The Hidden Successes of Failed Economic Policies

...MOST MAINSTREAM ECONOMISTS BELIEVE that macroeconomic stabilization and adjustment are unrelated to questions of class...

...however, in the case of Peru, the transition to civilian rule was accompanied by a continuation of neoclassically inspired policies...

...Structuralist economists, on the other hand, criticize this market-oriented orthodox policy package and, instead, advocate such "heterodox" policies as wage-and-price controls and other interventions by the state into markets...

...Structuralist economists criticize this neoclassical story and the policy of little or no state intervention...

...It, too, is poised to join the ranks of policy failures...

...governments need only intervene to eliminate "market imperfections" (i.e., barriers to the carrying out of rational autonomous free choice...

...Venezuela, having lately received banner headlines in the business press for successfully swallowing the bitter pill of neoliberal policies, has suffered its second coup attempt in the past year...

...Once appropriated, the surplus labor is distributed to still others, such as merchants, bankers, and the state-both inside and outside Latin America...

...A Self-Critical Farewell," Report on the Americas Vol...

...THE LATIN AMERICAN LANDSCAPE IS LIT- tered with failed economic policies-or so it would seem.' State-led development, authoritarian free-market strategies, heterodox programs to combat hyperinflation, and neoliberal privatization-all have been tried at one time or another over the course of the last 20 years...

...8-22, and S. Cullenberg, "Socialism's Burden: Toward a 'Thin' Definition of Socialism," Rethinking Marxism 5 (Summer 1992), pp...

...8 In the first instance, employers are able to hire workers for a wage that is less than the value of the customary standard of living of wage earners...

...In all three cases, TABLE 2 Stabilization and Adjustment Policies, 1970s-1990s Orthodox (1976-83) Middle Position (1974-79) Orthodox (1975-80) Middle Position Heterodox (1983-85) (1985-87) Orthodox Heterodox (1979-85) (1986-87) Orthodox Heterodox (1980-85) (1985-89) Orthodox (1988-92) Orthodox (1988-92) Orthodox (1990-92) VOLUME XXVI, NUMBER 4 (FEBRUARY 1993) ' 41A Market Solution...

...The first presumes a kind of conspiracy...

...Instead, the current debate over stabili- zation and adjustment continues to move within the narrow limits set by standard-neoclassical and structuralist-economics...

...To be clear, I am not arguing that a particular groupsay, the "ruling class"-has a clear notion of class and sets out to strengthen class relationships...

...3. L. Taylor, Stabilization and Growth in Developing Countries: A Structuralist Approach (New York: Harwood Academic Publishers, 1989) and Varieties of Stabilization Experience: Towards a Sensible Macroeconomics in the Third World (Oxford: Clarendon Press, 1988) are the most comprehensive English-language presentations of the criticisms ofneoclassical policies, the alternative framework ofanalysis, and the heterodox policies put forward by structuralist economists...

...Instead, they argue that the problem of stabilization and adjustment is grounded in power relations and other economic and social structures...

...It is the existence of such given or natural structures, not indi- vidual human nature, that plays the central role in the structuralist story...

...The capitalist process of appropriating surplus-value is thereby strengthened inside the state...

...Focusing attention on class is one way of expanding the existing limits of the debate...

...By "repressing" class within that debate, neoclassical and structuralist economists can avoid concerning themselves directly with the class consequences of the policies they advocate...

...Nor is there any societal logic that requires that class be successfully reproduced or reinforced all the time...

...Indeed, such class successes as we have discussed are also always being threatened with failure...

...Bringing class back into the debate-and thereby pointing out the class successes that have occurred throughout the post-war period-helps explain why development economists and policymakers are content to remain within the limits of the current debate...

...see, for example, A. Escobar, "Reflections on 'Development': Grassroots Approaches and Alternative Politics in the Third World," Futures (June 1992), pp...

...Classes, if they play a role at all (e.g., as in some structuralist accounts where the term sometimes appears), merely designate groups of economic agents who claim different flows of money income and who act on the basis of different psychological propensities to consume, save and invest...

...This advantage, of course, leads to an increase in the capitalists' rate of profit, an immediate class success created by the decline in real wages.' If this situation continues for any length of time, then the customary standard of living of wage earners can be expected to decline...

