A tale of two paradoxes

In two earlier posts I introduced the concept of Neoliberalism, the current iteration of capitalism that we have all bought into whether we realise it or not. Today I want to write about two inherent contradictions within this system that render it unviable.

The first is what economist James Crotty refers to as the Neoliberal Paradox. Crotty argues that neoliberal globalisation created two major changes; increased competition in key product markets that caused a downturn in corporate profits (of Non Financial Corporations; ie the actual producers of goods and services) and the rise of “impatient capital” forcing these corporations to pay an increasing share of their cash flow to financial agents, altering management incentives and shortening planning horizons. The paradox is that companies find it impossible to achieve high earnings in these destructively competitive markets, but the financial markets demand ever-increasing earnings and payout ratios.

Just one name will resonate with my Irish readers: Eircom. The former state asset has been plundered and stripped, again and again since its privatisation in the late ’90s. Today it is a burnt out husk of its former self, labouring under massive debts with nothing left over for investment in sorely needed upgrades of the network. This is a brilliant example of exactly what Crotty is talking about. Real rises in a share price occur through increases in sales of real commodities, resulting in higher real profits. What is happening more and more today is that companies such as Eircom are seen as mere commodities themselves, the acquisition of which may help to boost the share price of some amorphous financial entity, which actually produces nothing. It doesn’t matter how the share price goes up, just push it up, even if it’s just for a day. Forget about long term planning and investment, rip what you can out of your productive subsidiaries and sell whatever’s left over to the next financier looking to boost his share price in the short term.

The second paradox will also hit close to home for most people. Neoliberalism is all about bringing discipline to the labour market, and suppressing wages, which have been left stagnant despite increasing productivity. This has resulted in a widening gap between the output of the economy and the purchasing power of consumers. Who’s going to buy all this stuff? For years, this gap has been bridged by rising levels of personal and government debt. But debt is dangerous, particularly when financial instruments are so intertwined in today’s globalised financial markets. It doesn’t take much, as we have seen since 2008, to bring the whole house of cards crashing down. What is worrying is that all the proposed remedies – austerity, bailouts and EU monetary policy, do nothing to address the underlying flaws in the system.

I’ll be exploring what I see as a possible set of solutions to these problems in later posts. Right now there’s a warm windowsill demanding I take a nap on it.

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5 thoughts on “A tale of two paradoxes

  1. Pingback: Noam Chomsky on the financialisation of the US economy | Penny Wise

  2. Just this morning had time to read this. you said in a comment somewhere that ” It’s impossible to separate economics from human nature”. While the language in the report was not completely over my head, I must admit it was at least up to my neck. Still, I think I was able to grasp the gist of his essay. it makes me wonder though, given your own admission of the “human nature” aspect of economics, where does that nature enter the picture that Crotty has painted?

    There were a lot of social changes taking place in the time frames examined by Crotty. Children born out of wedlock, suicide, divorce, drug use, violent crime and many other negative symptoms were on the rise, and rapidly so. Can the economic problems in Crotty’s paper trace their roots to the same cause, or is Crotty confusing correlation with causation?

    Crotty points to Fraud (Few people were aware of the extent to which these reporting distortions had grown by the decade’s end. Yet evidence of massive fraud was freely available.) as a major contributing factor. I agree. But if fraud is the problem, how would further regulation to circumvent and ignore fix the problem? Or if deregulation was the problem, what rules were broken that resulted in fraud?

    Given the other social revolutions that were also taking place in society at large, why should the fact that a slew of large corporations like Enron and WorldCom, who were conducting business as if there were no higher order by which to judge themselves, surprise us? Might they simply respond, “who are you to impose your morality on us”?

    That, on the one hand we can insist that there is no absolute truth by which to judge all things, or even that, if there is such a truth it can’t be known, and on the other hand we are dismayed when people actually live as if this is true, in my opinion, is the real paradox.

    • Economics is a social science, so yes, human nature and economics are intertwined. We observe certain behaviour in certain economic situations, for example, a firm will produce something as long as the marginal benefit (measured in money) exceeds the marginal cost of doing so. Money works because both the buyer and the seller trust that this funny piece of paper can actually be exchanged for goods and services. Then there might be conditions that erode this confidence. Economic behaviour can provide us with insights into human nature, rather than the other way around.

      As to morality, I’m not convinced it has a role to play. Utility does, however. There’s no “absolute value” of a dollar yet the monetary system works. I think morality is best left to you humans, you can figure out what works and what doesn’t.

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