Profit Over People

Neoliberalism and Global Order

Noam Chomsky

Introduction by Robert W. McChesney

I. Neoliberalism and Global Order

II. Consent without Consent: Regimenting the Public Mind

III. The Passion for Free Markets

IV. Market Democracy in a Neoliberal Order: Doctrines and Reality

V. The Zapatista Uprising

VI. "The Ultimate Weapon"

VII. "Hordes of Vigilantes"

Index ... 169

***

Introduction

by Robert W. McChesney

Neoliberalism is the defining political economic paradigm of our time—it refers to the policies and processes whereby a rel­ative handful of private interests are permitted to control as much as possible of social life in order to maximize their personal profit. Associated initially with Reagan and Thatcher, for the past two decades neoliberalism has been the dominant global political eco­nomic trend adopted by political parties of the center and much of the traditional left as well as the right. These parties and the policies they enact represent the immediate interests of extremely wealthy investors and less than one thousand large corporations.

Aside from some academics and members of the business community, the term neoliberalism is largely unknown and unused by the public-at-large, especially in the United States. There, to the contrary, neoliberal initiatives are characterized as free mar­ket policies that encourage private enterprise and consumer choice, reward personal responsibility and entrepreneurial initiative, and undermine the dead hand of the incompetent, bureaucratic and par­asitic government, that can never do good even if well intended, which it rarely is. A generation of corporate-financed public rela­tions efforts has given these terms and ideas a near sacred aura. As a result, the claims they make rarely require defense, and are invoked to rationalize anything from lowering taxes on the wealthy

and scrapping environmental regulations to dismantling public edu­cation and social welfare programs. Indeed, any activity that might interfere with corporate domination of society is automatically sus­pect because it would interfere with the workings of the tree mar­ket, which is advanced as the only rational, fair, and democratic allocator of goods and services. At their most eloquent, proponents of neoliberalism sound as if they are doing poor people, the envi­ronment, and everybody else a tremendous service as they enact policies on behalf of the wealthy few.

The economic consequences of these policies have been the same just about everywhere, and exactly what one would expect: a massive increase in social and economic inequality, a marked increase in severe deprivation for the poorest nations and peoples of the world, a disastrous global environment, an unsta­ble global economy and an unprecedented bonanza for the wealthy. Confronted with these facts, defenders of the neoliberal order claim that the spoils of the good life will invariably spread to the broad mass of the population—as long as the neoliberal poli­cies that exacerbated these problems are not interfered with:

In the end, neoliberals cannot and do not offer an empir­ical defense for the world they are making. To the contrary, they offer—no, demand—a religious faith in the infallibility of the unregulated market, that draws upon nineteenth century theories that have little connection lo the actual world. The ultimate trump card for the defenders of neoliberalism, however, is that there is no alternative. Communist societies, social democracies, and even modest social welfare states like the United States have all failed, the neoliberals proclaim, and their citizens have accepted neolib­eralism as the only feasible course, it may well be imperfect, but it is the only economic system possible.

Earlier in the twentieth century some critics called fascism "capitalism with the gloves off/' meaning that fascism was pure cap­italism without democratic rights and organizations. In fact, we know that fascism is vastly more complex than that. Neoliberal­ism, on the other hand, is indeed "capitalism with the gloves off."

It represents an era in which business forces are stronger and more aggressive, and face less organized opposition than ever before. In this political climate they attempt to codify their political power on every possible front, and as a result, make it increasingly dif­ficult to challenge business — and next to impossible — for non-market, noncommercial, and democratic forces to exist at all.

It is precisely in its oppression of nonmarket forces that we see how neoliberalism operates not only as an economic sys­tem, but as a political and cultural system as well. Here the dif­ferences with fascism, with its contempt tor formal democracy and highly mobilized social movements based upon racism and nation­alism, are striking. Neoliberalism works best when there is formal electoral democracy, but when the population is diverted from the information, access, and public forums necessary for meaningful participation in decision making. As neoliberal guru Milton Fried­man put it in his Capitalism and Freedom, because profit-making is the essence of democracy, any government that pursues antimarket policies is being antidemocratic, no matter how much informed popular support they might enjoy. Therefore it is best to restrict governments to the job of protecting private property and enforc­ing contracts, and to limit political debate to minor issues. (The real matters of resource production and distribution and social organization should be determined by market forces.)

Equipped with this perverse understanding of democracy, neoliberals like Friedman had no qualms over the military over­throw of Chile's democratically elected Allendc government in 1973, because Allende was interfering with business control of Chilean society. After fifteen years of often brutal and savage dic­tatorship — all in the name of the democratic free market—formal democracy was restored in 1989 with a constitution that made it vastly more difficult, if not impossible, for the citizenry to chal­lenge the business-military domination of Chilean society. That is neoliberal democracy in a nutshell: trivial debate over minor issues by parlies that basically pursue the same pro-business poli­cies regardless of formal differences and campaign debate.

Democracy is permissible as long as the control of business is off-limits to popular deliberation or change, i.e. so long as it isn't democracy.

The neoliberal system therefore has an important and nec­essary byproduct — a depoliticized citizenry marked by apathy and cynicism. If electoral democracy affects little of social life, it is irra­tional to devote much attention to it; in the United States, the spawning ground of neoliberal democracy, voter turnout in the 1998 congressional elections arguably was a record low. with just over one-third of eligible voters going to the polls. Although occa­sionally generating concern from those established parties like the U.S. Democratic Party that tend to attract the votes of the dis­possessed, low voter turnout tends to be accepted and encouraged by the powers-that-be as a very good thing since nonvoters are, not surprisingly, disproportionately found among the poor and working class. Policies that could quickly increase voter interest and participation rates arc stymied before ever getting into the pub­lic arena. In the United States, for example, the two main busi­ness-dominated parties, with the support of the corporate community, have refused to reform laws that make it virtually impossible to create new political parties (that might appeal to non­business interests) and let them be effective. Although there is marked and frequently observed dissatisfaction with the Republi­cans and Democrats, electoral politics is one area where notions of competition and free choice have little meaning. In some respects the caliber or debate and choice in neoliberal elections tends to be closer to that of the one-party communist state than that of a genuine democracy

But this barely indicates neoliberalism's pernicious impli­cations for a civic-centered political culture. On the one hand, the social inequality generated by neoliberal policies undermines any effort to realize the legal equality necessary to make democracy credible. Large corporations have resources to influence media and overwhelm the political process, and do so accordingly. In U.S. electoral politics, for just one example, the richest one-quarter of one percent of Americans make 80 percent of all individual polit­ical contributions and corporations outspend labor by a margin of 10-1. Under ncoliberalism this all makes sense, as elections then reflect market principles, with contributions being equated with investments. As a result, it reinforces the irrelevance of electoral politics to most people and assures the maintenance of unques­tioned corporate rule.