...Nor am I arguing that there is an unconscious logic or mechanism that requires nonclass policy failures to result in class successes...

...A second failure attributed to stabilization and adjustment policies, especially heterodox ones, is an increase in government budget deficits...

...How, then, can a situation arise-inflation or a balance-of-payments deficit-that calls for stabilization and adjustment measures...

...First, from a class perspective, public enterprises which produce capitalist commodities in a capitalist (employerworker) setting are capitalist enterprises...

...According to the neoclassical story, a temporary disequilibrium may appear if an unantici- pated "shock"-in the form of a sharp rise in the price of VOLUME XXVI, NUMBER 4 (FEBRUARY 1993) 39A Market Solution...

...An alternative explanation is that results that appear to be failures when measured in terms of standard criteria such as unemployment, inflation, and the balance of payments, can be considered successes when viewed from a different perspective...

...4 They agree that success entails restoring internal and external balance-that is, creating the conditions for full employment, price stability, and balance-of-payments equilibrium...

...Before them, most recently in the mid-1980s, the heterodox policies supported by structuralists were tried...

...They simply don't see how the existence and reproduction of capitalist (and other forms of) exploitation is affected by-and, in turn, affects-stabilization and adjustment...

...Structuralists, on the other hand, believe rigidities and other "imperfect" features prevent the economy from automatically returning to full equilibrium...

...4 1 1-36 and A. Escobar and S. Alvarez, eds., New Social Movements in Latin America: Identity, Strategy and Democracy (Boulder: Westview, 1991...

...The failure of both approaches to create price stability, full employment, and balance-of-payments equilibrium may well mask considerable success precisely in terms of the class dimensions that are usually left out of the existing debate...

...oil, for example-occurs and individuals have not yet had time to adjust...

...Indeed, they may be quite misleading and politically ruinous as ways of analyzing events...

...Neither of these traditional forms of explanation is particularly useful...

...The United Nations' Economic Commission on Latin America and the Caribbean (ECLAC) led the way in Latin American development thinking and policy during this period...

...3 They argue instead that markets are inherently imperfect stabilizers and that, if left to themselves (i.e., without state guidance or intervention), they will not be able to restore macroeconomic balance...

...Today, however, these free-market policies are falling under heavy criticism...

...12 It makes it possible to conceive of the elimination of all forms of exploitation and therefore to imagine-and create-more collective and communal ways of organizing society...

...OF COURSE, THE EXPLANATIONS OF FAILure are different according to the two approaches...

...Structuralists, for their part, argue that "their" policies were made increasingly orthodox and that, therefore, the instabilities created by overly free markets were allowed to predominate...

...This disagreement between neoclassical and structur- alist economists about the appropriate set of stabilization and adjustment policies stems, in large part, from the different theories they use-or, in other words, the different stories they tell about the economy...

...Why the continued adherence to failed theories and policies in Latin America...

...It is precisely class analysis that makes it possible to see-and to criticize-the contradictory class effects of the different stabilization and adjustment policies that have been practiced in Latin America...

...It is precisely the assumption that human beings make rational decisions based on full and complete information, and a logic that reduces all aspects of the macroeconomy to these individual decisions, that serve as the basis of the orthodox set of policy measures advocated by the IMF and an increasing number of finance ministers and research centers throughout Latin America...

...Structuralists criticize the neoclassical idea that macroeconomic phenomena can be adequately explained by individual human behavior...

...However, once we consider the class dimensions of stabilization and adjustment, the usual claim that both sets of policies have failed turns out to be seriously misleading...

...Maintaining or increasing expenditures on a wide variety of programs provides many of the economic, cultural and political conditions whereby non-state or private capitalists can continue to appropriate surplus-value...

...Instead, the class successes that have occurred in Argentina, Brazil, Peru and elsewhere in Latin America are the result of an ever-changing combination of circumstances, including economic and political struggles, as well as state strategies to deal with the problems of stabilization and adjustment...

...Class is eliminated from discussion precisely because both neoclassical and structuralist economists focus on these nonclass aspects of capitalism which, in turn, are ultimately explained in terms of an underlying nature in which classes and class exploitation simply do not exist...

...To accept the existing terms of theoretical and policy debate is also to accept the criteria of success and failure defined by that debate...

...Once again, the initial promises of success have been followed by eventual failure...

