In 1962, Economist Milton Friedman published the bestselling book,
Capitalism And Freedom. The book had many practical policy ideas, but the real takeaway and basic principle was that “economic” freedom was a necessary precondition for political freedom. Without it, he argued, there was no hope for true freedom. In a sense, Friedman was putting the importance of economic freedoms over civil freedoms. This was not a new idea, and contemporaries of Friedman had already written about the vital importance of free markets, like F.A. Hayek. But Friedman helped bring this idea into the mainstream of American politics, and throughout the seventies showed that he truly believed in what he preached. The United States was not the first country to liberalize its economy. Friedman and his so called “
Chicago boy’s,” who were mostly Chilean proteges he had trained at the University of Chicago, first enacted radical free market policies to the Chilean economy under Augusto Pinochet.
In 1973, Chilean General Augusto Pinochet staged a coup d’etat against the democratically elected president of Chile, Salvador Allende, who was a Socialist. The Pinochet dictatorship would go on to be one of the most brutal and repressive regimes in South America, violating the human rights of hundreds of thousands. It has been reported that at least 3,065 people were “disappeared” or executed and around 80,000 were imprisoned for political reasons.
But while Pinochet threw away political and civil freedoms, he enacted the “more important” economic freedoms, which, as stated before, Friedman believed were necessary for political freedoms. Pinochet’s economic advisers were made up of the Chicago boys, and their advice seemed to be taken right out of Friedman’s famous book. The government began privatizing industry, cutting spending, and freeing up trade. These extreme policies caused immediate instability; nearly doubling inflation and costing many domestic jobs because of the opening up of foreign trade. In 1975, the man himself, Milton Friedman came to help the movement and had a private meeting with Pinochet. After the meeting, the free market reform continued agressively. They rapidly cut spending and the economy went into a massive recession.
By the early 1980’s, the sudden shift to free market policies, which have since been called "shock therapy," had taken their toll on the people, and Pinochet finally had to change course, getting rid of most of his Chicago boy advisors. But the human damage had been done, and the liberalization had been highly beneficial to foreign investors.
Chile was an odd social experiment where economic freedom had been placed above political freedom. Indeed, it took repressive actions against political freedoms to enact the economic ones. Had this strange ideology been thrown into the trash after its destructive nature had been revealed, maybe it would have been just a hiccup in the history of Social Democracy. But it was not discarded; the free market ideology spread to the developed world. In reality, this rapid liberalization, or “shock therapy,” was not so much about freedom, but about freeing up economies around the world so as to hurry up the process of globalization.
Ronald Reagan was a great admirer of Friedman, and by the 1980’s, the counterrevolution of neoliberalism had begun. It was deemed that the markets should be freed from government regulations (particularly finance) and taxes cut. The idea of “starving the beast,” or forcing the government to cut spending by cutting taxes was introduced by Reagan, and financial deregulation began its abrasive journey, which would culminate in 1999 with the Financial Services Modernization Act, signed into law by Bill Clinton.
At the same time as this political shift, (70’s-present), America went through a wave of deindustrialization, trading its manufacturing power for financial. During the post-WW2 period, when the middle class took shape, manufacturing accounted for over fifty percent of domestic corporate profits, while finance hovered above ten percent. Since the late seventies, America’s manufacturing sector has declined, accounting for about ten percent of profits by the early 2000's, though making a comeback to around twenty percent by 2012. At the same time profits for the financial sector have increased; in the early 2000’s they reached a high of 40 percent, and today are close to 30 percent.
But what is truly telling is each industries share of domestic employment. Around the fifties, manufacturing accounted for almost 30 percent of employment in the United States, while the financial sector accounted for less than five percent. Today, the manufacturing industry has dropped its employment share to under ten percent, and the financial sector, though increasing its share of profits, has hardly grown its share of employment in America, staying steadily under five percent.
Is it really any surprise we have such a massive debt today? Manufacturing has become a small part of the American economy, while consumption has steadily increased. At the same time, our government deregulated the financial industry; increasing profits for the top one percent, without creating many new domestic jobs. Financialization has created mountains of fictitious capital in America, while China has taken over as the top manufacturing country.
The Inevitable Fall of Keynes and the Middle Class
The free market movement, led by Milton Friedman in America, was not an inevitable shift in philosophy. Friedman and his followers were in the right place at the right time. Deindustrialization and the fall of the middle class were already taking place before neoliberalism really started in the eighties. But the free market movement certainly helped the process move along faster.
The stagflation of the 70’s provided the opening for Friedman. In Keynesian theory, inflation and unemployment were directly related phenomenons, as shown by the phillips curve. When there was high inflation, a low unemployment rate would be expected, and vice versa. But during the seventies, inflation and high unemployment occurred simultaneously, resulting in stagflation. The most obvious cause of this was the the oil shock of 1973, when the Organization of Arab Petroleum Exporting Countries declared an oil embargo on America and other developed nations because of their support of Israel in the Yom Kippur War. This caused the price of oil to shoot up 400 percent, causing mass inflation because of oil’s inelastic nature.
