A second part discussion of the historical context of Brexit.
The recent Brexit vote has certainly created lots of uneasiness among not only people in the United Kingdom but around the world. The event is complex and the repercussions are multifaceted. It is hard to talk about the complexity of it without getting bogged down in emotional tirades or mind-numbing detail.
What appears to be happening is that a major shift in the current economic/political/social structures seems to be underway. Since the 1980s, the twin forces of neoliberalism and economic globalization have expanded and now hold sway in the West. Neoliberalism is the modern politico-economic theory favoring free trade, privatization, minimal government intervention in business, reduced public expenditure on social services, balanced budgets, free movement of labor, and others. Economic globalization refers to the increasing integration and expansion of the capitalist (neoliberalism and state) economy around the world. Trade, investment, business, capital, financial flows, production, management, markets, movement of labor (although somewhat restricted), information, competition, and technology are carried out across local and national boundaries on a world stage, subsuming many national and local economies into one integrated economic system. There is also a growing concentration of wealth and influence of multi-national corporations, huge financial institutions, and state-run enterprises.
These twin forces have shifted the economy to favor those at the top of the economic ladder while the working and middle classes have either experienced stagnation or declining wages. For years, the backers of neoliberalism and economic globalization have been able to hold off complaints and protests about the inequality generated by these two forces, but it appears those on the “losing” end have made their voices heard. In the U.S., Donald Trump and Bernie Sanders have loudly voiced their displeasure with the status quo and the Brexit vote also showed that a majority of the UK wanted to get out of the European Union and forge their own path.
The problem with any type of protests and calls for change, as this seems to be, is what kind of system will replace the current one. Of course, there seems to be wide disagreement on what that replacement should look like. Here lies the problem. Those on the right, represented by Donald Trump in the U.S. call for protectionist policies, cuts in immigration, closing borders, and heightened nationalism, while those on the left, represented by Bernie Sanders, call for more government programs, such as free college tuition, an increased minimum wage, spending for infrastructure, and higher tax rates on the wealthy. Although these programs may sound good to their followers, the repercussions of high tax rates or protectionist trade policies are unclear. Hillary Clinton, on the other hand, represents the status quo, liberal democratic policies with some tweaks.
To give some historical light to this debate I would like to insert an edited section from my book: The Global Economy: Connecting the Roots of a Holistic System that explains the post-war economic order and the chaos of the 1970s, in which various forces vied for economic supremacy. Perhaps now is such a time again, as neoliberalism is being battered from various sides and may reassert itself or fall into the dustbin of history as it did in the 1930s.
The Post World War II Economy (1945-the 1970s)
In the spirit of wanting to avoid another Great Depression and world war, the major world economies met to discuss the post-war economic order in 1944 at the New Hampshire resort of Bretton Woods. Over the next three weeks, the delegates made plans for a postwar economic order, simply called Bretton Woods. The delegates forged three institutions to stabilize the post-war order: the International Monetary Fund (IMF), General Agreement on Tariffs and Trade (GATT) and the World Bank. The delegates settled upon a modified dollar/gold standard fixed at $35 to an ounce of gold. Many felt the dollar was a good monetary anchor for international trade, finance, and investment. The compromise brought stability to the world economy for 25 years. It also meant that labor was a powerful force in shaping policies that benefited them. The post-war years turned out to be a golden age for nations across the globe. Prosperity increased for many, and economic progress appeared to be limitless. It was generally a time of optimism and confidence in the future.
- The Golden Age of Capitalism
In the classical era of global capitalism, the elite generally had little concern for social or moral issues but said the market was a solution to all problems. After the war an ethical shift occurred. The West’s policies aimed to create more equal social policies in a new social democratic state. This ethic continued until the rise of neoliberalism in the 1980s. Managed capitalism reigned in the 1950s and 1960s. Some state-owned enterprises, usually large public services, coexisted with small businesses and free markets. Government was involved in the economy, along with a broad social safety net and powerful labor movements. A blend of active markets, strong governments, big business, and organized labor resulted in rapid rates of economic growth and stability. All prospered in this arrangement, but labor made the greatest strides. The golden age was a time of order and optimism.
- The Golden Age of Communism and Socialism
These nations made the case that central planning needed to replace global and national markets. They thought that the needs of poor people and poor countries for equality and a better standard of living could not be met by integration with world markets but adopting a command economy. From 1948-1973, the centrally-planned economies, such as the Soviet Union and Cuba, did quite well, and the results impressed many unhappy with the inequities of capitalism. Illiteracy dropped, and education improved. Medical care was free. Infant mortality dropped, often below that of wealthier countries. Communists and socialists ruled one-third of the planet and had millions of devout followers.
- The Golden Age for the Middle and Periphery Countries
The middle and periphery nations took two economic approaches. Most countries followed inward economic development of Import Substitution Industrialization (ISI). Others turned outward and promoted exports, such as in South Korea. The decision to adopt one or the other approach differed among countries.
