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.