collectively value the most, we ourselves are creating the conditions for an untenable society in which schools are run down while shop windows are cleaned twice a day. Not only is the result absurd, but by relying solely on markets in this way, we are also eroding our social institutions whose principles and values differ from those of the markets. These considerations lead me to formulate the second principle of the agenda for a democratic economy.

Second principle: The market is an indispensable space in any developed society for everyone to be able to conduct business and trade freely. This space determines the value of commodities, which are the part of wealth that has been produced for the purpose of being sold. Other forms of wealth: labour force, natural resources, money and capital, and all non-market goods and services do not belong in the realm of the market, and their value cannot be derived from competitive supply and demand mechanisms.

The state is the institution which embodies the collective consciousness and political organisation of a society to achieve certain shared objectives. When it is democratically organised, the state is also a space for discussion and collective decision-making The choices that a society has to make are plentiful and w ide-ranging. They may concern the trade-off between the short and the long term, between preserving the environment and maximising purchasing power, etc. Often, they involve decisions regarding the distribution of resources. For example, should very expensive goods be produced for an elite or should priority be given to the production of goods and services for the masses? One way of tackling this question is to de-commodify certain goods or services. For instance, during the Industrial Revolution in Britain, most people had only a low-quality primary education; in the countryside, among the working classes, most children did not attend school and remained illiterate. Adam Smith condemned this situation. In Book V of The Wealth of Nations, published in 1776, the Scottish philosopher examined the respective roles of the state and the private sector in the education system. While he expressed his reservations about the state taking charge of higher education, arguing that this might benefit only a small elite, he recommended that primary education should be managed through a public institution. Thus, he advocated for the state to establish schools “in every parish or district” so that working-class children would be compelled to receive an education. A basic education was necessary, Smith argued, not only to contribute to the

Conclusion: What could a post-neoliberal world look like?  159

individual emancipation of workers’ children, but also to develop a spirit of citizenship and improve social life (Smith 1776: 605). Thus, even in Adam Smith’s view of the economy, there is the idea that there are commodities whose production and distribution is determined by the market, and there are other things that fall in the realm of social objectives, principles, and non-market values. These second category of goods and services must be provided by the state, or at least managed by it, in specific ways. The state and the market are competing institutions in the sense that politically determined decisions may be different from choices made in a market setting. However, this does not mean that state decisions should always take precedence over market choices. A government that decides to administer all prices or to impose ways of producing and distributing wealth would impair the primary function of the market, which is to be a place of exchange and public negotiation for free and autonomous individuals. Naturally, there are exceptional circumstances where it becomes necessary to drastically reduce the hold of the market without eliminating it completely. The administration of 90% of prices at the end of World War II in the United States was necessary because the constraints imposed by the war had become severe. Against a backdrop of relative stability and peace, and even considering the challenges posed by the ecological transition, it should be possible to preserve a relatively large space where goods can be traded and negotiated freely, and where the state would continue to simply play the role of referee and facilitator. The following two questions remain. How can we distinguish between market and non-market forms of wealth? How can the respective roles of the state and the market be delimited for the making of collective choices? A first rule of thumb might be that the allocation and distribution of commodities should be left up to the markets, while the management of all non-market forms of wealth should be conducted by states. Commodities are the part of wealth that has been produced for the purpose of being sold. Therefore, anything that has not been produced, or anything that has been produced but for a purpose other than sale, cannot be considered a commodity and must be managed in a non-market manner. Most means of production are not commodities. Some, because they have not been produced: land and natural resources, sea and oceans, air and space, are used as means of production, but their management should not be left to the market. Natural resources such as oil or lithium are extracted, but not produced. The difference is that extraction concerns non-renewable stocks, while production can be renewed. Other means of production have been produced but not for the purpose of being sold. Neither human labour nor the cultural heritage of a country are commodities, even though they can be harnessed for economic ends. Money is not a commodity either, which implies that interest rates must be regulated by a public administration.