The ISI countries largely closed themselves to foreign trade and industrialized. They met with general success. The newly independent colonies, likewise, kept out foreign goods and often foreign capital to build up their independent national economies. ISI governments’ aim was to make domestic manufacturing more profitable, and they provided tax breaks to investors in the favored industries. These policies resulted in industrial development, but at the expense of the primary exporting sectors, such as farming and mining. Farmers and miners paid more for tariff-protected manufactured goods, but had to sell their own products without government assistance at world market prices, which were usually low. Taxes on the primary exporting sector, in effect, subsidized favored national industries. ISI policies shifted resources and people from farming and mining to manufacturing, from the countryside to the cities, in an effort to help industry flourish.
In the mid-1960s four East Asian countries, the so-called “Asian tigers” – South Korea, Taiwan, Singapore, and Hong Kong – tried a different form of ISI: they pushed exporting their manufactured goods to core countries. The East Asians turned to export-oriented industrialization (EOI) in part because they had few natural resources to export, and the only way to earn foreign currency was to export manufactured goods. They specialized in exporting labor-intensive goods, using their hard-working and large pool of cheap labor as their comparative advantage. The government gave help to export industries and created plenty of jobs, and low wages kept exports cheap. Their exchange rates were also undervalued to make their exports more competitive on the world market, which also resulted in depressing consumers’ purchasing power.
For capitalists, communists/socialists, ISI and EOI nations, the early 1970s was the high-water mark of the postwar world economy. Almost all nations, including former colonies, grew rapidly and consistently. Prosperity reigned. But things were about to change.
The Crisis of the 1970s
The 1970s, like the 1930s, proved to be an important era in economic history. Looking at all the following factors as a holistic system we can see how all contributed to the 1970s crisis, it is hard to pin-point the major one. The United States’ position as the superpower of the capitalist world was suddenly hit from all sides, and the Bretton Woods system lay in disorder. Would the ruling powers be able to patch together the old Bretton Woods order again? Or would the old order be overturned and a different one established? The answer in the turbulent 1970s was not clear.
- The Dollar and Gold. Since 1944, the U.S. had been committed to the post-war international economic order –Bretton Woods. It was about to be undone. After 25 years of stability, its collapse unleashed a host of problems. Confidence in the dollar declined. Holders of dollars wanted to exchange them for gold, which led to a run on U.S. gold reserves. The dollar’s fixed rate of $1= 1/35oz. of gold needed to be undone and the dollar devalued. In August 1971, the U.S. decided that the dollar was not exchangeable with gold. The dollar dropped compared to other currencies by about 10 percent and devalued again by 10 percent in 1973.
- International Financial Flows. When the dollar/gold standard was undone, currencies were allowed to float; a nation’s currency value varies according to the foreign exchange market. As a result, the growth of currency speculation skyrocketed. International finance returned, along with economic instability. It had been inactive since the Depression years, with governments managing their own domestic monetary policies and capital controls to prevent currency speculation. Because of the collapse of the Bretton Woods order, speculators could now move money around the world in search of profits.
- Overcapacity. By the mid-1970s, the key problem for core economies was overcapacity or overproduction of goods. Capitalist economies have a tendency to build up more capacity to produce goods and services relative to consumption. Overcapacity was found in the U.S. and Europe. Also, newly industrialized countries like Brazil and South Korea added to overproduction. Yet, incomes limited the demand for the overproduced goods. Thus, overcapacity resulted in a steady decline in profitability for business.
- Stagflation. Inflation picked up in the U.S. in the late 1960s, going from about 3 percent in 1966 to nearly 6 percent in 1971. These rates were considered high at the time. Inflation spiked to over 10 percent in 1974 and again from 1979 to 1981. Adding to the economic misery, the unemployment rate topped 8 percent in 1975 and reached nearly 10 percent in 1982. Growth in the core countries slowed. Governments tried to stimulate their economies by increasing spending, but then inflation raged. The economy seemed trapped in the new, cleverly-termed nightmare of “stagflation:” a combination of low economic growth and high unemployment (stagnation) with high rates of inflation. Policymakers seesawed back and forth between trying to solve high inflation and then trying to solve high employment. Nothing seemed to work.
- Low Labor Productivity. The combined effects of rising wages and declining productivity growth resulted in large increases in labor costs per unit of output. While unit labor costs were constant in the first half of the 1960s, they grew at nearly 2 percent per year from 1966 to 1967, and at over 6 percent per year from 1968 to 1969. These rising labor costs, in turn, ate into business profits and added to inflation.
- Oil. The increase in the price of oil contributed to economic uncertainty and inflation. To some, the world price of oil had lagged behind inflation for decades, and was merely “catching up” in the 1970s. The major oil producing nations were tired of supplying cheap oil to the core nations and formed the Organization of Oil Producing Countries (OPEC) that regulated the price and production of oil. Since oil supplied half to three-fourths of the industrial world’s energy, oil importing countries were at OPEC’s mercy.
Decline of U.S. International Authority. The U.S. continued to be a major superpower in the world through the 1970s but it no longer enjoyed the dominance it had once experienced. The recovery of manufacturing in Western Europe and Japan meant more competition for U.S. firms in industries like steel and automobiles. Also, U.S. decline in the periphery undermined U.S. companies’ easy access to cheap materials and energy resources.
