Burying neoliberalism

...But Friedman's work opened the door to the wholesale repudiation of the idea that free markets could be inherently flawed in favor of the old thesis that bad government policies are the sole source of economic trouble...

...We want to retain the innovative capacity and flexibility of markets, but we must promote human development over the destabilizing use of capital that led to the current financial collapse...

...Many, though not all, economists agree that bad policies during the banking crisis of the 1930s, particularly the government's slow response to the crisis, which resulted in thousands of bank failures and the evaporation of credit in the economy, turned a terrible industrial slump into a calamity...

...Therefore, a general decline in wages will be matched by an associated decline in prices and buying power, which cannot generally lead to a revival of production and employment...

...But the central problem noted above remains: what do we do about the labor market...

...Because the economic authorities in the United States and around the world are responding to the current crisis with strong efforts to boost demand and rescue banks, the mistakes of eighty years ago won't be repeated...

...government, are avoiding the dreadful policy mistakes that worsened the misery of the 1930s...

...Liberal-left economics has its own fundamental flaw: a regime that promotes high employment and economic security for the working majority also tilts the distribution of income in favor of labor and wages, away from capital and profits...

...This view has a powerful implication: capitalism must be restructured so that both human and technological development are the primary priorities of our investment system...

...Thus, any political economy that favors wages at the expense of profits will tend toward stagnation...

...In turn, one way to keep labor markets "flexible" is to limit social benefits, thereby making sure that workers must work for income and whatever benefits they may be able to garner and, of course, to limit unions by making workers into inert, pliable things...

...The usual argument among classical liberal economists was and is that government regulations, especially minimum-wage laws, support for trade unions, and social safety nets, prevent wages from falling far enough and fast enough to eliminate unemployment...

...Employment and incomes are falling at a sickening rate, with the official American unemployment rate rising from 4.8 percent of the labor force in January 2008 to 8.5 percent as of April 2009...

...The first and most important task of the liberal Left is to turn capital into the servant instead of master of society by converting labor from an input into an asset...

...Yet, classical liberalism was able to survive because the liberal Left, with its mix of redistribution and economic management aimed at preventing mass unemployment and gradually eradicating poverty, made a basic mistake...

...Recall that the law of supply and demand is based on the idea that bargaining between buyers and sellers in an unregulated market will result in a rough balance between the amount buyers want (demand) and the amount sellers want to provide (supply)-a limited price range called, for the sake of convenience, the "market price...

...The policy implications of modern classical liberalism-like its depressionage precursor-are clear enough: the best way to manage capitalism is to make sure that the labor market is "flexible," which in turn means that workers have to behave themselves by responding in the right way to the balance between supply and demand...

...At the same time, liberal economists and Nobel laureates Paul Krugman and Joseph Stiglitz made no secret of their disdain for the government's efforts as too small to be effective and too solicitous of an incompetent banking and financial oligarchy...

...And a liberal president confronts a scary menu of very risky options...

...Capital needs competent and inexpensive labor-made cheap because its wages are more than matched by its very high productivity-but is opposed to paying the cost of creating and maintaining the necessary pool of skilled workers...

...We must teach all who will listen and learn from this crisis that unregulated markets turn people into trash-and that we must not accept...

...Incentives for risk-taking, innovation, and investment will be dampened by redistributive taxation and economic regulation...

...Burying neoliberalism MARCELLUS ANDREWS As I write, in late April of 2009, the citizens of rich capitalist societies are watching their jobs, wealth, and life plans being laid waste by an economic collapse every bit as ferocious as the crisis of the 1930s...

...Instead, prices could only rise in a sustained way if firms' costs rose, which in turn could only happen if workers were in a good position to demand higher wages...

...The economic crises of the 1970s and 1980s allowed classical liberalism to emerge out of its depression-era disgrace...

...Modern economics, despite its awful record during its dangerous dalliance with the classical liberal cult, has taught the world that sustained economic prosperity is rooted in the creation of knowledge-and of healthy, knowledgeable, and capable men and women across society...

...The classical model was effectively destroyed by Keynes's General Theory as well as by later work by a generation of liberal economists inspired by his example...

...When sellers offer more of something than buyers want, competition between sellers will force prices down, thereby leading to both an increase in purchases as well as a reduction in the amount of products offered by sellers...

...These values, shared by classical liberals, egalitarian liberals, and democratic socialists alike, are viewed with an anti-utopian realism by all sectors of the Left, given our understanding of the strengths and weaknesses of the market mechanism...

