1a) Paradigm change – history & prospects

To give you an understanding of the concept of economic paradigm I will not go into a theoretical discourse (this has been done in part in the introduction) but will delve directly into the history of how paradigms evolved in the last 200 years, and especially in the latest 75 years.  In this section (1a) I will review a paper (‘Beyond Neoliberalism) to show how paradigms change over time and discuss the future prospects. In section 1b I will use the book ‘The Global Minotaur’ to give you a better understanding of the latest two paradigms and why we have reached a time of transition.  Let’s start with the paper written in 2017:

 ‘Beyond Neoliberalism’ by Laurie Laybourn-Langton and Michael Jacobs from the Friends Provident Foundation.  

available online:

Click to access Michael-Jacobs-LLL-Moving-Beyond-Neoliberalism-Report-5-Oct-2017.pdf

I have decided to use a review the above paper, in order to explain the concept of paradigm change, because it is by reading it that I first had the idea of using the concept of economic paradigm as the main building block of my work.  In the first part of this review, originally done for my Positive Money group in January 2018, I will introduce the concept of economic paradigm and the idea that we are in the middle of a paradigm change.  In the second part I will analyse what possibilities this situation is likely to open up, and finally move the discourse to the subject of the next Chapter, dedicated to the main agent forcing change: the Chinese challenge to Western hegemony.

Please note: if you prefer to skip the introductory remarks about the paper and start directly with the explanation of what economic paradigms are about, you can go directly to Part I

Introductory remarks about the paper – The most interesting aspect of this paper – perhaps even more than its actual content- is the subject itself, the concept of ‘paradigm change’.  It is an extremely good sign that the very idea of ‘paradigm change’ is finally starting to circulate in progressive circles, as this is a very useful concept.  For the past few decades, progressive groups have either advocated piecemeal reforms (which tend to be ineffective at best) or, for what concerns the most radical ones, complete system change, that is, abandoning capitalism.  As much as this would be a great idea, it is just as ineffective, given that nobody knows how to achieve it.  Paradigm change, on the other hand, is not just achievable, but also very useful to understand how capitalism really works.  In fact, looking at how the capitalist system has been historically organised with a succession of socioeconomic paradigms, is probably the most useful way we have in order to a) try to understand how the system really works (as the concept of capitalism tout court has turned out to be extremely elusive), and b) figure out how we could transition it towards a more sustainable path.

Going back to the paper ‘Beyond Neo-liberalism’, it is important to highlight the ‘novelty’ introduced by it.  Although it is common among critics of the current state of affairs to criticise neo-liberalism in its entirety, it is not common at all to frame it as a ‘paradigm’, as one of the several (three to be precise) ways in which capitalism has historically been organised, and which historically had their own heyday, ran their course and were eventually replaced.  Critics talk about neo-liberalism all the time, but they hardly ever highlight its historical nature and its necessary evolution and eventual demise as all historical phenomena.  In addition to this useful way to frame our understanding of neo-liberalism, the paper is also interesting because it announces that the paradigm is nearly dead, change is rather overdue, and should definitely be put on the agenda. This is remarkable because, while the supporters of the system understandably never ever dare to mention this basic truth, it is not quite clear why the critics don’t seem to have awakened to this rather obvious state of affairs either. Therefore, it is rather refreshing to see that somebody in the progressive galaxy has finally come to realise that the current economic crisis must be read not as one of the many crises periodically (and apparently randomly) affecting capitalism but as a sign that the neo-liberal paradigm has reached the end of its useful – or harmful, depending on the point of view – life.  Therefore, we must praise the authors of the paper for drawing the necessary conclusion: if we want to end the current crisis and have a proper recovery, we need a complete change of paradigm, not just a mix of piecemeal reforms, however far reaching.  In other words, we need a change of the same magnitude of the one operated under the Margaret Thatcher and Ronald Reagan administrations in the 80’s, but obviously in a completely different direction.

After announcing the near demise of neo-liberalism and briefly illustrating the concept of paradigm change with a brief historical overview, the paper then moves on to its main object: a) discussing how far ‘we’ (the progressive forces) are from devising a new and coherent paradigm, and b) analysing what obstacles and barriers stand in the way of completing this theoretical endeavour and actually starting to push the idea into the political arena.

