The neoliberal program never achieved more than mediocrity and overall it has failed even on its own terms. Worse, it has corrupted government, fractured society and visited destruction upon the Earth. This failure flows from two false premises at the heart of neoliberalism: the libertarian claim that people should be rugged individualists, and the neoclassical claim that free markets usually will automatically optimise an economy.
Behind the votes for Brexit and Trump lies a simple perception: the system is rigged in favour of the rich. That perception is accurate. People may lash out at scapegoats and follow false prophets, but their disgust and alienation are quite justified. Trump promised to break up the cozy club at the top, and many people said Yes.
Two extracts published at Pearls and Irritations, here and here.
Part I presented the evidence that economies in the free-market era delivered only mediocre performance before crashing in the disastrous Global Financial Crisis. Part II showed how the standard theory of free markets bears no useful resemblance to real economies, and its application amounts to pseudo-science.
Returning to the GFC now, there is a particular reason free-market economists claim the GFC was unforeseeable: debt and money play no role in their standard equilibrium economic models. They claim one person’s debt is another person’s asset, and so aggregate “demand” is not affected by debt. This would be true in a barter economy, or if the banking system was based entirely on savings, for only in those cases would the extra purchasing power of the borrower be balanced by the reduced purchasing power of the depositor.
[Another sample from The Nature of the Beast, from Chapter 11: Economic Fire. Another downloadable instalment will be available after Easter.]
Almost every institution involved in the financial system is, in the jargon, highly leveraged. This is as true of old-fashioned banks with fractional reserves and mainstream banks with capital adequacy requirements as it is of shadow banks. What does highly leveraged mean? It means that you are betting a small amount on a large return. If the return is positive, you make a handsome profit. However if the return is negative you lose not only your stake but potentially everything you own.