On the other hand, to be effective, democracy requires that people feel a connection to their fellow citizens, and that this con­nection manifests itself though a variety of nonmarket organiza­tions and institutions. A vibrant political culture needs community groups, libraries, public schools, neighborhood organizations, coop­eratives, public meeting places, voluntary associations, and trade unions to provide ways for citizens to meet, communicate, and interact with their fellow citizens. Neoliberal democracy, with its notion of the market liberals, takes dead aim at this sector Instead of citizens, it produces consumers. Instead of communities, it pro­duces shopping malls. The net result is an atomized society of dis­engaged individuals who feel demoralized and socially powerless. In sum, neoliberalism is the immediate and foremost enemy of genuine participatory democracy, not just in the United States but across the planet, and will be for the foreseeable future-It is fitting that Noam Chomsky is the leading intellectual figure in the world today in the battle for democracy and against neoliberalism. In the 1960s, Chomsky was a prominent U.S. critic of the Vietnam war, and, more broadly, he became perhaps the most trenchant analyst of the ways U.S. foreign policy undermines democracy quashes human rights, and promotes the interests of the wealthy few. In the 1970s, Chomsky, along with his co-author Edward S. Herman, began their research on how the US news media serve elite interests and undermine the capacity of the cit­izenry to actually rule their lives in a democratic fashion. Their 1988 book, Manufacturing Consent, remains the starting point for any serious inquiry into news media performance.

Throughout these years Chomsky, who could be characterized as an anarchist or perhaps more accurately, a libertarian socialist, was a vocal, principled, and consistent democratic oppo­nent and critic of Communist and Leninist political states and par ties. He educated countless people including myself, that democracy is a non-negotiable cornerstone of any post-capitalist society worth living in or fighting for. At the same time, he has demonstrated the ahsurdlty of equating capitalism with democracy, or ol thinking that capitalist societies, even under the best of cir­cumstances. will ever open access to information or decision mak­ing beyond the most narrow and controlled possibilities. I doubt any author, aside from perhaps George Orwell has approached Chom­sky in systematically skewering the hypocrisy ol rulers and ideo­logues in both Communist and capitalist societies as they claim that theirs is the only form ol true democracy available to humanity

In the 1990s, all ol these strands of Chomsky's political work — from anti-imperialism and critical media analysis to writ­ings on democracy and the labor movement—have come together, culminating in work like this book on democracy and the neolib eral threat Chomsky has done much to reinvigorate an under standing ol the social requirements lor democracy, drawing upon the ancient Creeks as well as the leading thinkers ol democratic revolutions in the seventeenth and eighteenth centuries As he makes clear, it is impossible to be a proponent for participatory democracy and at the same time champion capitalism, or any other class-divided society. In assessing the real historical struggles for democracy, Chomsky also reveals how neoliberalism is hardly a new thing, but merely the current version of the battle lor the wealthy lew to circumscribe the political rights and civic powers of the many

Chomsky may also be the leading critic of the mythology ol the natural 'free* market, that cheery hymn that is pounded into our heads ahout how the economy is competitive, rational, effi­cient, and fair. As Chomsky points out. markeis are almost never competitive Most of the economy is dominated by massive cor­porations with tremendous control over their markets and that therefore (ace precious little competition ol the sort described in economic textbooks and politicians' speeches. Moreover, corpo­rations themselves arc effectively totalitarian organizations, oper­ating along nondemocratic lines. That our economy is centered around such institutions severely compromises our ability to have a democratic society

The mythology ol the tree market also submits that gov­ernments arc inefficient institutions that should be limited so as not to hurt the magic of the natural laissez-faire* market. In fact, as Chomsky emphasizes, governments are central to the modern capitalist system They lavishly subsidize corporations and work to advance corporate interests on numerous fronts The same cor­porations that exult in neoliberal ideology are in fact often hyp­ocritical: they wane and expect governments to funnel tax dollars to them, and to protect their markets for them from competition but they want to assure that governments will not lax ihcm or work supportively on behalf of non-business interests, especially on behalf of the poor and working class Governments are bigger than ever, but under neoliberalism they have far less pretense to being concerned with addressing non-corporate interests.

And nowhere is the centrality of governments and poli­cymaking more apparent than In the emergence ol the global mar­ket economy what is presented by pro-business ideologues as the natural expansion of free markets across borders is. in lact- quite the opposite Globalization is the result ol powerful governments, especially that of the United States pushing trade deals and other accords down the throats of the worlds people to make it easier for corporaliuns and the wealthy to dominate the economies ol nations around the world without having obligations to the peo­ples ol those nations. Nowhere is the process more apparent than in the creation of the World Trade Organization in the early 1990s, and, now, in the secret deliberations on behalf of the Multilateral Agreement on Investment (MAI)