Before we can review the main part of the paper, we need to better clarify the concept of economic paradigm and of paradigm change, as the paper treats it in a very passing manner.  This is fundamental in order to understand where we are in history, and to make sense of the apparent state of disarray in which our society has been thrown both by the prolonged post-2008 economic crisis and by the political instability that has followed it.

PART I – brief history of economic paradigms

Capitalism as a mode of production (to be kept distinct from capitalism as a mode of accumulation, which emerged from feudal society in its merchant version a few centuries earlier) started with the Industrial Revolution.  Since then (that is, for the last two centuries) it has been organised under three sets of rules and systems of governance, or ‘paradigms’: liberal, Keynesian (also known as Bretton Woods or Post WWII paradigm) and neo-liberal.

The liberal paradigm, which is associated with British hegemony and the gold standard for international transactions, consisted, very roughly speaking, of ‘unfettered’ capitalism: free trade, free markets, low barriers to cross border capital movements, low state intervention in the economy.  This is a very rough description, as matters were in reality more complicated than this, because the more powerful countries (mainly Western Europe, the United States and Japan) did not follow the same policies and started to apply protectionist measures in order to develop their own industries.  Therefore, we could say that liberalism was a paradigm more or less ‘imposed’ from the part of Britain either by force (to the colonies) or by means of unequal treaties with weaker but formally independent countries.  Without getting into further detail (see also Ha-Joon Chang’s ‘Economics: the user’s guide’ p. 57-79 and ‘Bad Samaritans’) the important thing for our purposes is to highlight how this paradigm came to its demise. It happened at the end of the 19thcentury, as British hegemony, both economic and political, came to be challenged by other countries.  This ushered in a phase oftransition characterised by serious turmoil: a series of depressions and financial collapses up to the outbreak for WWI which also marked the suspension of the gold standard (unsuccessfully resumed in 1925 with an overvalued parity, causing severe depression in the UK), a wave of austerity measures imposed after WWI in order to repay the war debts (the most notorious case being that of Germany), then the financial crash of 1929, followed by the Great Depression until finally a new paradigm started to emerge, with the publication of Keynes’ ‘General Theory’ and the implementation of the ‘New Deal’ in the US.  At the end of WWII the new paradigm became official (with the Bretton Woods agreement) and was extended to the part of the world that came under the hegemony of the USA, while at the same time Russia and later China, implemented their own – not just paradigm but – system change, by exiting capitalism (or whatever was the prevalent mode of production of those two countries at the time) and replacing it with communism.

For the next 30 years (approximately 1945-1975) in what came to be known as the western block, or ‘free world’, a new paradigm was implemented (probably the lesser evil, from the point of view of the ruling classes, considering the communist alternative): Keynesian economics, associated with American hegemony and the Bretton Woods monetary system, which replaced the gold standard with a gold linked (but essentially fiat) dollar standard for international transactions. The post WWII paradigm consisted, roughly speaking, of a mixed economy with strong government intervention and a strong redistributive tendency: financial repression with expansion of the real economy, creation of a welfare state, economic policies targeting full employment (rather than price stability) and this way empowering workers to reap the benefits of productivity gains through collective bargaining.  This paradigm came into crisis in the early 70’s, for two related reasons. One was the loss of economic – but not political or military – predominance by the USA vis a vis the growing strength of the Western European (especially German) and Japanese economies.  This had lead to an abuse of the status of the dollar as the main international currency, with the USA resorting to money creation in order to finance its increasing trade deficits and high government spending, especially inflated by the Vietnam war. The desire to maintain political hegemony in the face of waning economic superiority was only part of the reason why the USA decided to shift to the neoliberal paradigm.  The other part was the desire of the ruling classes to maintain their status and power, endangered by a situation of near full employment that had enabled the lower classes to gain higher and higher salaries and to enjoy an increased status in society and more influence in the political arena. The neoliberal paradigm was thus devised also with the aim of pushing the lower classes back into their place.  Thus in the 70’s we entered another phase ofturmoil, ushered in by the closing of the gold window in 1971 by President Nixon (effectively defaulting on the promise to convert US dollars into gold).  The end of this convertibility marked the end of the Bretton Woods monetary system and was followed by the oil shocks of 1973-74, the birth of the petro-dollar (replacing the gold backed dollar standard), the unsettling phenomenon of stagflation, then followed by another oil shock in 1979 which paved the way for the over-hauling of the whole Bretton Woods paradigm, under the leadership of the UK and USA with the Thatcher and Reagan administrations.