Social Movements in the United States. Mass social movements of the 1960s and 1970s – civil rights, women’s liberation, anti-war, gay rights, anti-nuclear, consumer rights, Native American rights and the environment – contributed to the crisis. Increased pressure for social reform gave rise to greater government regulation of private business. Before, government agencies had just regulated specific industries, but new social regulations included environment, consumer-protection, occupational safety and health, and anti-discrimination laws.
- Debt and Poverty in the Middle and Periphery Nations. With the return of international finance, middle and periphery nations could borrow money from private international bankers. And borrow money they did. Tens of billions of dollars a year flowed from banks and bondholders in the core nations to the borrowing middle and periphery nations. Inflation exploded. Their debts and interest payments soared.
ISI national economies were breaking under a number of problems. ISI nations favored industry over agriculture, which worsened rural poverty in countries that were heavily rural. Farmers migrated to the cities to look for jobs in the new industries. But ISI growth was very capital-intensive, and industrialists did not need much labor. Poverty awaited farmers who flooded into the cities seeking non-existent factory jobs. ISI countries often ended up as dual economies. Skilled workers earning fairly high wages worked in industries, government policy froze out a majority of struggling farmers and urban poor from the modern economy.
The socialist economies primarily relied on the export of natural resources – petroleum, gold, timber, minerals – but these would not be enough to pay for necessary imports. Although the socialist countries were not in crisis in the 1970s, signs warned of problems ahead. Socialist reform programs had stalled, and the central planners struggled with poor living standards, lagging technology, and declining growth rates. The 1970s signaled that the glory days of socialism would soon be over.
The Uncertainty of the 1970s
The postwar order (1948-1973) had achieved its goals. The capitalist countries got economic integration, coupled with a welfare state and a well-managed economy. Some of the middle and periphery countries built their industrial base, along with protection from foreign influence. The socialist countries got rapid industrial and economic growth and a somewhat equal distribution of income. But by the late 1970s, these goals had become more difficult for all three groups. The way forward was not clear.
The Shift to the Right
The late 1970s and early 1980s looked like the 1930s. Different interest groups fought each other over how to restructure national and global economies. There were the nationalists and globalists, free marketers and managed capitalism supporters; there were leftists who wanted socialism and rightists who wanted less government. Compromise appeared impossible. When the dust settled, it was the political right, the free-market supporters, who had gathered political and popular support. It wasn’t an over-night victory, the right had been working on its agenda throughout the 1970s and even before, but its victory was decisive and shaped the economic and political landscape to the present day.
The crisis of the 1970s marked the end of the “Golden Age” and the rise of neoliberal capitalism. Neoliberals wanted an end to social welfare programs, deregulation, and the dismantling of labor unions. It blamed government regulation, taxation, and social programs for what it thought to be the economic and moral decay of society. It tapped into and fueled a backlash against the civil rights and women’s movements. It also drew on the power of patriotism, since many Americans thought that their country was in decline. The right promised to restore the country to its rightful place of global supremacy.
Even though many Americans supported the turn to the right, it was largely a movement of the powerful. Some of the very largest corporations organized a campaign to make sure that they settled the crisis in a way that favored them. First, they set up “think tanks” which outlined a conservative economic agenda. Second, they stepped up their lobbying efforts of friendly government officials and put money into supportive business organizations, such as the U.S. Chamber of Commerce. Third, they financed conservative candidates for public office. These efforts in the 1970s played a big role in bringing about the “turn to the right.” The conservatives gradually displaced the managed, social democratic form of capitalism followed for over four decades in the U.S. with an agenda similar to the classical era. It would fall to Republican Ronald Reagan, elected president in a decisive showing in November 1980, to forge a new economic agenda in the U.S.
The crisis of the 1970s had ended with the emergence of a neoliberal version of capitalism. It was a well-planned change to a system that benefited specific groups of people. The golden era of post-war capitalism in the U.S. was a time when there was a balancing act among government, labor, the middle class, and business interests. Although not perfect, all groups generally profited from the cooperation. Yet, many business groups felt they were limited in their ability to make more profits. Big business interest group organized and funded an agenda to take the lead in shaping the future economic system. For them, their hard work and investments paid off.
As the world’s leading economy, the U.S. had a more significant role in shaping the global economy than other countries. Three dimensions to the global economy took shape out of the disorder of the 1970s – neoliberalism, economic globalization, and financialization.
Today, Europe clings to the social democratic policies since the 1930s with a generous social safety net, but it also competes with countries practicing neoliberalism, such as the U.S., that has seen a fraying of the social safety net. State capitalism, a carryover from communist command economies, continues in China, Russia, Saudi Arabia, and elsewhere. Perhaps the Brexit vote will mean a move to more nationalistic, protectionist economies, reminiscent of the ISI economies in the 1950s and 1960s. Or perhaps the supporters of neoliberalism will once again assert that their principles govern the world economy.
- Why did different economic models exist during the post-war years?
- Why was there a return to the classical era of laissez-faire capitalism (neoliberalism) in the 1970s?