Indeed, it is the inability to have honest and candid dis­cussions and debates about neoliberalism that is one of its most striking features. Chomsky's critique of the neoliberal order is effec lively off-limits to mainstream analyse despite its empirical strength and because of its commitment to democratic values. Here, Chomsky's analysis of the doctrinal system in capitalist democracies is useful. The corporate news media, the PR indus­try. the academic ideologues, and the intellectual culture writ large play the central role or providing the "necessary illusions'' to make this unpalatable situation appear rational, benevolent, and neces sary, if not necessarily desirable. As Chomsky hastens to point out, this is no formal conspiracy by powerful interests: it doesn't have to be. Through a variety of institutional mechanisms, signals are sent to intellectuals, pundits, and journalists pushing them to see the status quo as the best of all possible worlds, and away from challenging those who benelit from the status quo. Chomsky's work is a direct call for democratic activists to remake our media system so it can be opened up to anticorporate, antineoliberal per spectives and inquiry. It is also a challenge to all intellectuals, or at least those who express a commitment to democracy to take a long, hard look in the mirror and to ask themselves in whose inter­ests. and lor what values, do they do their work

Chomsky's description of the neoltberal / corporate hold over our economy, polity, journalism, and culture is so powerful and overwhelming that for some readers it can produce a sense of resignation. In our demoralized political times, a few may go a step further and conclude that we are enmeshed in this regressive sys­tem because, alas, humanity is simply incapable of creating a more humane, egalitarian, and democratic social order

In fact, Chomsky's greatest contribution may well be his insistence upon the fundamental democratic inclinations of the worlds peoples, and the revolutionary potential implicit in those impulses The best evidence of this possibility is the extent to which corporate forces go to prevent there being genuine politi­cal democracy. The worlds rulers understand implicitly that theirs is a system established to suit the needs of the few. not the many, and that the many cannot therefore ever be permitted to question and alter corporate rule. Even in the hobbled democracies that do exist, the corporate community works incessantly to see that important issues like the MAI are never publicly debated. And the business community spends a fortune bankrolling a PR apparatus to convince Americans that this is the best ol all possible worlds. The time to worry about the possibility of social change for the better, by this logic will be when the corporate community aban­dons PR and buying eleciions, permits a representative media, and is comfortable establishing a genuinely egalitarian participatory democracy because it no longer fears the power of the many. But there is no reason to think that day will ever come.

Neoliberalism's loudest message is that there is no alter­native to the status quo, and that humanity has reached its high est level. Chomsky points out that there have been several other periods designated as the ''end of history" in the past. In the 1920s and 1950s, for example, U.S. elites claimed that the system was working and that mass quiescence reflected widespread satisfac­tion with the status quo. Events shortly thereafter highlighted the silliness of those beliefs. I suspect that as soon as democratic forces record a lew tangible victories the blood will return to ihctr veins, and talk ol there being no possible hope for change will go the same route as all previous elite fantasies about their glorious rule being enshrined for a millennium.

The nniion that there can be no superior alternative to the status quo is more farfetched today than ever, in this era when there are mind-boggling technologies for bettering the human condi­tion. It is true that it remains unclear how to establish a viable, free, and humane post-capitalist order and the very notion has a Utopian air about it But every advance in history, from ending slavery and establishing democracy to ending formal colonialism, has had to conquer the notion at some point that it was impossible to do because it had never been done before. And as Chomsky hastens to point out. organized political activism is responsible lor the degree of democracy we have today for universal adult suffrage for women's rights, for trade unions, for civil rights, for the freedoms we do enjoy. Even if the notion of a nost-capitalist society seems unattainable, we do know that human political activity can make the world we live in vastly more humane. And as we get to that point, perhaps we will again be able to think in terms of build ing a political economy based on principles of cooperation equal ity, self-government, and individual freedom.

Until then, the struggle for social change is not a hypo­thetical issue. The current neoliberal order has generated massive political and economic crises from east Asia to eastern Europe and Latin America. The quality ol life in the developed nations of Europe, Japan, and North America is fragile and the societies are in considerable turmoil. Tremendous upheaval is in the cards for the coming years and decades. There is considerable doubt about the outcome of that upheaval, however and little reason to think it will automatically lead to a democratic and humane resolution. That will be determined by how we, the people, organize, respond, and act. As Chomsky says, if you act like there is no possibility of change for the better, you guarantee that there will be no change for the better. The choice is ours, the choice is yours.

Robert W. McChesney

Madison, Wisconsin

October 1998

------------------

I. Neoliberalism and Global Order

I would like to discuss each of the topics mentioned in the title: neoliberalism and global order. The issues are of great human significance and not very well understood To deal with them sen­sibly, we have to begin by separating doctrine from reality. We often discover a considerable gap.

The term "neohberalism" suggests a system of principles that it both new and based on classical liberal ideas Adam Smith is reverred as the patron saint. The doctrinal system is also known as the 'Washington consensus', which suggests something about global order. A closer look shows that the suggestion about global order is fairly accurate, but not the rest. The doctrines are not new, and the basic assumptions are far from those that have animated the liberal tradition since the Enlightenment

The Washington Consensus

The neoliberal Washington Consesnsus is an array of mar ket oriented principles designed by the government of the United States and the international financial institutions that it largely dom inates, and implemented by them in various ways — for the more vulnerable societies, often as stringent structural adjustment programs. The basic rules, in brief, are: liberalize trade and finance, let markets set price ('get prices right"), end inflation ('macroeconomic stability'), privatize. The government should "get our of the way' - hence the population too, insofar as the government is democratic, though the conclusion remains implicit. The decisions of those who impose the 'consensus' naturally have a major impact on global order Some analysts take a much stronger position The international business press has referred to these institutions as the core ol a ''de facto world government'' or a "new imperial age '

Whether accurate or not. this description serves to remind us that the governing institutions are not independent agents but reflect the distribution or power in the larger society That has been a truism at least since Adam Smith, who pointed out that the "prin­cipal architects* of policy in England were "merchants and man* ufacturers" who used state power to serve their own interests. however "grievous" the effect on others, including the people of England. Smith's concern was "the wealth of nations'' but he understood that the "national interest'' is largely a delusion: within the 'nation'' there are sharply conflicting interests, and to understand policy and its effects have have to ask where power lies and how it is exercised, what later came to be called class analysis.