...Modern technical economics is analytically prepared to rethink the process of investment and correct the balance between human and business development, if only left liberals learn the critical lesson from capitalism's second great crash in four generations: capital markets cannot be relied on to guide economic development without supervision...

...The Chicago program succeeded in marginalizing John Maynard Keynes's analysis of the sources of recession and depression in his masterwork The General Theory of Employment, Interest and Money, which clearly explained why mass unemployment was a regular and necessary feature of unregulated free market systems...

...This example may seem utopian until we realize that the United States engages in an ongoing process of capital reallocation and planning via changes in the tax code and regulatory reform tilted in favor of corporate investment...

...Free market economic thought has buckled under the weight of the market's wreckage, revealing the remaining proponents of unlimited markets tended by a subservient government to be witless ideologues and charlatans...

...The current crisis, the second collapse of the classical liberal model (after the Great Depression), offers the Left an opportunity to cripple the market Right-so long as leftists do not repeat the mistakes of our forbears during the long era of liberal-left dominance between the end of the Second World War and the 1970s...

...Faced with raising prices, workers would want their wages to rise ahead of price increases in order to protect their buying power...

...The Chicago project of turning labor into just another thing to be traded for money has come to nothing, or worse than nothing, just as its equivalent vision of seamless and omnicompetent capital markets to manage risk turned into a maelstrom of financial destruction...

...Yet, I suggest that left economic radicalism and analytical economics are quite compatible...

...The current crisis bears more than a passing resemblance to the Great Depression...

...DISGRACE FOR THE ECONOMISTS The revival of classical liberalism in macroeconomics was led by the ambitious intellectual and political program of the late Nobel laureate Milton Friedman and the University of Chicago's economics department...

...Indeed, investments in education deliver much more reliable returns than common stocks, because asset markets are prone to violent and irrational fluctuations, not to mention the panics and crashes of the past couple of years...

...after 1975 at the University of Chicago or other classical liberal departments...

...Negrophobia) but are trying to reverse the nation's economic slide by expanding the budget deficit to gargantuan proportions...

...Marcellus Andrews is a professor of economics at Barnard College of Columbia University...

...For the moment, free market zealotry and the cruelty it inspires have been routed by real capitalism...

...Even the most sober economic analysts are suggesting that one in ten American workers may be out of work by year's end...

...The Great Depression revealed how mass unemployment and poverty are an essential part of the free market mechanism and demonstrated that unregulated markets are incompatible with individual liberty and social peace in a democratic order...

...This finding in no way contradicts, and in many ways strengthens, Keynes's thesis that capitalist economies are prone to periods of mass unemployment because these systems might fail to generate a large enough demand compared to their prodigious power of production...

...The aim is to end the underinvestment in the minds and bodies of all our citizens, especially those trapped in poverty...

...His current book projects are "Economic Policy and the Road to Social Justice" (completed manuscript) and "Race, Distribution and Growth" (in progress...

...One might be able to claim that workers in a strong social democratic society, with extensive social benefits and supports for unemployed workers, could demand high wages-employed workers will feel safe to push employers given the high degree of social protection...

...Of course, this places the burden of financing human development on the shoulders of ordinary men and women who don't have the resources required to provide health care and education on an equal basis...

...CRIPPLING CLASSICAL LIBERALISM The classical liberal era promised modest prosperity to most, vast riches to a few, and silent yet somehow obedient penury on pain of prison to a substantial number of the rest-if societies would just liberate capital from the shackles of regulation within nations and limits on capital mobility among nations...

...An example may suffice...

...This is not the place to show how ordinary economic theory can be recruited to the task of radical economic reform...

...The revolutions in technology and production that drive the form of capitalist development called "creative destruction" by the great economist Joseph Schumpeter, a conservative contemporary of Keynes and a critical admirer of Marx, are ultimately based on the expansion of knowledge and capability among all members of society...

...American conservatives fashioned an extensive critique of welfare states as barriers to robust development because of their "excessive" concern to avoid mass unemployment and economic inequality...

...The argument that depressed economies cannot be revived by wage cuts has been resisted by classical liberal economists for decades because it suggests market systems cannot extricate themselves from slump conditions without help from governments...

...A housing boom turned bust has destroyed a global financial system once cited as proof that unregulated finance could convert greed into a cornucopia for the masses-if only ham-handed governments kept out of business affairs...