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Finally, public services such as primary education are not commodities, because they are not meant to be sold. They are forms of wealth that could be treated as commodities, but which have been taken out of the market to be managed and distributed in other ways. Once this distinction has been made, there remain certain goods that are clearly commodities, but which also fulfil a specific social role and whose management is not always left to the market. This is the case, for example, of books and cultural products in France. The 1981 law on the single price of books imposes a strict regulation on the French publishing industry. In cinema and music, there are subsidy and quota systems to protect French creation. As a result of this regulation, the price of a new book cannot be freely negotiated (it is decided by the publisher), television channels must contribute a share of their turnover to help fund cinematic productions, and radio stations must respect a quota of French songs in their programmes. The market is, in the case of cultural goods in France, strictly regulated to protect certain principles and values that French society finds important. French governments have always defended – and obtained – the so-called “cultural exemption” in European regulations and free trade agreements. These measures have protected French cinema and resulted in France boasting one of the densest networks of bookshops in the world. It should be noted that this particular choice is not one shared by other countries. As such, it is an example of market regulation that emanates from a specific national choice. The French state’s control over certain goods and services illustrates how an institutional influence can be exerted on a market to fulfil certain social objectives. Even though they are commodities, agricultural products are other goods which warrant special management. Firstly, because they result directly from the land (which is not a commodity) and have a significant impact on the environment, but also because they are essential for sustaining human life. A food production crisis is typically the type of social danger that states cannot afford to ignore. Thus, food sovereignty is a legitimate issue that can arise when world trade is no longer assured. Medicines and health products may also require stricter market regulation. All in all, it is up to societies to decide whether or not the production and distribution of certain goods should be more strictly regulated. Finally, as we have stated in the first principle, it is also the role of the state to foresee and plan for the future. Since natural resources are scarce, and more importantly non-renewable, their management and allocation cannot be determined by market prices alone. Similarly, it is absurd to try to reduce greenhouse gas emissions by using only the mechanism of price signals. If the reduction of allowances on the European carbon market leads to a surge in the price of emissions that could endanger the whole of European industry, it is certain that governments would intervene to bring the price per tonne of emissions down to a financially sustainable level. The fact that this scenario has never been considered by the EU authorities demonstrates, if proof

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were needed, the somewhat naive faith that neoliberals have in the market price mechanism. The experience of subprime loans has shown that market prices are, as John Maynard Keynes wrote, only conventions between buyers and sellers. They are not intended to determine the fundamental value of resources, nor to correctly anticipate their future value. In short, the state can legitimately intervene in the place of the market in the management of non-market wealth (natural resources, labour, money, cultural heritage, public services, etc.); it can also intervene in the rules of the market for the production and distribution of certain commodities that fulfil specific social roles, while guaranteeing producers a degree of relative independence (cultural goods, food, etc.); finally, it can intervene in markets to plan and manage the allocation of resources that are necessary for the achievement of overriding objectives. During the post-war period, the economic model adopted by capitalist countries was to make a distinction between means of production and agriculture, whose prices were supervised by the states, and consumer goods, whose prices remained mostly determined by the markets. This model is not only still relevant, but it seems to be re-emerging through the control that central banks have gradually established over short- and long-term interest rates. If this model were to be followed again, new mechanisms will have to be set up to determine the prices of raw materials, agricultural produce and energy, alongside the establishment of institutions to safeguard workers’ remuneration. This scenario becomes even more apt when we consider that a certain control over the means of production will be essential to planning and coordinating the ecological transition. Nevertheless, to achieve this, public energy supply chains will have to be re-established and nonrenewable resources will have to be distributed according to terms and prices that make it possible to distinguish between contexts and uses. This leads me to formulate a third principle relating to the roles and functions of the state.

Third principle: The state is a sovereign institution that allows a nation to decide on and attain collective objectives. These goals must preserve a space for individual freedoms that includes freedom of trade and enterprise. The state is responsible for managing resources that are not commodities in a democratically decided manner. In order to achieve its objectives, or to preserve certain principles or values, it can intervene in the rules of markets and indeed directly in markets, for example by limiting competition or regulating prices.