The "principal architects" of the neoliberal "Washington consensus" are the masters of the private economy, mainly huge corporations that control much ol the international economy and have the means to dominate policy formation as well as the struc­turing of thought and opinion. The United States has a special role in the system (or obvious reasons To borrow the words ol diplo­matic histonan Gerald Haines, who is also senior historian of the CIA, "Following World War II the United States assumed, out ot self-interest, responsibility for the welfare of the world capitalist system". Haines is concerned with what he calls 'the Americani zation of Brazil" but only as a special case. And his words are accu­rate enough.

The United States had been the worlds major economy long before World War II. and during the war it prospered while its rivals were severely weakened The state-coordinated wartime economy was at last able to overcome the Great Depression By the wars end, the United States had half ol the worlds wealth and a position ol power without historical precedent. Naturally, the principal architects ol policy intended to use this power to design a global system in their interests.

High-level documents describe the primary threat to these interests, particularly in Latin America, as "radical* and 'national­istic regimes" that are responsive to popular pressures for "imme­diate improvement inm the low living standards ol the masses' and development lor domestic needs. These tendencies conflict with the demand for "a political and economic climate conducive to pri­vate investment', with adequate repatriation of profits and 'pro­tection of our raw materials'' — ours, even if localed somewhere else For such reasons, the influential planner George Kennan advised that we should "cease to talk about vague and unreal obiectives such as human rights the raising ol the living standards, and democra tization" and must "deal in straight power concepts', not "hampered by idealistic slogans'' about 'altruism and world-benefaction"— though such slogans are fine, in fact obligatory, in public discourse.

I am quoting the secret record, available now in principle, though largely unknown to the general public or the intellectual community.

"Radical nationalism* is intolerable in itself, bui it also poses a broader 'threat to stability'' another phrase with a spe cial meaning. As Washington prepared to overthrow Guatemalas first democratic government in 1954 a Slate Department official warned that Guatemala had "become an increasing threat to the stability of Honduras and El Salvador Its agrarian reform is a pow­erful propaganda weapon, us broad social program of aiding the workers and peasants in a victorious struggle against the upper classes and large loreign enterprises has a strong appeal to the populations of Central American neighbors where similar condi tions prevail''. "Stability'' means security for 'the upper classes and large loreign enterprises', whose welfare must be preserved.

Such threats to the "welfare of the world capitalist system'' justily terror and subversion to restore "stability*. One of the first tasks of the CIA was to take part in the large scale effort to under mine democracy in Italy in 1948. when it was feared that elections might come out the wrong way, direct military intervention was planned if the subversion failed. These are described as efforts "to stabilize Italy". It is even possible to "destabilize' to achieve "sta bility". Thus the editor of the quasi-official journal Foreign Affairs explains that Washington had to 'destabilize a freely elected Marxi st government in Chile" because "we were determined to seek, sta­bility". With a proper education, one can overcome the apparent contradiction.

Nationalist regimes that threaten "stability" are sometimes called "rotten apples' that might "spoil the barrel" or "viruses'' that might "infect" others. Italy in 1948 is one example. Twenty-five years later, Henry Kissinger described Chile as a "virus" that might send the wrong messages about possibilities for social change, infecting others as far as Italy, still not "stable" even after years of major CIA programs to subvert Italian democracy. Viruses have to be destroyed and others protected from inlection. For both tasks violence is often the most efficient means, leaving a gruesome trail of slaughter, terror, torture, and devastation.

In secret postwar planning, each part of the world was assigned its specific role. Thus the "ma|or function" of Southeast Asia was to provide raw materials for the industrial powers. Africa was to be "exploited" by Europe for its own recovery. And so on, through the world.

In Latin America. Washington expected to be able to implement the Monroe Doctrine, but again in a special sense Pres­ident Wilson, famous for his idealism and high moral principles, agreed in secret that "in its advocacy of the Monroe Doctrine the United States considers its own interests". The interests of Latin Americans are merely "incidental", not our concern. He recognized that 'this may seem based on selfishness alone'', but held that the doctrine "had no higher or more generous motive''. The United

States sought to displace its traditional rivals, England and France. and establish a regional alliance under its control that was to stand apart from the world system in which such arrangements were not to be permitted.

The "function" of Latin America were clarified at a hemi­spheric conference in February 1945. where Washington proposed an 'Economic Charter of the Americas* that would eliminate eco­nomic nationalism "in all its forms" Washington planners under­stood that it would not be easy to impose this principle. State Department documents warned that Latin Americans prefer 'poli­cies designed to bring about a broader distribution of wealth and to raise the standard of living of the masses/ and are ''convinced that the first beneficiaries of the development of a country's resources should be the people of that country''. These ideas are unacceptable: the ''first beneficiaries' of a country's resources are U.S. investors, while Latin America fulfills its service function with­out unreasonable concerns about general welfare or "excessive industrial development" that might infringe on US interests.

The position of the United Slates prevailed, though not without problems in the years that followed, addressed by means I need not review.

As Europe and Japan recovered from wartime devastation, world order shifted to a tripolar pattern. The United States has retained its dominant role, though new challenges are arising, includ­ing European and East Asian competition in Soulh America. The most important changes took place twenty-five years ago, when the Nixon Administration dismantled the postwar global economic sys­tem, within which the United States was, in effect, the world's banker, a role it could no longer sustain. This unilateral act (to be sure, with the cooperation of other powers) led to a huge explosion of unregulated capital flows. Still more striking is the shift in the composition of the flow of capital. In 1971, 90 percent of interna­tional financial transactions were related to the real economy — trade or long-term investment — and 10 percent were speculative. By 1990 the percentages were reversed, and by 1995 about 95 percent of the vastly greater sums were speculative, with daily flows regularly exceeding the combined foreign exchange reserves of the seven biggest industrial powers, over $ 1 trillion a day, and very short-term about 80 percent with round trips of a week or less.

Prominent economists warned over 20 years ago that the process would lead to a low-growth, low-wage economy, and sug­gested fairly simple measures that might prevent these conse quences. But the principal architects of the Washington consensus preferred the prtdictahle effects, including very high profits These effects were augmented by the (short-term) sharp rise in oil prices and the telecommunications revolution, both related to the huge state sector of the U.S economy, to which I will return.