...This tendency can be resisted if left-liberals fashion a regime of redistribution married to a high-octane knowledge economy, combining technological dynamism with a humane but insistent pressure in favor of flexibility in occupations and ways of work...

...It is time to liberate labor and manage capital...

...The only way mass unemployment could occur is if workers were unwilling to accept low wagesin which case their "unemployment" was due to their excessive greed-or if employers were unable to offer low enough wages because of government minimum-wage policies...

...The predatory character of modern capitalism is revealed by the stark contrast between what the system needs and what it will pay for...

...Workers, as sellers of labor, can therefore always find a job if they are willing to settle for wages low enough to permit employers to hire them and earn a profit...

...Lucas and his colleagues revived an analysis of economic activity popular before the Great Depression, called the classical model, which purported to show that unemployment in a market economy could only happen if workers demanded wages that exceeded the value of their labor to employers...

...The current crisis reteaches the lesson of the Great Depression: capital unbound is capitalism and society undone...

...Classical liberal economic thought emerged from its disgrace during a time of rapid inflation, high unemployment, and economic stagnation in the 1970s...

...In turn, workers' bargaining power with their employers would be especially strong if unemployment rates were low...

...Baby boomers on the brink of retirement face the evaporation of their life savings...

...Once-detested liberals were not only granted control of Congress and the White House (as voters cast aside ordinary U.S...

...Indeed, the classical liberal goal of the past thirty years was not so much the end of government involvement in the economy as it was the recruitment of government to the task of liberating capital from its responsibilities to societyespecially workers and citizens...

...The primary difference between the last depression and our current troubles, which may yet avoid the economic abyss, is that governments across the world, and especially the U.S...

...Capital's reign has come to an end in a vicious crash, with ruined lives, bankrupt nations, and the free market model in tatters...

...But the decisive steps that the authorities are taking represent a stunning repudiation of almost all contemporary macroeconomics since the beginning of the classical liberal revival in the 1970s...

...The foregoing analysis implies that the best way to deal with an inflation problem is deliberately to push up the unemployment rate enough to break the capacity of workers to demand higher wages, which is precisely what the Federal Reserve under the leadership of Paul Volcker-the current head of Obama's Economic Recovery Advisory Board-did in the late 1970s and early 1980s...

...Employers would then find themselves with rising wages in the midst of high unemployment...

...Imagine a situation where the prices of all the goods and services that working people need are rising, perhaps because of an oil price explosion due to political maneuvers by Middle Eastern oil producers or a failed harvest leading to a shortage of crucial grain supplies...

...Friedman's research on the role of bad economic policy in making the Great Depression worse than it need have been suggested that government failure was at least as culpable in causing economic catastrophe as market failure...

...Friedman and his associates scored an impressive ideological victory by using mathematical and statistical methods to obscure capitalism's tendency to generate recession, depression, and mass unemployment...

...Worse, we have no mechanism for determining the best mix between investments in people and investments in productive capital, in large part because we have designed our system for accumulating and allocating capital on the assumption that people are inputs rather than assets-and then granted private capital an exemption (in the form of very low taxes) from paying for human resources...

...Of course, this turns labor into an input and therefore a cost item that must be used most efficiently, meaning at minimum cost...

...Conservative parties and policies that only a short while ago were called midwives to an age of limitless prosperity built on free markets, small governments, and a stoical acceptance of the sufferings of the poor are now objects of popular ridicule and disgust...

...Any situation where the wages of the bulk of the working population fall is bound to lead not only to lower production costs for firms, which should lower the prices they charge to customers, but also to fewer customers, who spend less because they have lower wages...

...The administration and the Federal Reserve are pursuing a bank rescue program that consists of a staggering two trillion dollars in loans, loan guarantees, and capital injections into the banking system as well as purchases of forms of economic securities-the infamous "collateralized debt obligations" known as "toxic" assets-in a desperate effort to prevent the complete collapse of the banking system...

...Left-liberal politics has to place human development at the center of economic policy by creating new institutions, including human development banks, a unified system of national educational finance, and a new set of regulatory mechanisms that monitor the allocation of capital between human development and other uses...

...Of course, there are a number of flaws in this analysis, not the least of them the notion that people without jobs are in a position to demand anything...

...The ruling idea among the (very mildly) liberal mainstream of the time was that a modern economy could not experience high unemployment and high inflation at the same time...

