The Rise and Fall of Neoliberal Capitalism

David M. Kotz

• Publisher: Harvard University Press
• Year: 2015
• ISBN:
  9780674967182
• Topic: Économie
• Subtopic: Conditions économiques

The financial and economic collapse that began in the United States in 2008 and spread to the rest of the world continues to burden the global economy. David Kotz, who was one of the few academic economists to predict it, argues that the ongoing economic crisis is not simply the aftermath of financial panic and an unusually severe recession but instead is a structural crisis of neoliberal, or free-market, capitalism. Consequently, continuing stagnation cannot be resolved by policy measures alone. It requires major institutional restructuring.Kotz analyzes the reasons for the rise of free-market ideas, policies, and institutions beginning around 1980. He shows how the neoliberal capitalism that resulted was able to produce a series of long although tepid economic expansions, punctuated by relatively brief recessions, as well as a low rate of inflation. This created the impression of a "Great Moderation." However, the very same factors that promoted long expansions and low inflation—growing inequality, an increasingly risk-seeking financial sector, and a series of large asset bubbles—were not only objectionable in themselves but also put the economy on an unsustainable trajectory. Kotz interprets the current push for austerity as an attempt to deepen and preserve neoliberal capitalism. However, both economic theory and history suggest that neither austerity measures nor other policy adjustments can bring another period of stable economic expansion. Kotz considers several possible directions of economic restructuring, concluding that significant economic change is likely in the years ahead.

1

Introduction

In 2008 a severe financial and broader economic crisis broke out in the United States. It rapidly spread to much of the global financial and economic system. As will be shown in detail in Chapter 5, this has been the most severe crisis since the Great Depression of the 1930s. While the acute stage of financial collapse and economic free-fall at the start of the crisis has passed, it has been followed by a period of stagnation and economic instability continuing up to the time of this writing five years later. The term “crisis” aptly captures the ongoing condition of the U.S. economy and that of much of the rest of the world economy.

The crisis came as a surprise to most of the leading economists and policy-makers in the United States, who believed that depressions were no longer possible in contemporary capitalism. Robert Lucas, a leading representative of the free-market Chicago School of academic economics, claimed in his 2003 presidential address to the American Economic Association that the “central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”¹ Ben Bernanke, a noted Princeton University economist who was appointed chairman of the Federal Reserve in 2006, told a meeting of Federal Reserve officials in March of that year that “I think we are unlikely to see growth being derailed by the housing market.” At the same 2006 meeting Janet Yellen, a Berkeley economist and Federal Reserve official who later succeeded Bernanke as head of the Federal Reserve, added “Of course, housing is a relatively small sector of the economy, and its decline should be self-correcting.”² Thus, leading representatives of the mainstream of the American economics profession could not see the impending economic crisis, and many were convinced that a serious crisis could not happen again.

This crisis issued from the particular form of capitalism in the United States in recent decades, often called free-market, or neoliberal, capitalism.³ Neoliberal capitalism arose around 1980, first in the United States and the United Kingdom, replacing the quite different “regulated capitalism” that had preceded it. It soon spread to many, although not all, other countries and came to dominate the global-level economic institutions of this era.

The full meanings of neoliberal and regulated capitalism will be explored in Chapter 2. In brief, in neoliberal capitalism market relations and market forces operate relatively freely and play the predominant role in the economy. By regulated capitalism we mean a form of capitalism in which such non-market institutions as states, corporate bureaucracies, and trade unions play a major role in regulating economic activity, restricting market relations and market forces to a lesser role in the economy.⁴ The aim of this book is to uncover the roots of this crisis in neoliberal capitalism, as well as to provide an understanding of the neoliberal form of capitalism that gave rise to the crisis. This requires an examination of several related questions. What is neoliberal capitalism? Why did it arise after several decades of regulated capitalism, a development that, like the current crisis, surprised most analysts at the time? How has this form of capitalism worked since its inception around 1980, a period that has seen a series of historically long economic expansions, low rates of inflation, and high and rising levels of inequality and debt?

Finding answers to the foregoing questions prepares the way to understand the roots and character of the crisis that began in 2008, as well as the state responses to the crisis. The analysis offered in this book suggests that significant economic and political change is likely in the coming years. While it is not possible to foresee with any certainty the future course of developments, this analysis sheds some light on the kinds of future economic and political change that could potentially resolve the current crisis.

