Politics 177 (Week 7): The tragedy of neo-liberal globalization

Politics 177 (Spring 2004): America and the World

Week 7: The tragedy of neo-liberal globalization

Why "tragedy?" The concept of "tragedy" generally implies a fatal flaw: "a dramatic or literary work depicting a protagonist engaged in a morally significant struggle ending in ruin or profound disappointment...essentially as a consequence of some extreme quality which is both his greatness and his downfall." The American struggle to transform the world into its likeness has these qualities, while the attacks on New York and Washington of September 11, 2001, and the potential failure of the project in Iraq, might well represent the downfall of that effort. To understand how the tragedy has come about, we need to look back at the origins of neo-liberal globalization.

5/11: Crisis of capitalism and the passing of Fordism

I. The basis of American and global prosperity, 1950-1970

1. The Fordist model of production: Everyone knows about Henry Ford's innovation in mass production. He took the assembly line, mechanized and electrified it, put unskilled and semi-skilled labor to work assembling autos, and paid them $5 a day, twice the going wage at the time. By fostering high productivity, workers could produce enough cars each day to bring down their unit cost. The relatively high wage meant they could also afford to buy a car, and many Americans did. Fordism was central to the creation of the consumer society, one in which wages supported the demand necessary to avoid the problem of excess capacity that had been so troublesome during the late 1800s.

2. Ford's system veered from consensus toward facism during and after World War One: While the Fordist model was adopted by other auto companies, the Ford Motor Company itself faced problems after World War One. Inflation reduced the value of the wage, worker productivity fell and turnover grew, and the company relied more and more on surveillance and punishment to discipline workers. Ford tried to prevent unionization, and its plants were not unionized until well into the 1930s. The other big auto companies were much more successful in adopting Fordism, unionizing, and achieving success. Fordism became the model for manufacturing throughout the world.

3. Successful Fordism developed only through a labor-capital class compromise: During the 1930s and the Great Depression, many of the big unions were fairly radical and there was considerable resistance to them by capital. The fact that unemployment remained high throughout the decade meant that the unions' leverage was limited. Still, industrial peace required union recognition, and this emerged during the decade. During World War II, the demand for labor was high, the supply was tight, and there was a considerable amount of labor unrest. Following the war, both the government and capital feared radicalization and the communization of labor, and went to great lengths to prevent it both in the United States and Europe. The AFL-CIO and industry owners came to a general agreement that labor would be deradicalized--that is, remain anticommunist--while owners would accept unionization and engaged in periodic negotiations over wages and working conditions. For some 20 years, this pattern provided industrial workers with high and steadily increasing wages, and the compromise made the middle-class blue-collar household a social norm. This is what Antonio Gramsci called "hegemony," articulated through a "hegemonic bloc" supported by a general social consensus.

4. But the compromise was an unstable one: The unions supported the state's anti-communist policies, and helped to establish non-communist unions in Europe and Japan. Still, as reconstruction and redevelopment proceeded, and American allies began again to produce capital and consumer goods, competition developed among fractions of capital. Profit margins realized by American corporations began to shrink. Many corporations established foreign subsidiaries in order to produce behind national tarrif and trade barriers. In the United States, companies sought to reducing costs through increased pressure on workers on the shop floor, by moving from closed-shop to right-to-work states, and by getting tougher during contract renewal negotiations. Wages and costs rose, as well, in response to the inflation of the late 1960s and the 1970s, and this had negative impacts on capital accumulation and demand. The result was the accumulation crisis of the 1970s.

II. The economic crisis of the 1970s

1. The crisis began during the 1960s: It is only in retrospect that the nature of this crisis became clear; during the 1970s, there was not much understanding of what was happening. As I noted last week, one source of the developing crisis was to be found in the dollar glut resulting from global militarization and the Vietnam War (some $400-500 billion in current dollars), which contributed to worldwide inflation and led Richard Nixon to the abolish the gold exchange standard and devalue the dollar. This made U.S. goods cheaper and European and Japanese goods more costly, but it also made dollar holdings and investments less valuable. This rankled, in particular, the oil-producing countries. Oil was denominated in dollars and its world price was controlled by the Seven Sisters, which meant that royalties paid to oil producing countries were declining in real terms. Saturation points were reached for "white" (household) goods, in particular, which were replaced only infrequently. New product lines, such as electronics, had not yet emerged to revive consumption, and industry was beginning to shift from the North to the South and West.