...They also agree on the criteria of success and failure in devising appropriate economic policies: full employment, price stability and balance-of-payments equilibrium...

...7 Later, under the civilian Alfonsin government, the Argentines moved from policies associated with the middle position to the heterodox Austral Plan inspired by structuralist economic theory...

...Rethinking Marxism 5 (Summer 1992), pp...

...It, too, was declared a failure and was followed by an increasingly orthodox set of policies...

...T HE PROBLEM WITH BOTH SIDES OF THE debate (and, of course, with the ever-present "middle position" that serves to bring the two sides together) is that they ignore the issue of class...

...It is useful to consider two different dimensions of typical state activities which are often tied to fiscal deficits: stateowned enterprises and current government expenditures...

...In the Marxian story, surplus labor is pumped out of the direct producers in the capitalist form of surplus-value and in a variety of other noncapitalist ways...

...2 The same oscillations have characterized the debate over shorter-run stabilization and adjustment policies in REPORT ON THE AMERICAS 38Latin America...

...6. Two good overviews of the use and effects of different stabilization and adjustment policy packages in these countries and in the rest of Latin America are H. Handelman and W. Baer, eds., Paying the Costs of Austerity in Latin America (Boulder: Westview Press, 1989) and W. L. Canak, ed., Lost Promises: Debt, Austerity, and Development in Latin America (Boulder: Westview Press, 1989...

...It is in this sense that while structuralist economists-unlike their neoclassical counterparts-often refer to power relations and other economic and social structures, they end up overlooking both the existence and the important social effects of exploitation...

...uncertainty and ignorance on the part of important groups of economic actors...

...But the verdict remains the same: Latin America continues to suffer widespread unemployment, inflation, and balance-of-payments difficulties...

...Various "phases" and new plans were announced but in all three countries, recession and hyperinflation returned, and external debt payments were suspended...

...These countries have served as a kind of economic laboratory for economists of both schools (and, Argentina of course, the middle position) during the past 20 years...

...Attempts to free up markets by eliminating government spending programs, increasing real interest rates to attract savings, and lowering tariff barriers often lead to increased unemployment and underemployment among wage earners...

...Yet, these failures have not led to the abandonment of either the policies or the economic theories that give shape to those policies...

...Thus, what is considered a failure in terms of providing jobs for all workers and maintaining workers' real living standards may thus be successful when viewed from the perspective of strengthening capitalist class processes...

...The usual explanation is that the theories and policies have worked elsewhere, but that Latin Americans have failed in implementing them...

...Stabili- zation and adjustment are automatic if individual eco- nomic agents are allowed to carry out rational decisions in free markets...

...We can begin with the assumption that capitalists pay a wage (W) equal to the value of labor power, i.e., W = V. Then, if the real wage falls (while the customary standard of living remains the same), capitalists are able to purchase labor power at less than its value, i.e., W < V. Laborers are, in effect, paying a subsidy to the capitalists (equal to the difference between W and V) in order to be hired...

...In the structuralist story, the presence of such naturally existing economic and social structures-which neoclassical economists assume away-requires government intervention in order to achieve the desired macroeconomic objectives...

...64-83...

...4. A. Foxley, the current minister of finance in Chile and a member ofCIEPLAN (Corporaci6n de Investigaciones Econ6micas para Am6rica Latina) in Santiago, is probably the best-known Latin American econo- mist associated with the middle position...

...6 Both orthodox and heterodox policy Brazil packages (and various combinations thereof) have been applied in order to correct the Peru macroeconomic imbalances associated with inherited domestic policies and the turmoil within the world economy...

...Now, neoclassical economists and their orthodox policies predominate...

...The capitalists are now able to appropriate the original S and, in addition, the revenue associated with purchasing labor power at less than its value (R = V - W...

...It falls to Marxists and others on the Left to point out that the problem of stabilization and adjustment is not independent of class...

...8.A decline in real wages and an increase in poverty are common results of orthodox policy packages...

...24, No...

...In this sense, the ability to maintain and control fiscal deficits may actually strengthen the capitalist class process of appropriating surplus-value...

...In the structuralist story, economies in Latin America are also characterized by such non-neoclassical structural phenomena as incomplete financial markets...