The approach followed in this book views capitalism as a system that evolves and changes over time. However, such change is not simply partial or gradual. While capitalism has retained certain fundamental defining features since its origin centuries ago, it has assumed a series of distinct institutional forms over time. Each form of capitalism has displayed internal coherence, with a set of economic and political institutions, as well as dominant ideas, that reinforce one another. Each form of capitalism has also persisted for a significant period of time, from a decade to several decades in duration. Transitions from one institutional form of capitalism to the next have been punctuated by crisis and restructuring.

The defining features of capitalism are the ownership/control of enterprises by a part of the population, the capitalists, who employ wage earners to produce products for sale in the market, with the aim of gaining a profit. However, that is a sparse account of a socioeconomic system, and a much richer set of economic and political institutions has developed in every historical period of the capitalist era. The view that such sets of institutions tend both to be coherent and to last for significant periods of time was put forward by two theories that arose in the late 1970s and early 1980s, the social structure of accumulation theory and the regulation theory. The former arose in the United States (Gordon et al., 1982; Kotz et al., 1994) and the latter in France (Aglietta, 1979).

The analysis in this book is based on a modified version of the social structure of accumulation theory, which holds that each coherent institutional structure in capitalist history, referred to as a social structure of accumulation, centers around promoting profit-making and a stable capital accumulation process (Wolfson and Kotz, 2010). After one or several decades, each social structure of accumulation turns from a structure that promotes profit-making and accumulation into an obstacle to it, ushering in a period of economic crisis. The crisis period lasts until a new social structure of accumulation is constructed. This theoretical approach does not in itself explain why a particular form of capitalism gives rise to a severe crisis at a given time and place, but rather it provides a framework for investigating the roots of a crisis.

Like every preceding form of capitalism, neoliberal capitalism has a particular configuration of economic and political institutions, as well as dominant economic theories and ideas. As argued in Wolfson and Kotz (2010), each social structure of accumulation provides a way to stabilize the main conflicts and resolve the main problems that capitalism tends to produce. This includes stabilizing the relation between capital and labor as well as relations among capitalists. To promote profit-making and stable accumulation, a social structure of accumulation also must assure growing markets for the output of an expanding capitalist economy. Central to each social structure of accumulation is the role of the state in relation to the economy.⁵

This approach to analyzing capitalist growth and crisis combines theoretical considerations with historical analysis of particular conjunctures. In this book the most important actors are not individuals but classes and groups, which engage in struggles and enter into alliances and coalitions as each seeks to advance its interests in the face of economic developments. The broadest category of actors is classes, such as capitalists and workers. The capitalist class is not an undifferentiated group, and our analysis will pay attention to the sometimes conflicting interests of different segments of the capitalist class.

The neoliberal era has seen two related developments that have stirred much debate, globalization and financialization. While capitalism has shown a powerful tendency to expand globally since its inception, in the neoliberal era it became significantly more globally integrated than in the past by some measures. Another feature of capitalism in the neoliberal era has been the “increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of domestic and international economies” (Epstein, 2005, 3), a development that has been given the awkward name “financialization.” Some analysts view the character of the economic system during this period mainly through the lens of globalization or financialization rather than neoliberalism. In Chapter 2 we will argue that neoliberalism is the most useful concept for understanding the current form of capitalism, with globalization and financialization best understood as important features of neoliberal capitalism.

A number of books have appeared that offer analysis of neoliberal capitalism and/or the crisis to which it has given rise. Examples are Harvey (2005, 2010), Dumenil and Levy (2004, 2011), Stiglitz (2010), Foster and Magdoff (2009), Sweezy (1994), Palley (2012), Howard and King (2008), and Rogers (2011). There are some points of agreement and some differences between the conclusions found in those works and this book. A distinguishing feature of this book is the approach taken, which utilizes the concept of successive institutional forms of capitalism underlying periods of growth and crisis, offers a combination of theoretical and historical analysis, and presents a focus on classes and class segments. This approach can yield insights into the past, present, and future of capitalist society that cannot be found by other methodological approaches.

A central argument of this book is that the crisis that began in 2008 is not just a financial crisis, or a particularly severe recession—or a combination of the two. It is a structural crisis of the neoliberal form of capitalism. By a structural crisis is meant not only that the crisis emerges from the current structural form of the economy but that the crisis, unlike an ordinary business cycle recession, cannot be resolved within the current structural form. A structural crisis cannot be resolved by well-chosen economic policies. Even a bold Keynesian policy of fiscal expansion through big increases in public spending, while capable of stimulating faster economic growth and creating more jobs for a time, would not in itself resolve the underlying structural problem that is blocking a resumption of a normal trajectory of profit-making and economic expansion over the long run. Rather, major structural change in the economy and other related aspects of society represents the only route to resolving the current crisis, a view that finds support from the history of the resolution of past structural crises in the United States such as that of the 1930s.