The so-called 'Communist' states were outside this global system. By the 1970s China was being reintegrated into it. The Soviet economy began to stagnate in the 1960s, and the whole rotten edifice collapsed twenty years later. The region is largely returning to its earlier status. Sectors that were part of the West are rejoining it, while most of the region is returning to its tra­ditional service role, largely under the rule of former Communist bureaucrats and other local associates of foreign enterpriser along with criminal syndicates. The pattern is familiar in the third world, as are the outcomes. In Russia alone, a UNICEF inquiry in 1993 estimated that a hall-million extra deaths a year result from the neoliberal "reforms," which it generally supports. Russia's social policy chief recently estimated that 25 percent ol the population has lallen below subsistence levels, while the new rulers have gained enormous wealth, again the familiar pattern of Western dependencies.

Also familiar are the effects of the large-scale violence undertaken to ensure the "welfare of the world capitalist system ' A recent Jesuit conference in San Salvador pointed out that over time, the 'culture of terror domesticates the expectations of the majority''. People may no longer even think about 'alternatives diffe rent from those of the powerful," who describe the outcome as a grand victory lor freedom and democracy.

These are some of the contours of the global order within which the Washington consensus has been forged.

The Novelty of Neoliberalism

Let us look more closely at the novelty of neoliberalism. A good place to start is a recent publication of the Royal Institute of International Affairs in London with survey articles on major issues and policies. One is devoted to the economics of develop ment. The author, Paul Krugman, is a prominent figure in the field. He makes five central points, which bear directly on our question.

First, knowledge about economic development is very lim­ited. For the United States, for example, two-thirds of the rise in per capita income is unexplained. Similarly, the Asian success sto­ries have followed paths that surely do not conform to what "cur­rent orthodoxy says are the key to growth", Krugman points out. He recommends 'humility' in policy formation, and caution about 'sweeping generalizations."

His second point is that conclusions with little basis are constantly put forth and provide the doctrinal support for policy the Washington consensus is a case in point.

His third point is that the "conventional wisdom" is unsta­ble, regularly shifting to something else perhaps the opposite ol the latest phase—though its proponents are again lull of confi­dence as they impose the new orthodoxy.

His fourth point is thai in retrospect, it is commonly agreed that the economic development policies did not 'serve their expressed goals'' and were based on ''bad ideas".

Lastly, Krugman remarks, it is usually 'argued that bad ideas flourish because they are in the interest of powerful groups. Without doubt that happens'.

That it happens has been a commonplace at least since Adam Smith. And it happens with impressive consistency, even in the rich countries, though it is the third world that provides the crudest record.

That is the heart of the matter. The "bad ideas'' may not serve the 'expressed goals'', but they typically turn out to be very good ideas for their principal architects. There have been many experiments in economic development in the modern era, with regularities that are hard to ignore. One is that the designers tend to do quite well, though the subjects of the experiment often take a beating.

The first major experiment was carried out two hundred years ago, when the British rulers in India instituted the 'Perma­nent Settlement'', which was going to do wondrous things. The results were reviewed by an official commission forty years later, which concluded that ''the settlement fashioned with great care and deliberation has unfortunately subjected the lower classes to most grievous oppression'', leaving misery that ''hardly finds a par-allel in the history of commerce'', as "the bones of the cotton-weavers arc bleaching the plains of India."

But the experiment can hardly be written off as a failure. The British governor general obverved that ''the Permanent Set­tlement'', though a failure in many other respects and in most important essentials, has this great advantage, at least, of having created a vast body of rich landed proprietors deeply interested in the continuance of the British Dominion and having complete command over the mass of the people''. Another advantage was that British investors gained enormous wealth. India also financed 40 percent of Britain's trade deficit while providing a protected mar­ket for its manufacturing exports: contract laborers for British pos­sessions, replacing earlier slave populations; and the opium that was the staple of Britain's exports to China. The opium trade was imposed on China by force, not the operations of the *free mar­ket" just as the sacred principles of the market were overlooked when opium was barred from England.

In brief, the first great experiment was a 'bad idea'' for the subjects, but not for the designers and local elites associated with them. This pattern continues until the present: placing profit over people. The consistency of the record is no less impressive than the rhetoric hailing the latest showcase for democracy and capitalism as an "economic miracle'' — and what the rhetoric regularly conceals. Brazil, for example. In the highly praised history of the Americanization of Brazil that I mentioned, Gerald Haines writes that from 1945 the United States used Brazil as a "testing area for modem scientific meihi>ds of industrial development based solidly on capitalism " The expenment was carried out with ''the best of intentions''. Foreign investors benefited, but planners "sin cerely believed" that the people of Brazil would benefit as well. I need not describe how they benefited as Brazil became ''the Latin Amencan darling of the international business community" under military rule, in the words of the business press, while the World Bank reported that two-thirds of the population did not have enough food for normal physical activity.

Writing in 1989, Haines describes 'America's Brazilian policies' as 'enormously successful'', ''a real American success story''. 1989 was the ''golden year" in the eyes of the business world, with profits tripling over 1988, while industrial wages, already among the lowest in the world, declined another 20 percent: the UN Report on Human Development ranked Brazil next to Albania. When the dis­aster began to hit the wealthy as well, the "modern scientific meth­ods of development based solidly on capitalism" (Haines) suddenly became proofs of the evils of statism and socialism — another quick transition that takes place when needed.

To appreciate the achievement, one must remember that Brazil has long been recognized to be one of the richest countries of the world, with enormous advantages, including half a century of dominance and tutelage by the United States with benign intent, which once again just happens to serve the profit of the few while leaving the majority of people in misery.

The most recent example is Mexico. It was highly praised as a prize student of the rules of the Washington consensus and offered as a model for others — as wages collapsed, poverty increased almost as fast as the number of billionaires, foreign cap­ital flowed in (mostly speculative, or for exploitation of cheap labor kept under control by the brutal 'democracy"). Also familiar is the collapse of the house of cards in December 1994. Today half the population cannot obtain minimum food requirements, while the man who controls the corn market remains on the list ot Mexico's billionaires, one category in which the country ranks high.