...For a discussion of the differences among contemporary approaches to radical economic analysis generally, see S. Resnick and R. Wolff, "Radical Economics: A Tradition of Theoretical Differences," in Radical Economics, pp...

...Argentina, for example, started out with the most orthodox package in the mid-1970s...

...Aggregate supply is a direct reflection of individual choice and human productivity...

...See, for example, P. Glewwe and G. Hall, "Unorthodox Adjustment and Poverty in Peru," Finance and Development 29 (December 1992), pp...

...In particular, it adds an important dimension to current attempts to redefine the goals and procedures of development.'I It is also an important ingredient in rethinking the future of socialism or, as the late Alberto Flores Galindo suggested, of "imagining new scenarios...

...201-25, and Latin American Experiments in Neoconservative Economics (Berkeley: University of California Press, 1983...

...7. See Foxley, Latin American Experiments...

...14-43...

...In the neoclassical story, the economy, if left to itself, will always supply a level of output corresponding to full employment...

...For example, structuralist economists argue that prices are not determined by the free interplay of supply and demand in competitive markets, but rather are set, within limits, by powerful large firms...

...Brazil, on the other hand, began with middle-position policies and only later turned to an orthodox policy package...

...The Hidden Successes of Failed Economic Policies 1. 1 would like to extend my thanks for useful comments and suggestions to Fred Rosen, Stephen Resnick and Joseph Buttigieg...

...In the language of Marxian value theory, the market price of labor power has fallen below its value...

...5 (February 1991), p. 9 . On alternative views of socialism, see D. F. Ruccio, "Failure of Socialism, Future of Socialists...

...see his "Latin American Development after the Debt Crisis," Journal ofDevelopment Economics 27 (October 1987), pp...

...Now, ECLAC and other structuralist research centers have fallen from prominence...

...TABLE 1 Stabilization and Adjustment Theories and Policies Theory Policy Neoclassical Orthodox (free markets) Causal Force Human Nature Structuralist Heterodox (state intervention) Economic and Social Structures According to neoclassical economists, as long as rational choice (human nature) is allowed to operate freely through competitive markets, the economy as a whole will reach an equilibrium of full employment, price stability, and external-payments balance...

...The rationale of all three heterodox plans-Austral, Cruzado and Inti-was that previous stabilization and adjustment programs did not conform to the structural problems of Latin American economies, particularly the inertial or structural nature of inflation, and that government controls were necessary to bring each economy back to full equilibrium...

...The failure of mainstream economic policy to provide full employment masks its considerable success at strengthening capitalist labor markets...

...5. For an extended discussion of the differences between power and class in radical analyses of debt and development, see D. F. Ruccio, "Power and Class: The Contributions of Radical Analyses to Debt and Development," in B. Roberts and S. Feiner, eds., Radical Economics (Boston: Kluwer Academic Publishers, 1992), pp...

...David Ruccio is on the editorial board of the journal Rethinking Marxism and is associate professor of economics and faculty fellow of the Kellog Institute at the University of Notre Dame...

...Then, when those policies were widely believed to have failed, the centrist Sarney government experimented with its own heterodox Cruzado Plan...

...Martin's Press, 1991) are good overviews of the general debate among development economists in the post-war period...

...Thus, capitalists receive a revenue in addition to the surplus-value extracted from the laborers...

...The disequilibrium may even persist if market imperfections, such as rigid wages or government control of foreign-exchange markets, prevent individuals from carrying out the appropriate adjustments...

...Both H. W. Arndt, Economic Development: The History ofan Idea (Chicago: University of Chicago Press, 1987) and C, P. Oman and G. Wignaraja, The Postwar Evolution ofDevelopment Thinking (New York: St...

...minimal levels of risk-taking investment...

...Focusing on class also shows a way out of this continued oscillation between failed policies...

...The challenge facing the Left, therefore, is to move beyond its traditional critique of free-market neoliberal policies and its close association with the more state-centered structuralist pole of the debate, and to call into question the limits imposed by both sides of the debate...

...These state capitalist enterprises may and often do differ from capitalist enterprises in a host of ways: in terms of property ownership, the procedures for appointing managers, access to funds other than from sales, etc...

...Early on in this century, neoclassical economists-who support a strategy of development based on free markets and more private forms of capitalism-had the upper hand...

...10-13...