Democracy is a principle of social organisation in which all citizens can participate in making social decisions.

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The second and third principles described above distinguish between resources that must be managed politically and resources that can be managed and distributed by the market. One of the fundamental differences between management by the market and management by political action is the frontier. A politically organised society necessarily debates shared issues, determines its objectives and works towards their implementation within the context of its own specific border. Indeed, no human community can claim to govern what happens outside its established boundaries. This is profoundly different from the market, which allows for exchange across political or cultural barriers on a purely interpersonal basis. The frontier within which the democratic debate takes place is not easy to determine. This frontier can be geographical (a state, a region, a municipality), cultural (a religious or national community), institutional (a company, a corporation). Individuals have multiple identities and as a result no one belongs to a single democratic space. In most countries, economic matters are debated and the most important decisions taken at the national level. However, there are exceptions to this setup. In the European Union, the main economic policy issues are taken up by EU institutions. Similarly, in some federal states, many decisions are taken at the regional or state level. At what level should economic policy choices be made? Within the European Union, there is a legal principle that determines the relationship between the different levels of decision-making: the principle of subsidiarity. European legislation defines it as follows: Under the principle of subsidiarity, in areas which do not fall within its exclusive competence, the Union shall act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States, either at central level or at regional and local level, but can rather, by reason of the scale or effects of the proposed action, be better achieved at Union level. (Treaty on the European Union, art. 5, §3) The way this principle is formulated is both interesting and problematic. It is interesting because it aims to prioritise the actions of local and national institutions. The idea that decisions can be taken more easily in a smaller framework which is more conducive to consultation and debate may seem desirable from a democratic point of view. However, this formulation is problematic because it fails to explicitly raise the question of popular legitimacy, which differs considerably from one level to another. For example, it is more difficult to organise a democratic debate at the European level than at a national level for several well-known reasons: cultural and linguistic differences are greater at the European level; elections to the European Parliament are marked by a low participation rate; the European Parliament has fewer powers compared to

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a national parliament; European citizens are poorly informed and do not feel directly concerned by the decisions taken by the EU. Another aspect of the problem is that European economic policy principles are largely enshrined within the frameworks of the treaties. As a result, they are, in a way, constitutionalised, which means that they are not the result of a democratic process and lack popular legitimacy (Delaume and Cayla 2017, Jouin 2019). The fact that actions and decisions are taken in a place such as the European Union, which does not allow for greater democratic debate, raises questions. As formulated, the principle of subsidiarity opts for a conception of action that is not based on any democratic consideration but rather on objectives of efficiency alone. However, legitimacy may outweigh efficiency as a democratic principle for the general public. More fundamentally, the question of sovereignty is central to structuring the interaction of the markets with democratic societies. In principle, democracy stipulates that people can express themselves and decide “sovereignly”, i.e. in an absolute and uncontested manner. French essayist Coralie Delaume believes that this sovereignty should be both “national” and “popular” (Delaume 2021). In her view, while national sovereignty implies a certain independence from foreign influence, popular sovereignty requires that collective political choices take precedence over those arising from individual interests and economic relationships. Thus, the will of the citizens should take precedence over the will of the markets. In order to guarantee popular sovereignty, the market must therefore be reincorporated into societies. But such a re-embedding is only possible if the society in question has been clearly delineated beforehand. From this, other questions emerge. Why should national borders take precedence over others? Couldn’t more power be delegated to European elected representatives, for instance, so that the market may be democratically regulated at the European level? This would be possible if there were a European nation, i.e. if the citizens of the EU felt that they shared a common destiny and that the greater political community it represents is more legitimate than their own national polities. The problem is that such feelings of allegiance are not based in law or in formal institutions, but on socio-cultural parameters rooted in history and perceptions. People’s identities are, first and foremost, national, and it is at this level that they debate and express their political and social preferences. Generally speaking, for a democracy to exist fully, the formal institutions, i.e. the decision-making bodies, must be consistent with the informal institutions or the habitus of the people and which characterises them. In a society where formal institutions are disconnected from cultural institutions, decisions could be enacted without debate, or debates could take place without any concrete decisions being taken. For this reason, taking decisions at the national level through a process which is visible to the population remains the most legitimate approach from a democratic point of view.