Changes in global order have also made it possible to apply a version of the Washington consensus at home. For most of the US population, incomes have stagnated or declined for filteen years along with working conditions and job security, continuing through economic recovery, an unprecedented phenomenon. Inequality has reached levels unknown for seventy years, far beyond other industrial countries. The United States has the highest level of child poverty of any industrial society, followed by the rest of the English-speaking world. So the record continues through the familiar list of third world maladies. Meanwhile the business press cannot find adjectives exuberant enough to describe the "dazzling'' and "stupendous'' profit growth, though admittedly the rich face problems too: a headline in Business Week announces "The Problem Now: What to Do with All That Cash?" as 'surging profits'' are "overflowing the coffers of Corporate America'', and dividends are booming.

Profits remain ''spectacular'' through the mid-1996 fig­ures, with "remarkable'' 'profit growth for the world's largest cor porations, though there is "one area where global companies are not expanding much payrolls'', - the leading business monthly adds quietly. That exception includes companies that 'had a terrific year'' with "booming profits'' while they cut workforces, shifted to part-time workers with no benefits or security, and otherwise behaved exactly as one would expect with "capital's clear subju gation of labor for 15 years," to borrow another phrase from the business press.

How Countries Develop

The historical record offers further lessons In the eigh­teenth century, the differences between the first and third worlds were far less sharp than they are today. Two obvious questions arise:

1. Which countries developed, and which not?

2. Can we identify some operative factors?

The answer to the first question is fairly clear. Outside of Western Europe, two major regions developed: the United States and Japan — that is, the two regions that escaped European colo­nization. Japan's colonies are another case, though Japan was a bru­tal colonial power, it did not rob its colonies but developed them, at about the same rate as Japan itself.

What about Eastern Europe? In the fifteenth century, Europe began to divide, the west developing and the east becom­ing its service area, the original third world. The divisions deep­ened into early in this century, when Russia extricated itself from the system. Despite Stalin's awesome atrocities and the terrible destruction of the wars, the Soviet system did undergo significant industrialization. It is the "second world'', not part of the third world — or was, until 1989.

We know from the internal record that into the 1960s, Western leaders feared that Russia's economic growth would inspire "radical nationalism' elsewhere and that others too might be stricken by the disease that infected Russia in 1917, when it became unwilling ''to complement the industrial economies of the West'', as a prestigious study group described the problem of Communism in 1955. The Western invasion of 1918 was therefore a defensive action to protect "the welfare of the world capitalist system'' threat ened by social changes within the service areas. And so it is described in respected scholarship.

The cold war logic recalls the case of Grenada or Guatemala, though the scale was so different that the conflict took on a life of its own. It is not surprising that with the victory of the more powerful antagonist traditional patterns arc being restored It should also come as no surprise that the Pentagon budget remains at cold war levels and is now increasing, while Washington's inter­national policies have barely changed, more facts that help us gain some insight into the realities of global order.

Returning to the question of which countries developed, at least one conclusion seems reasonably clear: development has been contingent on freedom from 'experiments'' based on the ''bad ideas'' that were very good ideas for the designers and their col­laborators. That is no guarantee of success, but it does seem to have been a prerequisite for it.

Let's turn to the second question: How did Europe and those who escaped its control succeed in developing? Part of the answer again seems clear: by radically violating approved free mar ket doctrine. That conclusion holds from England to the East Asian growth area today, surely including the United States, the leader in protectionism trom its origins.

Standard economic history recognizes that state interven­tion has played a central role in economic growth. But itss impact is underestimated because of too narrow a focus. To mention one major omission, the industrial revolution relied on cheap cotton, mainly from the United States. It was kept cheap and available not by mar ket forces, but by elimination of the indigenous population and slav-ery. There were of course other cotton producers Prominent among them was India. Its resources flowed to England, while its own advanced textile industry was destroyed by British protectionism and force. Another case is Egypt, which took steps toward development at the same time as the United States but was blocked by British force, on the quite explicit grounds that Britain would not tolerate independent development in that region. New England, in contrast, was able to follow the path of the mother country, barring cheaper British textiles by very high tariffs as Britain had done to India. With out such measures, half of the emerging textile industry of New Eng­land would have been destroyed, economic historians estimate, with large-scale effects on industrial growth generally.

A contemporary analog is the energy on which advanced industrial economies rely The 'golden age' of postwar development relied on cheap and abundant oil kept that way largely by threat or use of force. So matters continue. A large part of the Pen­tagon budget is devoted to keeping Middle East oil prices within a range that the United States and its energy companies consider appropriate. I know of only one technical study of the topic: it con­cludes that Pentagon expenditures amount to a subsidy of 30 per­cent of the market price of oil demonstrating that "the current view that fossil fuels are inexpensive is a complete fiction'', the author concludes. Estimates of alleged efficiencies of trade, and conclu­sions about economic health and growth, are of limited validity if we ignore many such hidden costs

A group of prominent Japanese economists recently pub-lished a multivolume review of Japan's programs of economic devel-opment since World War II. They point out that Japan rejected the neoliberal doctrines of their US advisers, choosing instead a form of industrial policy that assigned a predominant role to the state. Mar­ket mechanisms were gradually introduced by the state bureaucracy and industrial financial conglomerates as prospects for commercial success increased. The rejection ol orthodox economic precepts was a condition lor the Japanese miracle " the economists conclude. The sucecss is impressive. With virtually no resource base, Japan became the worlds biggest manufacturing economy by the 1990s and the worlds leading source of foreign investment, also accounting for halt the worlds net savings and financing US deficits

As for Japan's former colonies, the major scholarly study of the US Aid mission in Taiwan found that US advisers and Chinese planners disregarded the principles of "Anglo-Americn economics" and developed a "state-centered strategy'' relying on "the active participation of the government in the economic activ-ities of the island through deliberate plans and its supervision of their execution''. Meanwhile US officials were "advertising Tai­wan as a private enterprise success story''.