...It is also a necessary step toward the creation of social arrangements in which class exploitation is done away with...

...Perhaps the policies put forward by neoclassical and structuralist economists have failed to achieve macroeconomic balance but, in their different ways, they have contributed to increasing exploitation, and to expanding and strengthening the economic and social conditions of that exploitation...

...Only later, when the populist Alan Garcia was elected, was a heterodox policy package, known as the Inti Plan, tried...

...And all have been declared failures...

...Therefore, we can expect that sooner or later-in Argentina, Brazil, Peru, and elsewhere in Latin America-the stabilization and adjustment pendulum will once again swing away from neoclassical orthodoxy...

...Class either does not exist for neoclassical and structuralist economists or it is defined in a manner which rules out any consideration of the processes in and through which surplus labor is performed, appropriated and then distributed...

...199-227...

...For a more extensive discussion of the state and of state capitalist enterprises, see D. F. Ruccio, "The State, Planning, and Transition in Nicaragua," Development and Change 18 (1987), p. 527...

...1 Thus, maintaining or increasing the revenues to these state capitalist enterprises draws more of the population into capitalist social relations, and increases the amount of surplus-value appropriated from state workers...

...The pendulum has swung back to neoclassical economics: export promotion and the kinds of neoliberal strategies discussed elsewhere in this report...

...However, the heterodox stabilization and adjustment honeymoon proved to be shortlived...

...However, if the state enterprises are sites where the extraction of surplus-value takes place, they are no less capitalist than capitalist enterprises outside the state...

...Price and wage constraints, industrial policies, foreign-exchange regula40 REPORT ON THE AMERICAS 40 REPORT ON THE AMERICAStions, and government spending programs are all part of the heterodox policy package...

...The other is based on a notion of a disguised telos or inner law which impels society in a necessary direction...

...This increase in unemployment is usually accompanied by a decline in real wages which, in turn, can strengthen the class dimensions of capitalism...

...Thus, Latin American states are often actively involved in shaping the existence of capitalist class processes both within and outside the state...

...Named after the new currencies introduced in the three countries, the structuralist-inspired plans consisted of the de-indexing of all contracts (such as rents and savings accounts) in addition to wage-and-price controls and targeted subsidies and credits-quite the opposite of neoclassical liberalization...

...Failure and success are thus relative notions-and we must be careful how we use these terms...

...Precisely because class is repressed within non-Marxian economic and social theories, no individual or group can be credited with having consciously brought into existence the class aspects of Latin American society...

...Not surprisingly, then, both groups invoke their respective "natural" explanations to analyze the failure of their own as well as opposing policies...

...Neoclassical economists analyze the failure of "their" policies in terms of the continued interventionist role of governments-in bowing to pressures to maintain protective barriers and other such "irrational" controls over markets...

...The amount of surplus-value appropriated within capitalist enterprises increases, and the rate of exploitation-another index of capitalist success-rises as a result...

...See Table 2 for the approximate chronology of the changing nature of policies in the three countries under different governments and economic advisors.] The actual sequence of stabilization and adjustment policy packages varies from country to country...

...2. On the history of development thinking in Latin America, see J. Sheahan, Patterns of Development in Latin America: Poverty, Repression and Economic Strategy (Princeton: Princeton University Press, 1987) and Oxford Analytica, Latin America in Perspective (Boston: Houghton Mifflin, 1991), pp...

...State expenditures can also contribute to the strengthening of capitalist class processes outside the state...

...and rigidities in the production of food supplies...

...In other words, the value of labor power will fall to the lower market price...

...Thus, they have been success- ful precisely in the dimension that has been ignored in the standard debate: class...

...What neoclassical and structuralist economists disagree about-and what usually receives most publicity-are the specific recipes for success (and, of course, the reasons for failure...

...However, once the obstacles are removed and individual economic agents are allowed to carry out their decisions in free markets, the disequilibrium disappears and macroeconomic stability is reestablished...

...Workers gather to vie for jobs at a mining company in Paraopeba, Brazil...

...As is well known, neoclassical econo- mists support the kinds of policies usually associated with the International Monetary Fund (IMF) and other international lending agencies: tight monetary policy, eliminating fiscal deficits, and liberalizing internal and external trade and capital markets...