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However, not all decisions need to be made at the national level. It is relatively easy to argue that national governments should handle the management of public utilities, monetary policy, the production and distribution of electricity, the regulation of labour and wages and the organisation of agricultural markets. However, the question of how to manage natural resources or cope with climate change is much trickier. Natural resources are unequally distributed on the planet and therefore cannot be the subject of purely national policies. It is no longer possible, as it was in the 1950s, to impose the rule of a few large state-backed companies with neo-colonial aims over raw materials-producing countries. Raw materials must be de-commodified at the international level and in the framework of multilateral negotiations based on shared objectives. Similarly, discussions on global warming must continue to take place in a multilateral framework so that each country can determine its commitments accordingly. Finally, for the EU Member States, it is likely that some policies will continue to be managed at the supranational level. However, the political survival of the EU will require more democratic subsidiarity. The foundations of the single market, the uncontrolled free movement of capital and labour, the electricity market and the liberalisation of many public utilities have profoundly destabilised the social institutions of European nations and undermined citizens’ confidence in them (Cayla 2021). If the European Union is to survive the end of the neoliberal era, it will have to undergo a profound transformation and re-examine the path it has followed since the 1980s. The fourth and final principle of the democratic economy agenda could be formulated as follows. Fourth principle: Democracy presupposes the preservation of the primacy of politics over economics. This requires markets to be re-embedded in society and non-market wealth to be managed within the territories where most social institutions are located and where decisions can be made through the organisation of debate with the highest degree of popular legitimacy. Meanwhile, the objectives of environmental and climate preservation and the management of natural resources must be decided at the international level, through multilateral negotiations based on mutual respect.

*** In this book, as in the previous one, Populism and Neoliberalism, my aim was not to demonstrate the superiority of one economic system or another, but to reflect on how our resources and economies can be managed in a sustainable way. To do this, I have tried to demonstrate two things. The first is that a neoliberal

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governance of the economy has resulted in outcomes that have proven neither effective nor socially acceptable. The second is that there are other ways of managing the economy than those based on the market price mechanism. However, it is important to bear in mind that these alternative approaches are not necessarily more efficient or more socially acceptable than neoliberalism. The end of the neoliberal period could consequently spell the end of the rule of law or of democracy. In an age where environmental, social and geopolitical issues have rarely been so pressing, collective reflection around how we can build a truly sustainable society is the need of the hour. By proposing four broad principles on the basis of which a new relationship between societies and the market can be constructed, I hope to contribute to this reflection by offering a very general framework within which it is possible to conceive a plurality of social choices.

Notes

References Cayla, David (2021), Populism and Neoliberalism, London and New-York: Routledge. Cayla, David (2022), “How the Digital Economy Challenges the Neoliberal Agenda: Lessons from the Antitrust Policies”, Journal of Economic Issues, Vol. 56, No. 2: 546–553. Delaume, Coralie (2021), Nécessaire souveraineté, Paris: Michalon. Delaume, Coralie and David Cayla (2017), La Fin de l’Union européenne, Paris: Michalon.