In South Korea the 'entrepreneurial state' functions dif­ferently, but with no less of a guiding hand. Right now South Korea's entry into the Organization for Economic Cooperation and

Development (OECD), the rich mens club, is being delayed because of its unwillingness to rely on market-oriented policies, such as allowing takeovers by foreign companies and free move­ment of capita! much like its Japanese mentor, which did not per mit capital export until its economy was well established.

In a recent issue of the World Bank Research Observer (August 1996), the chair of Clinton's Council of Economic Advisors, Joseph Stiglitz draws ''lessons from the East Asian Miracle'', among them that ''government took major responsibility for the promotion of economic growth'', abandoning the "religion'' that markets know best and intervening to enhance technology transfer, relative equal ity, education, and health, along with industrial planning and coor­dination. The US Human Development Report 1990 stresses the vital importance of government policies in ''spreading skills and meet­ing basic social needs" as a ''springboard for sustained economic growth". Neoliberal doctrines whatever one thinks of them, under mine education and health, increase inequality, and reduce labors share in income, that much is not seriously in doubt.

A year later, after Asian economies were struck a severe blow by financial crises and market failures, Stiglitz — now chief economist of the World Bank — reiterated his conclusions (Keynote Address, updated, Annual Wolrd Bank Conference on Development of Economics 1997, World Bank 1998, Wider Annual Lectures 2, 1998)."The cur rent crisis in East Asia is not a refutation of the East Asian mira cle'', he wrote. The basic facts remain; no other region in the world has ever had income rise so dramatically and seen so many people move out of poverty in such a short time''. The "amazing achieve­ments'' are highlighted by the tenfold growth of per capita income in South Korea in three decades, an unprecedented success, with 'heavy doses of government involvement" in violation of the Wash ington consensus, but in accord with economic development in the US and Europe, he correctly adds "far from a refutation of the East Asian miracle'', he concluded, the 'serious financial turmoil* in Asia "may in part, be the result of departing from the strategies that have served these countries so well, including well-regulated financial markets'' — an abandonment or successful strategies in response to Western pressures, in no small measure Other spe­cialists have expressed similar views, often more forcefully.

The comparison of East Asia and Latin America is strik­ing. Latin America has the worlds worst record for inequality. East Asia among the best The same holds for education, health, and social welfare generally Imports to Latin America are heavily skewed toward consumption for the rich, in East Asia toward pro­ductive investment Capital flight from Latin America has approached the scale ol the crushing debt, in East Asia it had been tightly controlled until very recently. In Latin America, the wealthy are generally exempt from social obligations, including taxes. The problem of Latin America is not ''populism'', Brazilian economist Bresser Pereira points out, but ''subjection of the state to the rich''. East Asia differs sharply.

Latin American economies have also been more open to foreign investment. Since the 1950s, foreign multinationals have "controlled far larger shares of industrial production" in Latin Amer­ica than in the East Asian success stones, the UN analysts of trade and development (UNCTAD) report. Even the World Bank con­cedes that the foreign investment and privatization it hails ''has tended to substitute for other capital flows'' in Latin America, trans­ferring control and sending profits abroad The bank also recog­nizes that prices in Japan, Korea, and Taiwan deviated more from market prices than those of India, Brazil. Mexico, Venezuela, and other alleged interventionists, while the most interventionist and price-distorting government of all, China, is the Banks favorite and fastest growing borrower. And studies of the World Bank on the lessons of Chile have avoided the fact that nationalized copper firms are a major source of Chile's export revenues, to mention only one of many examples.

It seems that openness to the international economy has carried a significant cost for Latin America, along with its failure to control capital and the rich, not just labor and the poor. Of course, sectors of the population benefit, as in the colonial era. The fact that they are as dedicated to the doctrines of the "religion'' as foreign investors should come as no surprise.

The rote of state management and initiative in the suc cesslul economics should be a familiar story. A related question is how the third world became what it is today. The issue is discussed by the eminent economic historian Paul Bairoch. In an important recent study he points out that there is no doubt that the third world's compulsory economic liberalism in the nineteenth century is a major element in explaining the delay in its industrialization" and in the very revealing case of India, the ''process of de-indus­trialization'' that converted the industrial workshop and trading cen­ter of the world to a deeply impoverished agricultural society, suffering a sharp decline in real wages, food consumption, and avail­ability of other simple commodities. ''India was only the first major casualty in a very long list'' Bairoch observes including ''even polit­ically independent third world countries [ that ] were forced to open their markets to Western products''. Meanwhile Western societies protected themselves from market discipline, and developed.

Varieties of Neoliberal Doctrine

That brings us to another important feature of modem his­tory Free market doctrine comes in two varieties. The first is the official doctrine imposed on the defenseless. The second is what we might call "really existing free market doctrine" market disci­pline is good lor you, but nol for me, except fur temporary advan­tage. It is ''really existing doctrine'' that has reigned since the seventeenth century, when Britain emerged as Europe's most advanced developmental state, with radical increases in taxation and efficient public administration to organize the liscal and mil­itary activities of the state which became "the largest single actor in the economy'' and its global expansion, according to British his­torian John Brewer.

Britain did finally turn to liberal internationalism — in 1846, after 150 years of protectionism, violence, and state power had placed it far ahead of any competitor But the turn to the mar­ket had significant reservations. Forty percent of British textiles continued to go to colonized India, and much the same was true of British exports generally. Bntish steel was kept from U.S. mar­kets by very high tariffs that enabled the United States to develop its own steel industry. But India and other colonies were still avail able, and remained so when British steel was priced out of inter­national markets. India is an instructive case, it produced as much iron as all of Europe in the late eighteenth century, and Bntish engineers were studying more advanced Indian steel manufac­turing techniques in 1820 to try to close 'the technological gap". Bombay was producing locomotives at competitive levels when the railway boom began. But really existing free market doctrine destroyed these sectors of Indian industry just as it had destroyed textiles, shipbuilding, and other industries that were advanced by the standards of the day. The United States and Japan, in con­trast, had escaped European control, and could adopt Britain's model of market interference.

