Post by unlawflcombatnt on May 8, 2007 2:49:28 GMT -6
Economist Thomas Palley, chief economist at the U.S.-China Security Review Commission, wrote a very interesting article in April 2004, titled From Keynesianism to Neoliberalism: Shifting Paradigms in Economics. It's a critique of current economic policy under the Bush administration, as well as a description of the progression of the U.S. economy from the influence of Keynesianism to Neoliberalism. Below is an excerpt.
"For the last 25 years, economic policy and the public’s thinking have been dominated by a conservative economic philosophy known as neoliberalism. The reference to “liberalism” reflects an intellectual lineage that connects with 19th century economic liberalism associated with Manchester, England. The Manchester system was predicated upon laissez-faire economics and was closely associated with free trade and the repeal of England’s Corn Law, which restricted importation of wheat. Contemporary neoliberalism is principally associated with the Chicago School of Economics, which emphasizes the efficiency of market competition, the role of individuals in determining economic outcomes, and distortions associated with government intervention and regulation of markets.
Two critical tenets of neoliberalism are its theory of income distribution and its theory of aggregate employment determination. With regard to income distribution, neoliberalism asserts that factors of production--labor and capital--get paid what they are worth. This is accomplished through the supply and demand process, whereby payment depends on a factor’s relative scarcity (supply) and its productivity, which affects demand. With regard to aggregate employment determination, neoliberalism asserts that free markets will not let valuable factors of production--including labor--go to waste. Instead, prices will adjust to ensure that demand is forthcoming and that all factors are employed. This assertion is at the foundation of Chicago School monetarism, which claims that economies automatically self-adjust to full employment and that the use of monetary and fiscal policy to permanently raise employment merely generates inflation.
These two theories have been extraordinarily influential, and they contrast with the thinking that held sway in the period between 1945 and 1980. During this earlier era, the dominant theory of employment determination was Keynesianism, which maintains that the level of economic activity is determined by the level of aggregate demand. Additionally, Keynesians maintain that capitalist economies are subject to periodic weakness in the aggregate demand generation process, resulting in unemployment. Occasionally, this weakness can be severe and produce economic depressions--as exemplified by the Great Depression. In such a world, monetary and fiscal policy can stabilize the demand generation process....
The great reversal: the decline of Keynesianism and the rise of neoliberalism
For the 25 years after World War II (1945-1970), Keynesianism constituted the dominant paradigm for understanding the determination of economic activity. This was the era in which modern tools of monetary policy (control of interest rates) and fiscal policy (control of government spending and taxes) were developed. It was also a period in which union coverage rose to historical highs and “New Deal” style institutions of social protection and regulation were expanded.
However, in the mid-1970s the Keynesian impulse went into reverse, to be replaced by neoliberalism. This reversal piggybacked on the social and economic dislocations associated with the Vietnam War era and the OPEC oil price shocks, which dominated the 1970s. However, these dislocations only provided an entry point. The ultimate spark of neoliberal dynamism is to be found in the intellectual divisions of Keynesianism and its failure to develop public understandings of the economy that could compete with the neoliberal rhetoric of “free markets.”
Throughout the period of Keynesian dominance, there remained deep conservative opposition within the United States, providing a base from which to launch a neoliberal assault. This opposition had been present during the New Deal period, as manifested in conservative resistance to the creation of the Social Security retirement income system....
The concept of full employment (of Keynesians) was replaced with the notion of a “natural rate of unemployment.” (of Neoliberalism) This natural rate is unobservable and is supposedly determined by the forces of demand and supply in labor markets. The adoption of natural rate rhetoric has served two purposes. First, it has provided political cover for higher average rates of unemployment, which have undermined the bargaining position of workers....."
The full article can be found at
www.thomaspalley.com/docs/articles/macro_policy/keynsianism_to_neoliberalism.pdf
"For the last 25 years, economic policy and the public’s thinking have been dominated by a conservative economic philosophy known as neoliberalism. The reference to “liberalism” reflects an intellectual lineage that connects with 19th century economic liberalism associated with Manchester, England. The Manchester system was predicated upon laissez-faire economics and was closely associated with free trade and the repeal of England’s Corn Law, which restricted importation of wheat. Contemporary neoliberalism is principally associated with the Chicago School of Economics, which emphasizes the efficiency of market competition, the role of individuals in determining economic outcomes, and distortions associated with government intervention and regulation of markets.
Two critical tenets of neoliberalism are its theory of income distribution and its theory of aggregate employment determination. With regard to income distribution, neoliberalism asserts that factors of production--labor and capital--get paid what they are worth. This is accomplished through the supply and demand process, whereby payment depends on a factor’s relative scarcity (supply) and its productivity, which affects demand. With regard to aggregate employment determination, neoliberalism asserts that free markets will not let valuable factors of production--including labor--go to waste. Instead, prices will adjust to ensure that demand is forthcoming and that all factors are employed. This assertion is at the foundation of Chicago School monetarism, which claims that economies automatically self-adjust to full employment and that the use of monetary and fiscal policy to permanently raise employment merely generates inflation.
These two theories have been extraordinarily influential, and they contrast with the thinking that held sway in the period between 1945 and 1980. During this earlier era, the dominant theory of employment determination was Keynesianism, which maintains that the level of economic activity is determined by the level of aggregate demand. Additionally, Keynesians maintain that capitalist economies are subject to periodic weakness in the aggregate demand generation process, resulting in unemployment. Occasionally, this weakness can be severe and produce economic depressions--as exemplified by the Great Depression. In such a world, monetary and fiscal policy can stabilize the demand generation process....
The great reversal: the decline of Keynesianism and the rise of neoliberalism
For the 25 years after World War II (1945-1970), Keynesianism constituted the dominant paradigm for understanding the determination of economic activity. This was the era in which modern tools of monetary policy (control of interest rates) and fiscal policy (control of government spending and taxes) were developed. It was also a period in which union coverage rose to historical highs and “New Deal” style institutions of social protection and regulation were expanded.
However, in the mid-1970s the Keynesian impulse went into reverse, to be replaced by neoliberalism. This reversal piggybacked on the social and economic dislocations associated with the Vietnam War era and the OPEC oil price shocks, which dominated the 1970s. However, these dislocations only provided an entry point. The ultimate spark of neoliberal dynamism is to be found in the intellectual divisions of Keynesianism and its failure to develop public understandings of the economy that could compete with the neoliberal rhetoric of “free markets.”
Throughout the period of Keynesian dominance, there remained deep conservative opposition within the United States, providing a base from which to launch a neoliberal assault. This opposition had been present during the New Deal period, as manifested in conservative resistance to the creation of the Social Security retirement income system....
The concept of full employment (of Keynesians) was replaced with the notion of a “natural rate of unemployment.” (of Neoliberalism) This natural rate is unobservable and is supposedly determined by the forces of demand and supply in labor markets. The adoption of natural rate rhetoric has served two purposes. First, it has provided political cover for higher average rates of unemployment, which have undermined the bargaining position of workers....."
The full article can be found at
www.thomaspalley.com/docs/articles/macro_policy/keynsianism_to_neoliberalism.pdf