2. Price hikes in oil exacerbated the crisis: As an element in the Nixon Doctrine, the Nixon Administration supported small increases in the price of oil in 1970 and 1971. The Doctrine involved reliance on "regional powers," such as Iran, to police strategic areas, such as the Persian Gulf. But to pay for the U.S. weapons Iran needed, the Shah demanded higher royalties and oil prices. At the same time, American demand for oil was growing rapidly. During the 1950s and 1960s, import quotas restricted the amount of foreign oil that could enter the country, and gasoline prices were beginning to rise during the late 1960s, so Nixon eliminated the import quota, which allowed cheaper Persian Gulf oil into the country. Europe had benefited from relatively lower oil prices on the world market, so the price increase was also intended to reduce European competitiveness by making them pay more for energy. The small increase was absorbed with little effect on demand, but it made the Shah and others hungry for more money.

3. World supply and demand for oil were very tight by 1972-73: As global supply and demand tightened, the oil producing countries found themselves in an increasingly stronger structural position, since they were providers of the marginal barrel of oil. Prior to the October War of 1973, OPEC countries began to pressure the oil companies for higher royalties and, beginning with Libya in 1970, were able to do so. In 1973, the price of a barrel of oil rose to $4 and, with the Arab embargo of 1973, OPEC found that it could unilaterally increase the price to about $12/barrel. Oil company properties were confiscated and nationalized, and this further enhanced OPEC's market power. But the Seven Sisters enjoyed windfall profits, since they still owned a great deal of oil in other parts of the world. The transfer of funds from the industrialized countries to OPEC during the 1970s reached into the hundreds of billions of dollars, more than many of them could absorb domestically.

4. Producers of other commodities, such as aluminum and coffee, tried to establish cartels, too: Demand for raw materials was very high during the first few years of the 1970s, and studies such as The Limits to Growth, done at MIT for the Club of Rome, suggested that raw material supplies could soon be depleted. The environmental movement was growing, and there were major international debates over population, resources and consumption. There was a generalized concern that the industrialized countries might be facing a broad scarcity of raw materials, while developing countries began to demand better trade deals through what was called the "New International Economic Order" (NIEO). The NIEO was predicated on controlled production and prices for commodities, and it became a red flag waved in front of the American bull. The United States made it a policy to resist and undermine the NIEO.

5. Finally, high oil prices led to an enormous increase in petrodollar earnings: OPEC countries found themselves holding large dollar reserves, which they deposited in Western banks. Those banks, in turn, lent the funds to developing countries who were having a hard time paying for the increased costs of oil and other goods while also seeking to foster domestic development. As a result, Third World debt skyrocketed. In order to avoid default, creditors loaned debtors funds to make interest payments on the loans, and these then became part of the principal. By the beginning of the 1980s, total developing country debt was in excess of something like $500 billion, and it was clear that the debt could not be repaid. Yet, no one wanted to write off the debts, because that would threaten the international financial system.

III. The new ideological consensus

1. The accumulation crisis of the 1970s fostered a search for strategies to reduce costs and restore profits: A major source of costs to business was in wages and social taxes. These had become a growing part of the social compromise during the 1960s, and capital sought ways of reducing these payouts. But unions were seen to have acquired considerable power, and one line of thought argued that they had to be broken as an "unnatural intrusion" into the worker-owner contract relationship. The breaking of the unions began in the UK, where the coal miners' unions, an essential part of the Labour Party's social coalition, repeatedly went on strike during the early 1970s. Rising wages, inflation and public hostility to the unions helped the Conservative Party under Margaret Thatcher to defeat Labor in 1979, and she proceeded to break and destroy the unions. The free-market ideology and monetarist doctrines propounded by Thatcherites were especially attractive to the middle class, which felt heavily burdened by high taxes and inflation rates, low economis growth, and difficulty in acquiring property. Thatcher's brand of class warfare, disguised as "common sense," appealed to both the middle and working classes.

2. The new ideology treated the Keynesianism of the social compromise as a failure and even tantamount to creeping socialism: Keynsianism relied on a social safety net, deficit spending when necessary, and high taxes to pay for social welfare. By the 1970s, as the costs of the welfare state rose, Keynesianism appeared to foster inflation and impose excessive costs on middle class and wealthy individuals, who had least need for social services. By arguing that such taxes were unfair and amounted to theft, Thatcher was able to exploit resentment. By arguing for monetarism, Thatcher attempted to constrain state spending in the pursuit of lower taxes. By promising massive savings and smaller government through privatization, Thatcher was able to argue for the sloughing off of public services. And by deregulating financial markets, in particular, Thatcher gave the middle class new access to individual accumulation opportunities, either through home purchase, investment in newly-privatized services, or speculation in equities. The Falklands War helped to legitimize the Thatcher government, as well, by restoring British fantasies of imperial glory.