The Neoliberal paradigm, fully operative by the end of the 80’s, was based on reducing the weight of the real economy (by means of de-localisations and reductions of the welfare state) and expanding the financial one instead.   Like liberalism, the main features are free trade, free markets, low state intervention in the economy and low barriers to cross border capital movements.  It is, like the Bretton Woods paradigm it replaced, still associated with American hegemony, but with a completely different international monetary system.  The new system is still centred on the dollar but no longer backed by a fictitious convertibility into gold, and based instead on a) imposing the dollar as the only currency accepted to trade oil in the international markets, b) attracting vast amounts of capital into Wall Street and the City of London by generating high rewards for them at the expense of the real economy (which becomes trapped into higher and higher levels of debt) and, over time, as the debt becomes unsustainable c) generating fictitious rewards in the financial markets essentially by means of toxic title creation.  However unequal and unsustainable it may have been, the neoliberal paradigm was nevertheless a very clever mechanism that worked fantastically to maintain American hegemony and to discipline the lower classes into submission. Started in the UK and USA, it was gradually extended to most of the world by a mix of force, deception, and interference.   The main thing to understand about this paradigm is that it could only work for as long as there was a substantial amount of wealth in the real economy (in the form of assets owned by the welfare state and by the middle classes) that could be extracted and channelled to the financial markets.  We have now reached a stage in which it is difficult to extract any more wealth without seriously compromising social cohesion and political consent.  After generating serious financial instability in the periphery of the ‘empire’ with an endless string of financial collapses (something that happened by design, to facilitate wealth extraction) the neoliberal paradigm entered, just like the previous ones, its final stage characterised by the usual turmoil: financial collapses in the core countries (starting in 1998 with the collapse of a major hedge fund that required a collective bail out by Wall Street banks, then in 2001 the bursting of the dot.com bubble and eventually the 2008 crash) the challenge of rival countries (mainly China, in alliance with Russia and other Asian and BRIC countries) with its corollary of wars (especially in the Middle East but also in the Ukraine), destabilisations (especially in North Africa), severe austerity and economic collapse (especially in Southern Europe) accompanied by political instability everywhere in Europe and the United States.  These are all harbingers of imminent paradigm change.

This rapid overview of the last two centuries of economic history is necessarily very impressionistic.  The main thing to understand is that each paradigm worked for a while, and then at some point it stopped functioning, in part due to its internal contradictions, in part due to changing hegemonic positions and the challenges arising from rival powers.  In all three cases, the phase in which the paradigm stops functioning properly is characterised by various forms of economic and political turbulence, often climaxing into outright war.  We are now in one such phase of turmoil and therefore it is very appropriate to start thinking about the prospects of paradigm change, which will be dealt with in part II.

However, If you want to understand more about the historical unfolding of the last two paradigms (Keynesian and Neoliberal), you can go to section 1b, which is a summary of a book written on the subject by Yanis Varoufakis, ‘The Global Minotaur’

PART II – prospects of a progressive proposal for a new paradigm

Given this scenario, and thus accepting the argument made by the paper that the times are ripe for change, we now need to discuss part 2: what is needed and what is still missing in order for the progressive forces to be able to put forward a coherent proposal.

At this point the paper outlines a theory of change, which we can sum up in very succinct terms.  It consists of three aspects/phases:

  • Elaborating a coherent theory– synthesising the various ideas present in the progressive landscape and systematising them into a proper paradigm theoretically consistent.
  • Creating cultural hegemony– once the paradigm is ready, it needs divulgation, debate, legitimisation in academic circles and in the political discourse and eventually acceptance by larger and larger sections of the general public.
  • Entering the political arena– popular mobilisation, coalition building, political organisation until a big enough force has been created that can either aspire to take power, or at least to seriously influence the people who are in power.

