TRADE: by Colin TeeseNews Weekly
Globalism - an idea whose time has passed
, July 13, 2002
It has long been the position of serious analysts of the Vietnam War that - whatever one may think about the merit or otherwise of the exercise - the project was doomed from the moment it became obvious that the policies sustaining it no longer aligned with reality. (Recently a columnist in the Melbourne Age asserted the same proposition in relation to the conflict in the Middle East. Perhaps he is right. But that is another story.)
The same fate appears to be overtaking the global economic system, based upon almost total deregulation. That the system is unraveling before our eyes seems obvious to all but those unwilling to accept reality.
And for those it is once again a case of attempting to cast reality into the mould of policy, when what is necessary is the exact opposite. Policy must accommodate to reality.Washington Consensus
To understand how we got to this sorry state we must cast our minds back twenty years or so, and recall the emergence of what recently has become known as the Washington Consensus. The philosophy behind that so-called consensus changed all government thinking as it applied to global and domestic economics, along with trade and financial policy.
The new doctrine dethroned Keynesian economic policies, which has been the driver of economic growth and prosperity for all the Western economies for the two and a half decades after World War Two. For those who believed in the Washington Consensus, Keynesianism had run its course, and must now give way to a new economic orthodoxy.
Keynesian interventionist capitalism, they maintained, despite thirty years of success had been an aberration: and its shortcomings were now fully exposed. It could not restart a world economy stalled by the deadly combination of negative growth and galloping inflation.
Never mind that the stalled growth was cyclical and could easily have been dealt with - in the absence of rapidly accelerating levels of inflation in all of the prosperous economies. And never mind that this inflation came not from the application of Keynesian policies, but from the political necessity that obliged the US to finance the Vietnam war, not from increased taxes, but by printing money.
Keynesian economic policies would never have sanctioned the funding of war expenditure in this way.
Given that the US was - at least as much then as it is now - the core economy of what we called 'the West' (as opposed to the Communist bloc), US inflation quickly infected all of the Western economies.
None of these considerations, however, prevented the Keynesian economic baby being swept away in the bath water of US generated inflation, in favour of a return to neo-classical economic and financial policies. The same policies, their advocates preferred not to recall, as had come close to destroying capitalism by the 1930s; and which, earlier, had so much (albeit unintentionally) assisted the rise and spread of Communism.
The justification for this reversal (it was, of course, marketed as ‘reform') presented the view that only market oriented policies were capable of leading the world out of the mess created by the Keynesians.
The promise was that market forces, left to their own devices, and free of government interference, could generate faster growth and better economic and social outcomes than had ever before been experienced.
An essential difference between the two systems was deemed to explain why. Keynesians, we were told, were concerned with using taxation and government intervention as a means of distributing wealth more equitably. This approach had the effect of stultifying enterprise.
What was needed was faster growth, which would make everyone better off. To achieve this, tax collections needed to be kept at the absolute minimum necessary to sustain defence and security services and a basic safety net, as an incentive to enterprise and effort. Individuals should retain almost all of the fruits of their efforts, and of the faster growth rates, to dispose of at their will.
Fully competitive markets would safeguard consumers against monopoly exploitation. By the same process, business would be compelled to drive out inefficiencies from their enterprises. And business leaders would be answerable to shareholders for their companies' performances. From these new efficiencies, would flow faster and more sustainable growth and prosperity for everyone.
To enjoy the benefits of this system, governments would need to commit themselves in principle and practice to the free movements of goods, services and capital into and from their countries'. In addition, they would be required to ensure that there were no impediments to competition at home.
And so was born what the Canadian writer John Ralston Saul called 'the new Corporatism'.
At a superficial level, it was a seductively persuasive alternative to the prescriptions of Keynes. Especially for those prepared to shut out of their minds its previous record of failure. Big business, in particular, was seduced. All it could see was the chance to throw off what it considered the excessively constraining influence of government regulation and to watch flow into its own hands much of the power to run the economy which previously had been exercised by governments.
Various free market think tanks around the world supported and promoted the new economic and social orthodoxy and, supported by much of academia, they quickly began to persuade a wide spectrum of opinion leaders."No other way"
Although the ideas had no firm basis in economic theory, Mrs Thatcher's somewhat simplistic doctrine of 'there is no other way' took firm hold of policy makers. She also, soon after opined, "There is no such thing as society".- a view which was never so universally acclaimed. Perhaps because it revealed an uncomfortable truth about the market system; that is, that the individual was supreme. And that better outcomes for all could only be achieved if individuals were left to pursue their own self interest.
That idea disturbed many, who otherwise might have been attracted to the new doctrine. Instinctively they recognized that we all are social creatures, and that community considerations might sometimes need to overshadow, in importance, those of individuals. And, as to community, only duly elected governments should speak on its behalf.
It took almost two decades for cracks in the new system to become obvious to many in the community; though it must be said that Bob Santamaria and News Weekly
were among the first to recognize the dangers from the very beginning.
His courage and contribution to the debate when his views were widely ridiculed has never been recognised, and probably never will be, but what he predicted has largely happened.
Let's examine the record. The idea and the practice of free trade in goods and services can no longer be considered anything but a cruel hoax. Its strongest advocates in Europe and North America are among those who as a matter of practice most disregard the principles they claim to stand for. Others, including Australia, have been damaged and continue to be damaged by what is preached and not practised with regard to free trade - and the World Trade Organisation is no help, since it is powerless to address Big Power transgressions of its rules.
And even before all of this became obvious, we had already seen what havoc the consequences of financial deregulation has wrought on the economies of Australia's near neighbours.
Most recently we have watched emerge in the US a series of corporate frauds which threaten to destabilise the US share market for years. And, we should not assume that Australia can avoid the fall out from these disasters - any better than we were able to avoid the consequences of the spread of US generated inflation thirty years ago.
Neither should we assume that there are not more uncomfortable revelations still to come from the US.
In theory, corporate fraud could not happen if the Washington Consensus held up. Market forces and the operation of the stock exchange would punish non-performing companies. In fact it never happened quite like that. For the last twenty years, corporate strength has been measured entirely in terms of shareholder value rather that genuine company performance, and the stock market has gone along with it.
And, as we now know, real company performance has been concealed, and accounts falsified to create the illusion of success, by CEOs committed to inflating the share price by any means.
It is now clear that these CEOs have, as a consequence of this reward basis, been raping company shareholders for personal gain.
In fact, it now turns out that employing CEOs on short-term performance based contracts relating to share price - with rewards paid by share issues - may be the worst means of serving the companies' interests and protecting shareholders' investments and incomes.
Now of course the free marketers are all running for cover on this issue, but their common cry so far is that what we need to solve this problem is a return to trust. Business leaders must be guided by honesty and a sense of duty. Of course that is true, but is it not in clear contradiction with the other premise of free marketeers, that the economic system works best (and most fairly) when individuals are left to pursue their own interests?
Much more needs to be said on this issue which has implications for all Australian investors - and given the nature of the superannuation arrangements now applying, that means almost all Australians. Indeed, it should become the subject, in its own right, of a separate article. Here it is sufficient to observe that it is another example of an unregulated or under regulated market system failing to deliver the goods.
Underlying the whole system of a market-based approach is, above all, that it would deliver better growth outcomes than had been achieved during the Keynesian period.
Well, it is now possible to put that assertion to the test and an independent research group has done so. One hundred and sixteen countries were examined and 113 of them(including Australia) had better growth performances in the period from 1950 to 1970 than they were able to achieve in the years from 1970 to 1990.
What more will it take for our government to concede it is time to look for a better way?
- Colin Teese was Deputy Secretary of the Department of Trade