3. Thatcherism--aka, "neo-liberalism"--was adopted by Ronald Reagan: Neo-liberal ideology was not, strictly speaking, a British invention. It drew on the arguments of Friedrich Hayek and Ludwig von Mises, both Austrians, who were committed liberals in the classical economic sense, and the Chicago School, whose best-known member was (and is) Milton Friedman. The central dogma was "free markets," that is, the elimination of state regulation of market activities and reliance wholly on the price mechanism as a means of allocating resources efficiently. Although much market regulation, which they opposed, is intended to restrict opportunities for corruption by capital and to protect the public from various hazards, it also serves to structure the political economy within which markets can function. By equating such social regulation with Soviet-style command and control planning, the Chicago School made it seem as though any and all regulation was unnatural and tantamount to socialism.

4. The main aim of the new ideology was to break countervailing centers of political power: Both the state and organized labor represent centers of power that can limit the freedom of capital and, in doing so, impose costs on business. The state can force business to pay for externalities--pollution, health costs, pensions, medical benefits--while organized labor can hold industry hostage, and threaten a business with massive losses and even closure, if it fails to pay adequate wages and provide acceptable working conditions. (This is possible, however, only in a situation where the demand for labor is high relative to supply.) These countervailing centers of power are positied in opposition to the consumer, who wants only the freedom to buy at the best possible price. By making both state and labor seem unnatural, foreign and even subversive, the proponents of neo-liberal ideology were able to turn it into the new "common sense" and to use broad public support and the resources of capital to undermine unions, foster domestic deregulation, and empower markets as the dominant means of social choice.

IV. Neo-liberalism and the Second Cold War

1. Disposing of the convergence hypothesis: The rise of neo-liberalism was linked to the revival of the Cold War during the 1970s. One argument that was somewhat popular during the 1960s and early 1970s was the "convergence hypothesis," which proposed that the Western and Soviet systems were converging on some form of social democratic liberal state, a combination of the relatively free markets of Western Europe and the social support mechanisms of Eastern Europe. Under such circumstances, however, profits would be limited, if not by legislation then as a result of increased taxes and social costs. Convergence also suggested a resolution of the Cold War conflict in Europe, and detente appeared to be a first step in that direction. The revival of anti-communism was, thus, central to the eventual success of neo-liberalism, for it allowed the American and British states to link economic growth to national security and the necessity for changed policies.

2. Keeping Western Europe away from the East: Another concern in the United States was that Western Europe might arrange its own peace with the East. Beginning in the late 1960s, reconciliation between East and West Germany began to develop--known as Ostpolitik. While the revived Cold Warriors of the Committee on the Present Danger did not care much about economics, they found they could make common cause with the economic neo-liberals.

3. Breaking the NIEO: The NIEO also relied on a fair amount of market regulation, which was anathema to the neo-liberals. They believed that only the market should set commodity prices--which would, by the way, keep the terms of trade in the West's favor--and that American structural power would be gravely threatened by any kind of international regulation. Of course, markets in commodities were already heavily regulated to the benefit of the West. Ultimately, the back of the NIEO was broken as a result of efforts to control inflation. In 1979, the Federal Reserve began to raise domestic interest rates in order to restrict credit and control the money supply. This drew in foreign funds, causing the dollar to rise, and forcing up interest rates worldwide. The resulting global recession caused a commodity glut, and a collapse in the price of oil and other raw materials. Developing countries found that they had to sell their commodities at whatever price they could get, and that was the end of the NIEO.

4. Restoring American hegemony: As we shall see, the size of the U.S. economy and the international role of the dollar both serve to support American hegemony. The American economy constitutes a single market of almost 300 million consumers, with a GDP that is 25-30% of the gross global product. Until recently, moreover, the European and Asian markets were fragmented and difficult to enter. So, the U.S. was able to use this dominant position to structure the global political economy once again in a number of ways (of which more, below). And, as the international reserve currency, the United States can also shift deficits and costs onto foreigners, who regard the dollar as a reliable source of value. As we shall see, there is more to neo-liberal globalization than these two points, but they are of central importance to the overall story.

