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Mainstream, VOL L, No 1, December 24, 2011 (Annual 2011)

Tackle the Disease, not the Symptoms

Tuesday 27 December 2011, by Girish Mishra

In the late 1970s the world entered an era of turmoil. The so-called golden age of capitalism gave way to stagflation, that is, stagnation in output along with inflation. Unemployment soared. A chaotic situation prevailed. People of advanced capitalist countries were bewildered. Questions were sought to be raised about the efficacy of the long-continuing Keynesian approach that had rescued America and other Western countries from the Great Depression. Votaries of some almost dead or zombie ideas became emboldened. They included Friedrich von Hayek, Milton Friedman and other members of the Chicago School, who revived the zombie economics of neoliberalism.

Neoliberalism advocated a drastic reduction in the role of the government in economy. It should concern itself largely to the same three things that were advocated by Adam Smith in the 18th century, like protecting the country from external enemies, maintaining internal law and order, and providing infrastructural facilities like roads, and looking after education, health- care and so on. The rest of the things should be left to the market forces. Let them decide the three major questions, namely, what to produce, how to produce, and for whom to produce? The market, on the basis of the equation of demand and supply, will determine what goods and services need to be produced. Keeping in view the state of technology and the consideration of minimising the costs of production, the question of how to produce will be tackled. Lastly, the pattern of the distribution of income will indicate which goods and services need to be produced and for whom.

It was said that if the government or some other force did not interfere, the market would bring in a state of equilibrium and there would be no ups and downs. In other words, there would be no crisis. This idea came to be known as the Great Moderation. Its votaries seem to be unmindful of the historical fact that this idea has got discredited again and again. As far back as October 1929, just a few days before the onset of the Great Depression that devastated the entire world, barring the then Soviet Union, one of the leading American economists, Irving Fisher, declared: “Stock prices have reached what looks like a permanently high plateau.” In the prevailing ideological atmosphere, Fisher appeared to be right because it was assumed that there would never be any shortage of the volume of demand and whatever was produced would get sold. A great French economist of the 19th century, J.B. Say, had said: “Supply creates its own demand.” Though Marx and his followers had refuted this dictum, they were ignored. When the Great Depression set in and millions of people all over the world were rendered unemployed, enormous amounts of goods remained unsold, factories closed, farming came to a standstill, and banks crashed. The greatest symbol of world capitalism—Wall Street—was in a state of hopelessness. Even a remote and not fully developed capitalist country like India was affected and the falling agricultural prices rendered peasants to eviction by landlords for their inability to pay rents.

Keynes’ analysis and prescription were accepted and implemented by both America and England. J.B. Say’s dictum was rejected and it was admitted that supply did not always create matching demand to clear the market. Hence the government was required to step in and help manage the economy. The concept of public sector came up. Economists demonstrated that there could be frequent cases of market failure. Moreover, the private sector, solely concerned with maximising profit by reducing costs, might damage social interests. To give a concrete example, a factory may drain its discarded materials into a river and reduce its costs but will surely harm the society whose members go to it for bathing and drawing drinking water. Hence the government must step in to tackle this and other such cases of market failure.

From the 1980s onwards, this dead idea of the Great Moderation was again resurrected when it was declared that there would be no more ups and downs as capitalism had become free from crisis. Economist Gerard Baker proclaimed through his column in The Times of London (January 19, 2007): “Good policy has played a part: central banks have got much better at timing interest rate moves to smooth out the curves of economic progress. …

“It is the liberation of markets and the opening-up of choice that lie at the root of the transformation. The deregulation of financial markets over the Anglo-Saxon world in the 1980s had a damping effect on the fluctuations of the business cycle.” He predicted that with credit cards and other financial instruments coming into existence, there would be no shortage of demand.

As ill-luck would have it, a severe recession, now termed as the Great Recession, set in by the end of 2007, as the National Bureau of Economic Research has confirmed. With this collapsed the utopian wish that capitalism had become stable and free of crisis and there was no alternative to it. The Efficient Markets Hypothesis, touted by the neoliberals of the Chicago School, on which the idea of the Great Moderation was based, vanished into thin air.

ALL over the world, the realisation has now dawned that neoliberalism is no longer effective. An alternative to it needs to be worked out. A commission, appointed by the French President, has reached this conclusion. Among the leading economists who sat on it were two Nobel Laureates, namely, Amartya Sen and Joseph Stiglitz. Even the former Labour Prime Minister of Britain, Gordon Brown, had convened a conference that reached the same conclusion.

In spite of all this, the government of our country is still sticking to the zombie economics of neoliberalism and is bent upon dismantling the public sector, and rubbishing the national goals of reducing socio-economic inequalities and regional disparities. It is relentlessly advo-cating the discredited “trickle-down strategy” for distributing the results of development and privatisation. It has been trying to keep the doors open for the entry of foreign goods and capital, unmindful of the disastrous consequences that are sure to follow.

We, in India, already find a rapid increase in crimes including corruption, separatist move-ments, communalism and popular discontent as manifested in the Maoist surge. These are the results of the adoption of neoliberalism as the basis of economic policies. In recent times a number of people, from social activist Anna Hazare to yoga guru Ramdev, have come up with their prescriptions aimed at tackling only the symptoms rather than the main disease and its root causes. It is needless to add that they have created more confusion.

Arthur MacEwan and John A. Miller in a recent book, Economic Collapse, Economic Change: Getting to the Roots of the Crisis, say: “As doctors are concerned with the causes of disease in order to find cures, we are concerned with the causes of economic crisis in order to find cures. If we focus on the wrong factors, the symptoms rather than the underlying disease we will have no more success than the doctor who treats a serious illness by focusing on the headache and providing only aspirin. The aspirin may provide short-term relief, which can be a good thing, but the underlying disease is still there. Even antibiotics may do little good if the patient, cured of immediate illness, continues to face a nexus of deeper, underlying problems—a weak immune system; a germ-infested, polluted environment; and poor dietary habits (and smoking)—that create a risk for recurrence of the ailments.”

They go on to underline that though the labour movement has got weakened and is being despised by the neoliberals, the hope of mankind lies in mobilising the working class, building its unity and devising its strategies and tactics by keeping in view the changed situation. It needs to be educated so that it comes out of the old frame of mind and adapts itself to the changed situation.

The author, a well-known economist, used to teach Economics at Kirorimal College, University of Delhi, before his retirement a few years ago. He can be contacted at: gmishra@girishmishra.com

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