The paper concentrates mostly on the first two aspects, but it touches on the third one as well.  Its position is that, for what concerns the first aspect (theoretical underpinning), we are not far from the objective.  Enough ideas are being put forward by various groups, NGO’s, think tanks, academics etc. that we have sufficient material to build a coherent paradigm, if only an effort could be made at coordination and systematisation. For what concerns the other two aspects (acceptance and political action), the paper admits that we are much further behind, but it is confident that, with the vast array of organisations, activities and initiatives on the ground, it is reasonable to assume that progress could be made relatively fast, if the people and organisations involved could get their acts together, and start thinking in terms of coordination and strategic direction.

However, upon taking a closer look at the following paragraph, the doubt arises that even on the first aspect, the intellectual underpinning of the new paradigm, the situation is in reality a lot trickier than it would seem at a first glance.

“ Among academic economists, there are broadly two ‘non orthodox’ groups: those largely grounded in the mainstream who nevertheless seek reform of neoliberal policies; and those seeking a more radical reappraisal of economic theory. The latter do not always agree with one another – for example, there remains a significant divergence between those advocating various models of ‘inclusive, sustainable growth’ and those arguing for ‘de-growth’ (a division mirrored among campaigning organisations).  But there is currently a clear opportunity to forge a coalition of non-orthodox economists around an alternative economic prospectus.  A number of leading economists are now open to the attempt to synthesise new ideas and approaches in an effort to achieve greater convergence.”

In other words, these are the main theoretical positions, coming from the vast array of both individuals (mainly academics) and organisations seeking progressive change:

  • Seeking reform of the current paradigm– this theoretical approach is called neo-Keynesian (although many critics call it neo-classical). Apart from the confusion arising from the names, the main thing to understand is that its advocates express no particular intention of abandoning the neoliberal paradigm.  They are basically mainstream economists, the most famous among them being Paul Krugman and Joseph Stiglitz.
  • Seeking a paradigm that promotes inclusive, sustainable growth– this theoretical approach basically advocates a return to the post-WWII paradigm, revised and corrected to eliminate the flaws that caused its demise and to adapt it to the changes in the world economy that have taken place since then, making it partly obsolete.
  • Seeking a paradigm based on de-growth– As de-growth cannot be pursued indefinitely, a more appropriate definition would be ‘seeking a steady state paradigm’. It must be noted that a steady state economy represents not just paradigm change, but system change, as capitalism can only exist with growth.

Therefore, we have economists who don’t even want to leave the current paradigm and are contented with reforming it, economists who want to leave it and return to something similar to the previous one, and economists who are actually seeking a lot more, as they are actually aiming for system change, whether they frame their intentions under this category or not. These are no small differences, as the paper seems to imply, and I don’t see how they could be reconciled. Just because many policies advocated by the three different groups are similar, it is very tricky to assume that a compromise could be reached….

For what concerns the first group, as it doesn’t seek paradigm change, it should be excluded from our analysis.  It is possible to make tactical alliances with it, as it shares many ideas with the other two groups, but no strategic alliance is possible. The second and third group are not incompatible, but only if considered in chronological sequence, not in the sense that we can mix and match their ideas.  However, it is not quite clear whether there could be any agreement on such a sequential approach.

Quite aside from whether or not an agreement between the last two groups could be found, it seems to me that the third approach is highly unrealistic in the first place.  To begin with, even conceptually, to move from neo-liberalism (an extreme form of capital accumulation) straight out of capitalism altogether would represent quite a jump.  If we then take into account also the current political situation, it becomes clear that it is absolutely unfeasible at the moment.

