Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. But I can't by law give you advice, and I do make mistakes. Remember: the unexpected sometimes happens. Oddly enough, the expected does too, but all too often it takes longer than you thought it would, or on the other hand happens more quickly than you expected. The Goddess of Markets punishes (eventually) greed, folly, laziness and arrogance. No matter how many years you've served Her. Take care. Be humble. And don't blame me.

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Saturday, June 24, 2017


Cartoon by Jim Morin

Back in the late 1970s when I was at varsity studying economics, the new rising orthodoxy was "rational economics".  The theory behind it was simple and logical.  Any person knows much better what their preferences are than any centralised government authority possibly can, so we should let individuals decide what they want to do.  So far, so good.  But the advocates of rational economics took the whole idea a lot further.  They argued that any collective activity was ipso facto inferior to any individual one, and that therefore government should be scaled back to as small a profile as possible.  Regulation of private enterprises was unnecessary, because “the market” would take care of it.  Privatisation, even of entities such as schools, hospitals, generators and the grid was desirable, even if these entities were monopolies or not in fact profit-seeking organisations, because privately owned and managed enterprises would be “more efficient” than collectively owned ones.  Cutting tariffs and removing quantitative import controls would, it was maintained, lead to higher growth and rising living standards.  Welfare had to be cut back so that taxes could be cut, because taxes on the rich “reduced incentives”.    Prosperity was supposed to "trickle down" from the rich to the poor.  This philosophy is called “neo-liberalism”.

There was a fundamental flaw in the whole thesis.  When markets are “perfect” and supply is “atomistic” (i.e., there are a very large number of suppliers) the self-interest of each of the individual suppliers can potentially lead to positive outcomes, because any attempt to gouge the public is prevented by competition.  For example, in any urban centre there are thousands of cafés.  For all practical purposes supply is “atomistic”.  Each café is a “price taker”, not a “price maker”.  Contrast that with, say, the electricity grid.  It would be completely impractical to build a hundred grids with connections to each house.  The grid is a monopoly.  It could, theoretically, set its own price.  There are no constraints on the self-interest of those who own monopolies except regulation and politics.  As Adam Smith, the great guru of the economic rationalists and neo-liberals said:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices

There was a second critical flaw in the whole thesis of neo-liberalism.  The assumption was that economics would happen independently of the political system and political processes, that there would be a level playing field where all players could be potentially equally successful.  But that was wrong.  Neo-liberalism led to vastly increasing inequality, and the people with more money bought the politicians.  Laws and regulations were changed to favour incumbents.  Grumpy billionaires bought control of media outlets, and started pushing far-right agendas, which—quelle surprise!—favoured deregulation, lower taxes, lower wages and free migration. 

There are other fatal flaws to the whole doctrine of neo-liberalism, but I'll talk about them in future posts.

As the years went by I began to wonder whether neo-liberalism was actually as good as its proponents believed.  But what really killed it for me was the GFC.  The neo-liberal system plunged us into deep recession.  Banks were supposed to be capable of self-regulation.  Instead they lent imprudently and foolishly, and failed spectacularly, and had to be rescued--oh, the irony!--by the state.  The result was the  deepest recession since the Great Depression of the 30s.  And since then, trend growth in the OECD has fallen from 2.9% per annum to 1.8%.  It became obvious that austerity policies to try and balance budgets just made things worse.  The major burden of readjustment was everywhere borne by the poor.  The fastest recovery from the GFC lows was in the USA, which also ran the most Keynesian stimulatory policy in developed countries (to the fury of the Republican Party) while dogmatists elsewhere forced tax increases and spending and welfare cuts (Europe being the worst offender) which contrary to the theory simply deepened the downturns, while leaving the deficits unchanged.

I think the high water point of neo-liberalism has passed.  All the interlocking doctrines are under assault.  Just as with Communism, once a political doctrine loses its intellectual authority it is doomed.  Neo-liberalism is dying.  Its supporters just don't know it.

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