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Durand, Cédric (2020), Techno-féodalisme: critique de l’économie numérique. Paris: La ­Découverte, Zones. Graeber, David (2015), The Utopia of Rules: On Technology, Stupidity, and the Secret Joys of Bureaucracy. Brooklin and London: Melville House. Graeber, David (2018), Bullshit Jobs: A Theory London: Penguin. Jackson, Tim and Robin Weber (2016), “Limits Revisited: A Review of the Limits to Growth Debate”, report to the APPG, available online on: https://limits2growth. org.uk. Jouin, Céline (ed.) (2019), La Constitution matérielle de l’Europe, Paris: Pédone. Herrington, Gaya (2021), “Update to Limits to Growth: Comparing the World3 Model with Empirical Data”, Journal of Industrial Ecology, Vol. 25: 614–626. Meadows, Donella H., Dennis L. Meadows, Jørgen Randers and William W. Behrens (1972), The Limits to Growth: A Report for the Club of Rome’s Project on the Predicament of Mankind, Washington, DC: Potomac Associates. Mounk, Yascha (2018), The People vs. Democracy, Why Our Freedom Is in Danger and How to Save It, Cambridge, MA: Harvard University Press. Polanyi, Karl (1944) [2001], The Great Transformation: The Political and Economic Origins of Our Time, Boston, MA: Beacon Press. Reinhoudt, Jurgen and Serge Audier (2018), The Walter Lippmann Colloquium: The Birth of Neo-Liberalism, London: Palgrave Macmillan. Smith, Adam (1776) [2007], An Inquiry into the Nature and Causes of the Wealth of Nations, Amsterdam: Metalibri Digital Edition. Streeck, Wolfgang (2014), Buying Time: The Delayed Crisis of Democratic Capitalism, London and New York: Verso. Streeck, Wolfgang (2016), How Will Capitalism End? Essays on a Falling System, London and New York: Verso. Supiot, Alain (2017), Governance by Numbers: The Making of a Legal Model of Allegiance, London: Hart Publishing. Zuboff, Shoshana (2019), The Age of Surveillance Capitalism: The Fight for a Human Future at the New Frontier of Power, New York: Public Affairs.

INDEX

Note: Page numbers followed by “n” denote endnotes Abdelal, Rawi 82, 83–7 Adenauer, Konrad 23, 58 agenda for a democratic economy 153–62 Aglietta, Michel 12 Agriculture Improvement and Reform Act 88 American International Group (AIG) 103–4 Audier, Serge 4, 6 Ball, Laurence 49n1 Bank of Canada 105–6 Bank of England 105–6, 110, 113, 122–3 Bank of Japan 105–6, 110 bank rate 18, 23, 27, 33, 105–6, 108–9, 137–9 Bear Stearns 104 Becker, Garry 8 Bernanke, Ben 106, 108 Bilger, François 57, 59 Blanchard, Olivier 34, 111, 126 BNP–Paribas 100, 103–5 Böhm, Franz 4, 47 bond markets 91–2 Bretton Woods Agreements 2, 56, 60, 68, 70n13; collapse of 72–5, 80, 95; end of 82–4, 95, 149 Brown, Wendy 3, 6 Camdessus, Michel 85–6 Carter, Jimmy 27 Cayla, David 3, 9, 15, 42, 99, 124, 136, 148, 163–4

central bank: independence of 23, 27, 29–31, 39–41, 58, 60, 105, 110, 116–8, 122, 124, 128; role of 15–7 Chavranski, Henri 85–6 classical liberalism 4–8, 47, 51n21 climate emergency 144, 153, 164 Clinton, Bill 2, 27 cognitive dissonance 24, 116 collateralised debt obligations 96–7, 99, 101–2 Common Agricultural Policy 66–7, 88 convergence criteria 29–30 counterparty risk 103 Couppey–Soubeyran, Jézabel 34–5 credit default swap 91–2, 103 crowding–out effect 30, 37 cryptoassets 133–4 Dardot, Pierre 6 deindustrialisation 56, 76–7, 78, 143 Delaume, Coralie 117, 163 Deleau, Jean 66 Delors, Jacques 85–6, 87 derivatives 91–2 discount rate see bank rate dogma see dogmatic belief dogmatic belief 43, 130, 155 Draghi, Mario 113–4, 118 Durand, Cédric 148–9 economic calculation 21, 69, 94, 146; debate on 44–6 economic growth: disappearance of 77–8; and inequality 79; of the postwar period 68–9