5/13: Instantiating the new global economy

I. Sports as metaphors for economics and war

1. Structural rules and distributive rules: Think of the shift to neo-liberal globalization as changes to the game of baseball. Remember that there are two kinds of rules in any game: the rules that define the game and how it is played, and the rules for playing and scoring. Baseball is defined, therefore, by the diamond, the bases, team sizes and positions, ball and bat. These are constitutive or structural rules. If you see those things, you know it is baseball you are playing. Playing baseball, however, is defined by getting hits, running the bases, scoring runs and putting players out. These are distributive or accumulating rules. At the end of every game, there is a distribution of runs that results from the playing. So each game is different even though the Game remains the same.

2. During the last 30 years, the Game has been changed structurally: Changes made to Major League Baseball, including the designated hitter rule, the creation of divisions, additional playoff series, and interleague play have changed the fundamental structure of the Game, although there is enough that remains for anyone to recognize that it is baseball. The changes were intended to make the game livelier, to increase the fan base and, some might argue, to introduce greater balance among the teams.

3. Gaming the economy: The shift from Keynesianism to neo-liberalism has a similar character: certain structural aspects have changed, but the result is still recognizable. What has changed, in particular, is that the locus of the constitutive and distributive rules has been relocated from national capitals to international institutions. Thus, for example, the ability of countries to make political decisions about trade, finance, and investment has been largely pre-empted by rules embedded in the IMF, the World Bank, the WTO and other such institutions. This constitutes a structural change.

4. War, by contrast, is better understood through a comparison of football and soccer: The traditional way of war is a lot like football. It is a game of brute strength and power, with a modicum of strategy. It is good to be big and fast, and the team that is bigger and faster tends to have a constant advantage during the season. Soccer, by constrast, is a game of position and tactics. Size is less important than speed and constant movement.

5. War has changed from football to soccer--the game is a different one: The U.S. military is configured largely for football--wars of strength and power, in which armies face each other across front lines, and in which short periods of intense action are interspersed with getting into position and waiting. The new face of war is soccer: movement, tactics, constant motion, difficulty following the ball, as it were. When you are all suited up for football, it is not so easy to shoft over to soccer.

II. Restructuring the global political economy, 1980-2000

1. The restructuring of the global political economy involved changes in the constitutive rules: Whereas, under the old rules, the state set the rules structuring domestic political economy, and intervened to provide social welfare, education, health care, etc. as well as rules governing finance, trade, exchange and investment, the new rules largely take such capacity out of the hands of states, moving it out of the domestic realm. This means that national leaders and legislatures cannot, by and large, make political decisions about what the economy should produce and how resources ought to be distributed.

2. The restructured global political economy embedded the new structural rules in international institutions: By describing social intervention as imposing unnecessary and inefficient costs on capital, and making economic access and assistance contingent on "structural adjustment," the United States and its European allies were able to remove a considerable amount of decisional capacity from Third World countries. The Reagan Recession of the early 1980s created the conditions in which this became possible: high interest rates, declining demand, and low commodity prices made it impossible to repay loans. New loans were obtained only by promising to reduce budget deficits and social spending and, eventually, to accept new forms of economic intervention.

3. The United States went through a similar transformation, although without the fiscal discipline: The process of deindustrialization forced producers to reorganize their businesses. The Reagan Administration also sought to deregulated in the distributive realm--trying to eliminate welfare, for example--and to take certain kinds of economic decisionmaking out of the hands of Congress--especially in the trade area--while opening up the rest of the world to U.S. capital through what eventually became the World Trade Organization.

4. Europe has also been undergoing restructuring, although more slowly: The European Union is intended, in part, to be an arena through which economic restructuring and discipline can be imposed on its members. But national governments have retained much more capacity, and unions and other social groups have retained much greater influence, so that neo-liberalism has not thoroughly penetrated Europe.

III. Power and the Third Industrial Revolution

1. An important element of this restructuring has been the "Third Industrial Revolution": The First Industrial Revolution involved the breakup of cottage work and its transfer into factories. This had extremely disruptive effects on social organization, and was not, in England, fully completed until the mid-1800s. The Second Industrial Revolution was Fordist: a shift from skilled craft labor to semi-skilled workers, on the mechanized assembly line. Union and socialist agitation and revolution were responses to the social disruption of this process. Facism was also a result. The Third Industrial Revolution involves a shift in types of good produced as well as how and where they are produced. The end of Fordism has been extremely disruptive, once again. This is the critical aspect of neo-liberal globalization: it has compelled changes in social organization, practices and outcomes, and generated considerable resistance with which the state is ill-equipped to deal.

