7c) The stalled 5th Cycle – Neoliberalism

 

Starting point – the factors enabling the neoliberal ‘adaptation’ 

We will start our analysis from where we finished in the previous section.  We are in the early 70s, the upswing of the fourth Kondratieff wave is coming to an end and the downswing is about to start.  The United States is still the hegemonic power and within it the transnational financial elite is increasingly acquiring a dominant position. In the next thirty odd years which we are going to analyse, we will see how this elite will consolidate its power in the US, in the Western block and around the world, coming very near to complete global control, until everything starts to unravel. To analyse the unfolding of events we will keep on using the same framework, based on Paul Mason’s interpretation of the Kondratieff cycles.  Let’s now recall his description of the fourth wave in the book ‘Post Capitalism’:

The Fourth wave (Late 1940s – 2008)

‘In the fourth long cycle transistors, synthetic materials, mass consumer goods, factory automation, nuclear power and automatic calculation, electronics, radar, jet engines create the paradigm – producing the longest economic boom in history.  The peak could not be clearer: the oil shock of October 1973, after which a long period of instability takes place, but no major depression.    (In the late-1990s, overlapping with the end of the previous wave, the basic elements of the fifth long cycle appear.  It is driven by network technology, mobile communications, a truly global marketplace and information goods.  But it has stalled.  And the reason why it has stalled has something to do with neoliberalism and something to do with the technology itself.)’

The 1973 oil shock marks the beginning of the downswing; at this point, according to Paul Mason’s model, we would see the normal pattern of the downswing: what he calls ‘adaptation on the cheap’, followed by workers’ resistance, which forces ‘the capitalists’ to overcome the crisis by producing new technologies, in turn giving rise to the next wave.  Following the conclusions reached in the previous sub-chapters, we would need to integrate this model and add to workers’ resistance also inter-state competition and the upper class struggle (i.e. state resistance against the complete takeover on the part of the transnational elite).  However, the problem is that at this point in history all these resistances have been dramatically weakened and for this reason the development of new technologies, which did occur in the 90s, did not give rise to the next Kondratieff wave and the normal pattern became disrupted.  This is how Paul Mason explains this anomaly:

‘With the fourth wave, (1945-2008) a substantial part of the world outside is initially closed off.  Once the Cold War begins, about 20 per cent of the world’s GDP is being produced outside the market.  After 1989 the sudden availability of new markets [the ex-communist countries] and a new labour force plays an important part in prolonging the wave; so does the West’s new freedom of action to shape markets in neutral countries that were formerly off-limits:  new labour, new markets, entrepreneurial freedom, and new economies of scale – this is part of the reason of the disruption of the fourth wave.  Its cycle was prolonged, distorted and ultimately broken by the defeat and moral surrender of organized labour, the rise of information technology and the discovery that an unchallenged superpower can create money out of nothing for a long time.  

To sum up and highlight the causes of the disruption as identified by Paul Mason:

  • opening up of new lands after 1989, resulting in new markets, new labour force, entrepreneurial freedom, economies of scale
  • delocalisation (facilitated by the new technologies) leading to the defeat of organised labour + technology leading to job destruction via automation and thus contributing to the defeat of labour
  • monetary manipulation on an unprecedented scale, made possible by the combination of: an unchallenged superpower + opening up of new lands + productivity growth + creation of digital debt-money = all ingredients put together and cooked with great skill through the adoption of a new economic paradigm, the neoliberal one.  Monetary manipulation can be identified with the neoliberal economic paradigm itself.  Keeping in mind that neoliberalism is a wider phenomenon, of which the economic paradigm is only one part, although a very important one.