168 Index

Erdoğan, Tayyip 32–3, 147 Erhard, Ludwig 22–3, 24n12, 56–9 Eucken, Walter 4, 47 European Carbon Market 165n5 European Central Bank 28–9, 36, 106, 110–1, 114–8, 119n11, 119n14, 137; debt cancellation by the ECB 35–6 externalities 48, 51n22, 126–7, 154 Fama, Eugene 93–5, 97, 132 Fannie Mae 104, 107, 118n3 Federal Reserve 21, 27–8, 31–2, 41, 50n6, 98, 105–10, 114, 116–7, 123, 128 FICO rating 101 financial and trade imbalances 97–9 financial bubble 28, 98, 105, 130, 139, 146, 150 financial globalization see liberalisation of financial markets financial markets: controlled prices in 136– 40; presentation of 91–2; role of 92–5 Foucault, Michel 5–6, 55, 57 fraudulent mortgage loans 101–2 Freddie Mac 104, 107, 118n3 Freiburg school see ordoliberalism Friedman, Milton 4, 7, 10n3, 10n5, 19–22, 26–7, 34, 81, 115, 119n21, 126–7 frontier 162 futures contract 88, 89n11, 91–2 Galbraith, James 97 Galbraith, John K. 61, 68, 75 Galbraithian wage guideposts 61; collapse of 75 Gaulle, Charles de 72–3 German codetermination 58 German neoliberalism see ordoliberalism Giles, Chris 33 Ginnie Mae 107, 118n3 Glass–Steagall Act 95–6 Graeber, David 12, 148 Greenspan, Alan 27–8, 98 Grossman, Sanford 132 Grossmann–Doerth, Hans 4, 47 Harvey, David 5 Hayek, Friedrich 4, 7–8, 20–2, 28, 45–47, 49, 54–5, 69, 80–1, 86, 126, 131, 156 helicopter money 34–5 Herndon, Thomas 50n5 high frequency trading 95 Hoover, Herbert 56, 64, 70n3 hybrid interest rates 101–2 institutional collapse 152 interbank market 103, 105, 109, 16, 23, 91

investment bank 60, 92, 95–7, 101, 104, 113, 124 Jorion, Paul 99, 101, 118n5 Kelton, Stephanie 36–9, 41–2, 93 Keynes, John M. 68, 70n13, 134, 161 King, Mervyn 122 Kirman, Alan 132–3 Krugman, Paul 14–5, 138 Lagarde, Christine 36, 118 laissez–faire 5, 47–8, 51n21, 86, 124 Lamy, Pascal 85 Laval, Christian 6 Le Boucher, Eric 99 Lehman Brothers 36, 104, 106, 108 liberalisation: of agricultural markets 88–9; of financial markets 81–7, 95–7; of German prices 57–8; of international trade 88; of labour markets 88; of raw materials 87–8 Lordon, Frédéric 93 Manchesterian liberalism 47, 51n21, 124 Mankiw, Gregory 49n1 mark to market 129 mark to market accounting see mark to market market society 157 market value see mark to market markets: efficiency of 43, 48, 93–7, 130–2, 135–6, 146; as exchange places 47, 156–7; as information processors 45–6, 93–5, 131–3; inefficiency of 132–5; institutional conception of 134–6; neoliberal conception of 43–4, 46–9; state regulation of 158–61; traditional markets 94, 135–6, 154 Marrakesh Agreement 88 Marshall Plan 55, 56, 72 Meadows Report 144 merchant bank see investment bank Michau, Jean–Baptiste 138–9 Milward, Alan 65–6 Mirowski, Philip 2–5 Mises, Ludwig von 22, 44–7, 49, 69, 80, 146 modern monetary policy 36–8; limitations of 38–40 monetarism: alternatives to 40–3; crisis of 31–4, 113–8; hegemony of 26–30; principles of 18–23, 24n10, 49; promotion of 80–1 monetary policy: during the 2007–2008 financial crisis 105–8; principle of 18 money market: 91–2