Let’s begin with the conceptual aspect – at present we have a model which is:

  • based on the financial economy
  • based on growth (financial growth)
  • highly unbalanced
  • stalled

The third group of economists want to jump from there straight into a model which would be:

  • based on the real economy
  • based on no growth
  • rebalanced, made equitable
  • re-started

It is quite a jump, unless we transitioned through this model, which is basically what the economists of the second group advocate:

  • based on the real economy
  • based on growth
  • re-balanced via growth (which is politically more acceptable to all)
  • re-started via growth (which is both technically and politically easier to achieve)

Apart from the abstract merits of a gradual approach to system change, this issue is not likely to be resolved intellectually but, in all likelihood, it will be resolved politically. And to understand how this might happen, we need to look at the situation on the ground. Realistically speaking, it is fair to state that the progressive forces in the West have been completely defeated.  In this sense the neo-liberal economic paradigm (and whatever other extra-economic means might have been used for the purpose) has worked remarkably well, from the point of view of the ruling classes.  Now, for a disarray of groups and individuals who cannot even muster enough political muscle to put even mild progressive reform on the national political agenda, to actually imagine that they could achieve nothing less than system change is temerity to say the least.  Realistically speaking, I would say that even paradigm change is too ambitious an objective for such a disarray of groups.  The only reason why we are in a position to seriously consider the possibility of entering the game of paradigm change with a progressive proposal is that it is happening anyway, forced by external agents (namely China, Russia, and their allies).  This strong wind of change coming from the East might actually do the trick and kick both the intellectual debate and the political struggles into shape.  Alone, the progressive forces in the West would never make it, as they don’t have enough propulsive power on their own, but with this strong wind blowing from the East, there is a chance that they might actually gather enough political force to put a progressive paradigm on the agenda.  It is by no means certain or even likely, however, as at the moment it is the right which seems to be more attuned to the winds of change.  It remains to be seen if enough coordination and strategic ability can be mustered, but it is at least encouraging that there seems to be some awakening in this direction, as the very existence of this paper shows.

We now must turn to the outside forces that might function as a catalyst for paradigm change, not just in their part of the world but hopefully extending their influence all the way to us in Europe as well.

From what we can see, China, with the aid of Russia, seems to be in the process of organising and leading a group of nations determined to challenge the current world order.  With the New Silk Road infrastructure initiative, the Asian Infrastructure Investment Bank, the Shanghai Cooperation Organisation and lately the Yuan denominated oil futures contract convertible into gold (a direct challenge to the petrodollar), it seems that the building blocks are being put in place to construct an alternative international monetary system/world governance system which is rather reminiscent of the post WWII paradigm. This alternative architecture of economic governance that is slowly taking shape shows the signs of an enlarged (to a much more vast and populated area) Bretton Woods-style sort of arrangement. Kick-starting real economic growth by promoting development in a much enlarged area of the world which is in dire need of it, seems to be the way in which China is aiming to win the hearts and minds – that is, gather enough allies to be able to shift the balance of power in its favour.  We could call it a ‘gravitational’ approach, as it seems that the strategy is to win not by waging some sort of war (either military or economic) but by exerting an irresistible pull towards countries ravaged by destabilisation (Middle East and North Africa), perennial underdevelopment (many parts of Asia and sub-Saharan Africa) and austerity (the ex-rich countries of the West).  In the coming years we will probably see country after country gathering the courage to defect the austerity/destabilisation camp and join the newly formed ‘growth camp’, as this is the only way for survival as a viable entity. As the system being put in place by China and its allies seems to mirror the Post WWII arrangements, it is likely that a new and upgraded version of this paradigm will be the winning choice, but we will have to wait, as only time will tell.  What we can say for now is that this choice seems the most reasonable not just because it is so conceptually (gradual transition) and politically (less resistance in society if you advocate growth rather than de-growth) but also because it has been tried and tested in the past.  The Chinese, who probably have learned from their own (as well as others’) mistakes, might have come to the conclusion that engineering change is a very risky business, and the safest bet is to push evolutionary transformation by means of tried and tested measures, re-arranged and re-adjusted as necessity may suggest.

In conclusion, of the three positions outlined by the paper, it seems to me that the first one has to be excluded because it doesn’t represent paradigm change and the third one because it is highly premature. This leaves the second one as the only viable possibility, at least for the moment.  Not just viable, but actually favoured by the international shift about to take place.

In the next chapter we will look more closely at the Chinese challenge to the existing order.

Continue to 1b – Summary of the Book “The Global Minotaur”