2. The Third Industrial Revolution (TIR) is based on a shift from goods production to knowledge production: The first major product of the TIR was the atomic bomb, which involved the mobilization of science and technology to create a new weapon of mass destruction. The product was Fordist, while the process was post-Fordist. Over time, knowledge has become commodified, as seen in intellectual property rights, genetic engineering, computer hardware and software, and it generates much higher profits than mass production of goods. But knowledge production requires different skill sets, which means that those trained for blue and white-collar work in a Fordist system may not have the skills for a knowledge-based economy. Even those who are retrained may find that the demand for their new skills is limited (see "The Churn," by Katherine Boo).

3. Globalization has also made global labor accessible to capital: There continue to be major restrictions on labor mobility, most notably through immigration restrictions, but capital can seek out low-wage areas and invest and produce there. This puts downward pressure on both wages and the prices of goods, which keeps inflation relatively low and increases the purchasing power of consumers in rich countries. Low inflation rates means that wage hikes can be kept relatively small, which also helps to maintain profit rates. But one can see, in various forms of outsourcing, that many knowledge-based skills can also be exported.

4. During the 1990s, the United States was well-placed to take advantage of these changes: The Clinton Administration recognized the importance of economic growth to its electoral prospects and emphasized that as opposed to strategic concerns. Both NAFTA and the WTO were organized to facilitate international economic discipline and diffusion of the knowledge economy. The constant hope was that economic growth would generate investment and innovation, which would provide jobs for new entrants into the labor market as well as those who had been thrown out of work. Consequently, whereas at the end of the 1980s, there was pervasive concern about U.S. decline, especially relative to Japan, by the time Clinton moved into the White House, the Japanese economy was stagnant, and decline was off the books.

IV. The failure of neo-liberal discipline

1. The self-regulating market: One of the key elements of neo-liberal globalization is the notion that visible political intervention by states ought to be kept to a minimum. The political economy is structured by states, but the distributive rules of the market should be few and determined by those who participate in the market. The result is that the behavior of economic actors are not subject to surveillance and discipline by state authorities. Success in the market means you are behaving properly; failure means you have sinned. This is a version of Adam Smith's "Invisible Hand," which assumes that self-interested behavior benefits both the actor and society, and that the actor will be bound by moral structures to not engage in excess. It also assumes that individuals will not engage in behavior that might undermine or destroy the economic system, because it is not in their self-interest.

2. The ever-increasing velocity of change: The "Churn" is the process of creative destruction, but what is being destroyed are people's livelihoods and lives. You will probably change jobs (and perhaps occupations) as many as six times during your working life: this will happen because you will be employed on a short-term or temporary basis, your skills and your business will become obsolete, and because there is less-expensive labor available. The velocity of this process has increased, and so has the resulting disruption. Income and welfare disparities have grown, and the world is being reorganized into two classes: the Haves and the Have-Nots. Social disruption and the intrusion of globalized mores also generates resentment and anger. As Marx put it, "All that is solid melts into air."

3. The underemployed military: The successes of neo-liberal globalization coincided, of course, with the end of the Cold War. The disappearance of the Soviet Union presented the military with a problem: who or what would now be the threat? The First Gulf War was fought along the lines of football, and drew on strategies and tactics developed to fight the Warsaw Pact in Central Europe. For a time, the Defense Department offered the notion of the "Two-war strategy," being able to fight simultaneously two Gulf-type wars in two different parts of the world. Terrorism was of concern, but no one could figure out how to fight it. And "assymetric warfare" was also of concern: our enemies, lacking our capabilities, would hit us where we were vulnerable, that is, not on the battlefield. The search for a new strategy to replace containment was constant--we shall return to this in a couple of weeks.

4. 9/11: The attacks on New York and Washington, DC represented a failure of both neo-liberal self-discipline AND military strategy. Most of the hijackers were educated, middle-class Saudis, who were intensely disturbed by both the corruption of the monarchy and the diffusion of American culture and practices into Muslim society. They used the channels and infrastructures of neo-liberal globalization to communicate, plan and travel. And, they clearly failed the test of self-discipline, which turns out to be the major flaw in neo-liberal globalization: you cannot trust people to behave themselves in the required fashion (see also Enron).