Index  169

money: creation of 15–7; definition of 12–13; value of 13–5 Mont Pelerin Society 4–6, 10n3, 86 Morgenthau Plan 56 mortgage–backed securities 97, 102, 107 Mouffe, Chantal 3 Mounk,Yascha 117, 147, 165n4 Myrdal, Gunnar 80 National Defense Advisory Commission 69n1 neo–feudal capitalism 147–9 neoliberalism: chronology of 2; contemporary neoliberalism 125–30; death of 2–3, 143–52, definitions of 4–10; DNA of 86; during the COVID pandemic 124–5; and populism 3; neoliberal view of the state 126–8 Nixon, Richard 26, 73 Non–Accelerating Inflation Rate of Unemployment 26, 49n1 Obama, Barak 110 oil shock 74–75 ordoliberalism 16, 22–3, 24n12, 28, 47, 48, 56–9, 86, 117 Orléan, André 133 over–the–counter market 92; see also shadow finance Paulson, Henry 105 Piketty, Thomas 35, 42, 79 Polanyi, Karl 3, 42, 150, 157 Powell, Jerome 31–2, 41 Price Administration 54–5 price control of means of production 68–9 profit crisis in the 1970s 75 quantitative easing 107–8, 114–7, 137, 140n1, 150; exit strategy of 122–4; German contest of 117–8; as a way to control long–term interest rates 109–12 Reagan, Ronald 27, 82, 98 regulation: of agricultural markets 63–7; of financial markets 59–60; of labour markets 60–1; of raw materials 61–3 Reinhart, Carmen M. 50n5 Rodrik, Dani 5, 33–4, 43 Rogoff, Kenneth S. 50n5 Roosevelt, Franklin D. 53–4, 64 Röpke, Wilhelm 22–3, 28, 47, 70n4, 87 Saez, Emmanuel 42, 79 scarcity of natural resources 153, 155

Schmidt, Hubert 66 Schwartz, Anna 21 Securities Market Programme 119n14 securitization 95–7, 100, 102, 104, 129 shadow banking see shadow finance shadow finance 92, 118n2; see also over– the–counter market shortages 8, 14–5, 105, 125, 143–5, 147, 156 Slobodian, Quinn 5, 7 Smith, Adam 47, 51n21, 158–9 snowball effect 111, 119n13 Solchany, Jean 7 special purpose vehicle 96, 100 stagflation crisis 74–80 Steinbeck, John 64 Sterdyniak, Henri 38, 50n17, 141n4 Stiglitz, Joseph 3, 5, 43, 132 stock markets 91–2 Streeck, Wolfgang 149–53 subprime mortgage loans: crisis of 23, 28, 31, 97–103, 105, 106, 136, 145, 150, 161; definition of 101 subsidiarity 162–3; democratic subsidiarity 164 Summers, Lawrence H. 23, 26, 123–4, 138 Supiot, Alain 131, 147–9 systemic crisis 36, 103–6, 111, 139, 145, 147 systemic event see systemic crisis technostructure 61 Thatcher, Margaret 82 Tirole, Jean 43–4, 46–7, 126–30, 136 Treaty on Stability, Coordination and Governance 119n15 Troubled Asset Relief Program 105, 107 Trump, Donald 2–3, 31–3, 41, 147 Tsipras, Alexis 117 Turkish lira crisis 32–4 Turner, Adair 34 UK 1976 financial crisis 39 ultra–liberalism 27, 126 US central bank see Federal reserve Van Hook, James 58 Varoufakis,Yanis 117 Volcker, Paul 81, 137, 139–40, 27 Walter Lippmann Colloquium 4, 6, 15, 47, 86, 153 war economy 53–5, 69, 155, 156 Warner, Mark 31, 41, 117 Washington consensus 82, 85 whatever it takes 114, 118

170 Index

White, Dexter 70n13 World Trade Organisation 85, 88 Xiaoping, Deng 136

Yellen, Janet 2, 31 Zuboff, Shoshana 148 Zucman, Gabriel 42, 79