...Even in Argentina, the latest "success" story touted by neoclassical economists, recent increases in the external-trade deficit, along with decreases in real wages (as state employees are laid off) and in old-age pensions (a result of attempts to balance the central government budget), signal the impending failure of Economy Minister Domingo Cavallo's austerity plan...

...I am thinking, in particular, of attempts by Arturo Escobar and others to redefine development, especially from the vantage point of local initiatives...

...From the structuralist perspective, these kinds of policies, and not unregulated markets, are the recipe for success...

...Each time, economists claimed success was just around the corner...

...According to neoclassical economists, policymakers have two choices: either (a) do nothing, and let individuals make the appropriate decisions, or (b) if market imperfections exist and/or if there is government mismanagement of policy, dismantle market barriers and restrict the government to its role in maintaining free markets and protecting private property...

...The level of output (hence employment) is thus unaffected by changes in either aggregate demand or external payments...

...In general terms, both macroeconomic failure and different policy regimes-orthodox, heterodox, and middle position-are quite compatible with success at increasing and strengthening capitalist exploitation...

...Neoclassical economists tell a story in which individual human nature is the ultimate cause of all economic phenomena...

...5 The implications of the neoclassical-structuralist debate on stabilization and adjustment show through clearly in the recent experiences of Argentina, Brazil and Peru...

...193-98...

...A rise in unemployment, for example, is generally acknowledged to be one of the failures of the kinds of orthodox stabilization and adjustment policies advocated by neoclassical economists...

...Once again, a class analysis of fiscal deficits leads to a quite different conclusion...

...Instead, they share the view that the problem of stabilization and adjustment is inherent in "nature," in some underlying or naturally existing determinant of the economy that is independent of class...

...Therefore, while neoclassical economists focus on removing imperfections in markets, structuralists advocate increased controls over markets...

...They have also occurred with the application of heterodox policies...

...This conclusion stands in sharp contrast to recent pronouncements that class analyses and Marxist theory are irrelevant to the discussion of development issues in Latin America...

...While this is not the place to review the debate over the role of the state, it has long been generally agreed that throughout the history of capitalism, state expenditures have often created the best operating conditions for the extraction of surplus-value...

...The new profit rate is thus (S + R)/(C + V) which is greater than the original r. 10...

...the results were swift and dramatic: output and employment increased, inflation dropped, and the external-payments situation improved...

...In all three cases, the policy prescriptions of neoclassical and structuralist economists have been attempted and eventually declared failures...

...Aggregate demand and external payments-and the individual decisions that ultimately govern them-only play a role in determining the price level...

...9. In the terms of Marxian value theory, the capitalists' rate of profit can be written as r = S/(C + V), where S is surplus-value, C is the value of raw materials and means of production (what is often called constant capital), and V is the value of labor power or the value of the customary standard of living of the direct producers...

...Not surprisingly, the macroeconomic debate between free-market "neoclassical" and planning-oriented "structuralist" economists turns out to be consistent with the more general tradition of development thinking in Latin America...

...Subsequent elections brought in the "modernizing" Collor regime, which proceeded to apply the kinds of orthodox macroeconomic policies advocated by neoclassical economists...

...The heterodox plans were eventually seen as failures and, with the election of new governments in Argentina (Menem), Brazil (Collor), and Peru (Fujimori), the policymaking pendulum swung back to the orthodox policies advocated by neoclassical economists...

...REPORT ON THE AMERICAS 42T HE FACT THAT MANY NONCLASS FAILURES are class successes when viewed from the perspective of an alternative theoretical framework suggests that adhering to the limits of the debate between neoclassical and structuralist economists-and to the oscillation between orthodox and heterodox stabilization and adjustment policies-may itself strengthen the growth and development of capitalist class processes...

...Under its succession of military governments, itjoined Chile and Uruguay in enacting what came to be known as the Latin American experiments in neoconservative economics...

...From a Marxian perspective, class exploitation may be strengthened at the same time that-and even because-such nonclass phenomena as employment, prices and balance-of-payments are in crisis and need "fixing...

...Then, when that strategy was generally recognized to have failed, structuralist economists took the lead...

...Their strategy of import substitution involved more state intervention into markets and more state-led forms of capitalist development...

...Like Argentina, Peru also began the sequence with orthodox policies and military rule...