At the same time, the low unemployment that Keynesianism had provided created a strong unionized workforce. Without much of an industrial reserve army, industries had been forced to give in to higher wages over the past twenty years, which likely contributed to the inflation. Another likely factor was the dismantling of the Bretton Woods system, which had kept a fixed international exchange rate to the dollar, itself tied to gold. Nixon suspended the dollars convertibility to gold, creating a floating currency, which certainly did not help the currency instability of the seventies.
With all of these different events, suddenly, the Keynesian theory seemed unable to deal with the modern shock of stagflation. Keynesian policies had always prescribed increase fiscal spending when a recession came; but this was meant to deal the problem of aggregate demand, and the oil shock resulted in a problem of aggregate supply.
The stagflation confusion was a perfect weapon for neoliberalism. Keynesianism had failed, and a different philosophy was in order. Government became “the problem” and not the solution, while the market was elevated to an almost mystical stature. Intervening with the free market became sinful and wrong, like disrupting the laws of nature.
Neoliberalism was very much a global phenomenon. As Thatcher and Reagan were rising to power, China went through its own reform of economic liberalization with Deng Xiaoping. Opening up its economy and privatizing industries, China became the manufacturing behemoth we know today. This and the rise of manufacturing in other developing nations obviously contributed to America’s fall in productive capacities.
During the eighties and nineties, America weakened its manufacturing power while increasing its financial power, thanks to many contributing factors within and without the government. And today, while the middle class has slowly gone to waste, the top one percent has become wealthier than ever.
Can the Middle Class Be Resuscitated?
To an extent, the middle classes fall seemed inevitable. But shifts in philosophy and policy exasperated it. It was perfect wave of internal and external changes, and today the results are quite clear.
At the current rate, it does seem like the middle class will continue to dissolve in America, while the wealthy continue to get richer. Incomes have stagnated, and America has become a service economy. This is partly because of outsourcing, but more importantly because of automation. Technological innovation has destroyed jobs faster than it has created them. While productivity has increased since the turn of the century, employment has stagnated. Our GDP has grown, but household incomes have remained the same.
The thing is, this should not be surprising. This is a basic tenant of capitalism. Capitalists are always looking for ways to better exploit the labor. The mid-twentieth century period was a combination of “Fordism” and “Keynesianism,” where corporations and manufacturers paid employees decent rates to create aggregate demand and the government played an important part in the economy. This spread the wealth and created a more balanced society. Today, after becoming a service economy and going through financialization, wealth has become increasingly concentrated, yet an increase in credit has allowed much of the consumption to continue; not on earned wages, but on fictitious capital, which as we have seen is a recipe for disaster. The middle class has been hollowed out, but our GDP has continued to grow, along with the Forbes list of billionaires.
Is it possible to return to a similar Keynesian world today? Could a return to a regulated mixed economy all of a sudden result in a flourishing middle class? It is doubtful. The middle class is an anomaly in capitalism. Not only did government policies and a Fordist corporate philosophy contribute to the middle class, but also the major event of the century; World War 2. WW2 destroyed massive amounts of capital, which in someways created an even playing field, flushing away much of the capital that had previously been accumulated before the war. These different factors helped create a middle class under a semi-capitalist system.
But that is now history, as is communism; the only mass movement to ever really challenge capitalisms dominance. I do not think it is a coincidence that capitalism became “fairer” during a time when it was being challenged by another ideology. When the middle class grew during the post-WW2 period, people started to embrace capitalism as a system where everyone could earn a decent living. It was crucial for capitalists to prevent anti-capitalist ideologies from spreading, especially when over a third of the world was communist. Today, free market capitalism has been the dominant ideology in town for decades.
And when theres one game in town, it doesn't much matter if your Democrat or Republican; both are under Wall Streets thumb. The occupy movement seemed to be a clear reaction to the great inequality and fraud we have seen over the past decade. “We are the 99 percent” has become a popular slogan. But what should be recognized is that its not just fraud and corporate influence that has created these things, but the very system of capitalism. In order to change the incredible influence of corporate power and revamp the middle class, maybe there should be more consideration of what could be done other than raising taxes and regulating industry. The only other ideology that I see as viable is a form of socialism; whether it be classic socialism (cooperative ownership) or a more Scandinavian democratic socialism, as Bernie Sanders advocates.
History has definitively shown us, especially over the past forty years, that extreme inequality is not some kind of mutation of capitalism, but an inherent quality. FDR once said in a letter, “No question in my mind that it is time for the country to become fairly radical for at least one generation. History shows us that where this occurs, occasionally, nations are saved from revolutions.” I think it is time for this country to once again become fairly radical, and stop fooling ourselves with third ways, even if its just to put more pressure on the status quo. There is no third way in long run capitalism; there is only one way, and we are seeing it very clearly today.