When Japanese competition proved to be too much to handle England simply called off the game: the empire was effec­tively closed to Japanese exports, part of the background of World war II. Indian manufacturers asked for protection at the same time — but against England, not Japan. No such luck, under really existing free market doctrine.

With the abandonment of its restricted version of laissez-faire in the 1930s, the British government turned to more direct intervention into the domestic economy as well. Within a few years machine tool output increased five limes, along with a boom in chemicals, steel, aerospace, and a host of new industries, "an unsung new wave of industrial revolution'', economic analyst Will Hutton writes. State-controlled industry enabled Britain to outproduce Germany during the war, even to narrow the gap with the U.S., which was then undergoing its own dramatic economic expansion as corporate managers took over the state-coordinated wartime economy.

A century after England turned to a form of liberal inter­nationalism, the United States followed the same course. After 150 years of protectionism and violence, the United States had become by far the richest and most powerful country in the world and, like England before it, came to perceive the ments of a ''level playing field'' on which it could expect to crush any competitor. But like England, the United States had crucial reservations.

One was that Washington used its power to bar indepen­dent development elsewhere, as England had done. In Latin Amer­ica, Egypt, South Asia, and elsewhere, development was to be ''complementary'', not ''competitive''. There was also large-scale interference with trade. For example, Marshall Plan aid was tied to purchase of US agricultural products, part of the reason why the US share in world trade in grains increased from less than 10 percent before the war to more than half by 1950, while Argen tine exports reduced by two-thirds. U.S Food for Peace aid was also used both to subsidize US agrobusiness and shipping and to undercut foreign producers, among other measures to prevent inde­pendent development. The virtual destruction of Colombia's wheat growing by such means is one of the factors in the growth of the drug industry, which has been further accelerated throughout the Andean region by the neoliberal policies of the past lew years. Kenya's textile industry collapsed in 1994 when the Clinton Administration imposed a quota, barring the path to development that has been followed by every industrial country, while 'African reformers" are warned that they must make more progress in improving the conditions for business operations and ''sealing in free-market reforms" with trade and investment policies that meet the requirements ol Western investors.

These are only scattered illustrations. The most important departures from free market doctrine, however, lie elsewhere. One fundamental component of free trade theory is that public subsidies are not allowed. But after World War II US. business leaders expected that the economy would head right back to depression without state intervention. They also insisted that advanced industry — specifically aircraft, though the conclusion was more general — ''cannot satisfactorily exist in a pure, competitive. unsubsidized, ''free enterprise' economy" and that "the government is the only possible savior''. I am quoting the major business press, which also recognized that the Pentagon system would be the best way to transfer costs to the public. They understood that social spending could play the same stimulative role, but it is not a direct subsidy to the corporate sector, it has democratizing effects and it is redistributive. Military spending has none ot these defects.

It is also easy to sell. President Truman's Air Force Secre­tary put the matter simply: we should not use the word ''subsidy',' he said, the word we should use is "security". He made sure that the military budget would ''meet the requirements of the aircraft industry," as he put it. One consequence is that civilian aircraft is now the country's leading export, and the huge travel and tourism industry, aircraft-based, is the source of major profits.

Thus it was quite appropriate for Clinton to choose Boe­ing as "a model for companies across America'' as he preached his "new vision" of the ''free market future at the Asia-Pacific Summit in 1993, to much acclaim. A fine example of really existing mar kets, civilian aircraft production is now mostly in the hands of two firms, Boeing-McDonald and Airbus, each of which owes its exis­tence and success to large-scale public subsidy. The same pattern prevails in computers and electronics generally, automation, biotechnology, communications, in fact just about every dynamic sector of the economy.

There was no need to explain the doctrines of ''really exist ing free market capitalism'' to the Reagan Administration. They were masters of the art, extolling the glories of the market to the poor while boasting proudly to the business world that Reagan had ''granted more import relief to U.S. industry than any of his pre­decessors in more than half a century'' — which is far too modest, tney surpassed all predecessors combined, as they "presided over the greatest swing toward protectionism since the 1930s''. Foreign Affairs commented in a review of the decade. Without these and other extreme measures of market interference, it is doubtful that the steel, automotive, machine tool, or semiconductor industries would have survived Japanese competition, or been able to forge ahead in emerging technologies, with broad effects through the economy. That experience illustrates once again that 'the conven tional wisdom'' is "full of holes'', another review of the Reagan record tn Forein Affairs points out. But the conventional wisdom retains its virtues as an ideological weapon to discipline the defenseless.

The United States and Japan have both just announced major new programs for government funding of advanced tech­nology (aircraft and semiconductors, respectively) to sustain the private industrial sector by public subsidy.

To illustrate "really existing free market theory" with a dif­ferent measure, an extensive study ol transnational corporations (TNCs) by Winfried Ruigrock and Rob van Tulder found that ''vir tually all of the worlds largest core firms have experienced a deci­sive influence from government policies and / or trade barriers on their strategy and competitive position'' and "at least twenty com­panies in the 1993 Fortune too would not have survived at all as independent companies, if they had not been saved by their respec tive governments '', by socializing losses or by simple state takeover when they were in trouble. One is the leading employer in Gin grich's deeply conservative district, Lockheed, saved from collapse by huge government loan guarantees. The same study points out that government intervention, which has ''been the rule rather than the exception over the past two centuries ... has played a key role in the development and diffusion of many product and process inno­vations — particularly in aerospace electronics, modern agriculture. materials, technologies, energy, and transportation technology'', as well as telecommunications and information technologies generally (the Internet and World Wide Web are striking recent examples) and in earlier days, textiles and steel. And of course, energy. Gov ernment policies "have been an overwhelming force in shaping the strategies and competitiveness of the worlds largest firms''. Other technical studies confirm these conclusions.

There is much more to say about these matters, but one con-clusion se

Date: 2015-04-20; view: 1479