...many more are employed but frightened, with mortgage payments they cannot meet and without recourse or remedy should they become gravely ill...

...Human beings, from birth to death, must be treated as the purpose of economic activity rather than the means by which owners create wealth...

...Every slump is due to excessive risk-taking in banking and finance, radical increases in economic inequality within nations, substantial levels of excess industrial capacity (this time on a global scale), all of which combine to create conditions of extreme economic fragility...

...We cannot go back to the old formulas, because these make American workers more expensive and vulnerable to global competition...

...This means more than the usual economist's claim that the purpose of economic activity is consumption via the production of goods and services to satisfy human needs...

...One of the many flaws of the model is obvious to anyone except, perhaps, an economist who earned his or her Ph.D...

...At present, we have a very badly designed system for investing in people-whether in schools, health, or other elements of human development-because our system is an inefficient mix of local governments (primary and secondary schools), financial institutions (college loans), and insurance companies (health insurance...

...The imploding classical liberal regime that gave carte blanche to capital markets is ultimately based on a belief-despite the evidence-that economies are prosperous when investors are granted nearly unlimited freedom to craft organization and forms of work that promote maximum profitability...

...How did classical liberalism survive its failure in the 1930s...

...However, the decisive step in the intellectual revival of classical liberal economic policy, one that explains why governments today are fighting recession and depression by pointedly ignoring mainstream economics, came when Nobelist Robert Lucas of the University of Chicago, along with his globe-straddling research cohort, developed a theoretical approach to macroeconomics that deliberately ruled out the possibility of mass unemployment under capitalism...

...How could a theory that deliberately rules out economic calamity as a consequence of the operation of market economies become dominant in the economics profession, to the point where right-wing and so-called centrist governments rely on this theory to craft public policies...

...That left the ultimate control of the deployment of resources in the hands of business via capital markets, thereby putting the liberal Left in the awkward position of sponsoring an economic regime that increased the costs of labor in a global economy where cheap labor was abundant...

...The Obama administration's dramatic stimulus package, though criticized as too small, nonetheless moves to rescue the American economy from the effective demand crisis following on the financial crisis brought about by the collapse of the housing bubble and other forms of gonzo finance on Wall Street...

...Yet, the Chicago revival of classical liberalism won the day in the economics profession, as well as among right-wing politicians...

...Although this claim is correct, it is indifferent to a prior and more powerful claim given voice by Nobel laureate Amartya Sen: the purpose of economies is to promote maximum human freedom, which in turn means that economies must become engines for creating and disseminating capability-enhancing resources to all...

...Throwing people out of work for extended periods of time, until they use up their savings and unemployment benefits (should these exist), will convince workers to take whatever jobs are available at whatever rates of pay are on offer...

...But this picture did not and does not apply to the United States, which has a feeble social safety net as well as very weak unions...

...In a similar vein, the idea that financial systems can become so enmeshed in excessive risk-taking that bubbles give way to panics and crashes is likewise resisted by the dominant wing of the economics profession because such analyses repudiate the classical model of a self-regulating market economy...

...Economists estimate that the social rate of return from good schools-a measure that includes not just higher wages but also lower rates of unemployment, poverty, illness, crime, and incarceration-is quite high, on the order of 10 percent per annum, comparable to the very long-term rate of return on common stocks...

...The problem for leftliberals is simple to name but hard to manage: our old model favored labor by favoring wages instead of favoring labor's claim to the transformative powers of technology, knowledge, and markets...

...The simultaneous appearance of high inflation rates and high unemployment rates in the 1970s allowed the classical liberal idea that unemployment was due to high wages to reemerge in a new context: workers, it was said, were demanding high wages now in anticipation of higher prices later...

...Left-liberal economic policy must demote capital markets and financial institutions from central to subordinate players whose performance is judged by the extent to which they contribute to the steady and ever more widely shared benefits of economic development...

...So the liberal Left has another chance to build a free, just, and stable economic order-presuming we can somehow traverse the abyss of depression-if we can find a way to provide work and decent pay to ordinary people in a global labor market filled with equally talented, ambitious, and yet desperately poor people...

...Does all this mean that the neoliberal program is permanently discredited...

...Millions of workers have been left without jobs...

...No, because neoliberalism or, better, classical liberalism, is a specific cluster of three cardinal values-liberty, equality, and efficiency-which together make up the economic core of a market-based liberal democratic order...