Chapters 2, 3, and 4 present an analysis of neoliberal capitalism—what it is, how it arose, and how it has worked. Chapter 5 analyzes the roots and character of the current economic crisis, as well as the evolving state response to the crisis. Chapter 6 delves into the U.S. past, seeking lessons from earlier institutional forms of capitalism, and the transitions from one to another, that can inform a consideration of what will come next at this time. Chapter 7 concludes with a discussion of possible future directions of economic and political change.

This book focuses on the United States. The United States is of course the dominant economic, political, and military power in the world, as well as having a culture that exercises a substantial influence over the rest of the world. Neoliberal capitalism originated in the United States, along with the United Kingdom, and it was U.S. power that spread neoliberal institutions and policies throughout the global system. The current crisis emerged from the United States. However, both neoliberal capitalism and the crisis it has produced have important international dimensions, and the analysis in this book will take account of the major relevant developments in the global political economy.

In order to analyze the neoliberal form of capitalism, various economic data series will be introduced. (See the appendix to this book for information about data sources.) We will make comparisons to the previous dominant form of capitalism, which we call regulated capitalism. When using data for this kind of analysis, assessment, and comparison, the question of how to date the beginning and end of each period inevitably arises. The choice of beginning and ending years is more important than one might expect, because the business cycle—the periodic short-run ups and downs in the economy—can distort long-run comparisons of economic performance if the end-point years are not carefully chosen. A good way to remove such distorting effects is to choose a business cycle peak year for both the initial and final year of the period.

We regard the period of regulated capitalism as starting roughly in the late 1940s and continuing until the late 1970s, while neoliberal capitalism runs from the early 1980s to the present. According to the approach followed here, each form of capitalism has a period in which the social structure of accumulation works effectively to promote profit-making and economic expansion, followed by a period of structural crisis when the social structure of accumulation no longer works effectively. We will show in later chapters that regulated capitalism stopped working effectively as seen in most data series around 1973, although the average rate of profit in the U.S. began to fall earlier, after 1966. Hence, for most data series, we will treat the period 1948 to 1973—both business cycle peak years—as representing the regulated capitalist era in the sense of the interval when that system was in its effective phase. The interval 1973 to 1979—again both peak years—will represent the period of structural crisis of regulated capitalism, although for profit data we will examine 1948–66 and 1966–79 as the periods of effective working and crisis, respectively.⁶

Although neoliberal capitalism was not well established until the early 1980s in our view, we will regard the period 1979 to 2007, both business cycle peak years in the U.S., as the period when it was working effectively. While the year 1979 is a bit on the early side, the next normal business cycle peak was not until 1990, long after neoliberal institutions had become well established.⁷ The year 1979 marked a turning point in many economic data series, and it is common to regard that year as a break point between these two quite different periods. Following the business cycle peak year of 2007, the U.S. economy entered a period of structural crisis, which has not reached its end as of this writing. Additional details about the dating of these periods will be supplied in later chapters.

2

What Is Neoliberalism?

Because the current economic crisis emerged from the particular form of capitalism that has prevailed since about 1980, the first step toward understanding the roots of the crisis is to determine just what this form of capitalism is. There is disagreement about how to characterize the contemporary form of capitalism. In this book post-1980 capitalism is regarded as “free-market” or “neoliberal” capitalism. Some analysts have a different understanding of contemporary capitalism, arguing that the best defining concept is either “globalization” or “financialization.” This chapter examines the radically changed form of capitalism that emerged after around 1980 and presents a case that “neoliberalism” captures its main features—and hence is the best starting point for analyzing the roots of the current economic crisis.

The term “neoliberalism” is confusing to those schooled in U.S. politics, since in the United States a “liberal” political stance favors active state intervention in the economy aimed at benefiting the average person. However, the term “liberal” has long had more or less the opposite meaning in every other country, where a liberal political party is one that calls for a free-market economic policy. When a free-market form of capitalism began to emerge in the United States in the late 1970s and early 1980s, at first various names were applied, such as conservative economics, Reaganomics, or simply free-market economics. As this form of capitalism spread around the world, the term “neoliberalism” gradually came into common use to indicate a new form of “liberal” (free-market) ideas, policies, and institutions. In the 2000s the term “neoliberalism” became the most common name for the current form of capitalism and/or ...