Legacies of the Golden Age – If we now start to look a bit deeper into these three determinant factors for the success of neoliberalism, we will see that they are the result of Golden Age dynamics.  As we have mentioned (and will see soon in more details), the new technology is the result of a very advanced innovation paradigm developed during the Golden Age and, as for the collapse of the Soviet Union, although it was due predominantly to internal problems, the Cold War relentlessly and successfully conducted during the Golden Age played a non-secondary role.  The success of the transnational elite in regaining power in the West and the USA in particular, can also be attributed to the relentless ‘covert wars’ conducted during the Golden Age. In addition, the success of the grandiose monetary manipulation that took place during the neoliberal years, can be attributed first of all to the predominance achieved by this elite within the unchallenged superpower, and then also to the experience in managing the economic and monetary system accumulated during the Golden Age.  Therefore we can conclude that the activities conducted during the Golden Age by the people in power (mainly the dominant class of the hegemonic country, slowly taken over by the transnational elite or, in institutional terms, the ‘deep state’), were highly instrumental in producing the factors that led to the success of neoliberalism.  On the other hand, all the progressive tendencies arising from the bottom of society, which did exist as well, and in many cases were much more visible (most notably the ‘cultural revolution’ of the 60s and 70s) in the end were completely unable to change the course of events.  

I would rearrange the factors behind the success of neoliberalism and the stalling of the fifth Kondratieff wave in the following way:

  1. Fall of the USSR (as well as control of other parts of the world acquired via wars and covert wars) = shift in the balance of power in favour of the USA
  2. Increasing control of the transnational elite over Western countries (as well as other parts of the world) acquired via covert wars = shift in the balance of power in favour of this elite
  3. New Technology 
  4. Knowledge of how to manage capitalism 2.0 acquired during the Golden Age (this involves not just economics and finance, but also cultural and social aspects)
  • The fall of the communist block means that here is a shift in the balance of power in favour of one country.  In addition, in economic terms it means the opening up of new lands and of a new labour force
  • The new technology (ICT), together with the opening up of new lands, was highly instrumental in allowing Western enterprises to delocalise, and thus produce the defeat and moral surrender of labour.  In addition to enabling the delocalisation of jobs this technology destroyed many of them as well, via automation, thus contributing to the same effect. The new technology was also instrumental for the privatisation and transformation into debt of the money supply (97% of the total money supply is now created by banks as digital debt) and for the monetary manipulation in a grand scale that followed (the so called Great Moderation followed by QE for the financial markets) and that is still taking place.  We will soon analyse how this new technology came about.
  • Knowledge of how to manage capitalism 2.0 is the other big factor permitting the grandiose manipulation that neoliberalism has turned out to be, not just in the monetary and economic realms, but also in other realms, as we will see.

Therefore to sum up: the new very skewed balance of power (with the USA in control of a unipolar world and the elite/deep state increasingly in control of the USA) along with the new technology and the opening up of new lands allowed the creation of a new economic paradigm (heavily reliant on massive monetary manipulation), which succeeded in stalling the fifth Kondratieff cycle.  However, neoliberalism is more than simply an economic paradigm: it is a full spectrum covert war waged not just in the economic realm but also in the political, geopolitical, cultural and social realms.  I will dedicate the most part of this essay to analysing how neoliberalism, the whole phenomenon, managed to stall the fifth Kondratieff wave, to block progress (in fact, to revert the world to 19th century-style arrangements) and to enormously increase the power of the transnational elite that guided the whole process. Another way of saying this is that in the last part of the 20th century a series of factors came together, which allowed a shift in paradigm, which worked as a huge covert war against nation-states and against civil society, and which resulted in the acquisition of near total control by a small elite.  To sum up:

Skewed balance of power + opening up of new lands + new technologies + good knowledge of capitalism 2.0 + continued covert wars = neoliberalism, that is, a political, geopolitical, economic, cultural & social paradigm working as a massive covert war (essentially based on manipulation) against states and against civil society to entrench the domination of a small elite.  

The rest of this essay will be devoted to explaining how neoliberalism unfolded as a massive covert war, before we get to its end results and future prospects.  But first of all we need to analyse how one of the facilitating factors, the Information and Communication Technology (ICT) revolution, came about, as this story is by no means in the common domain. We mentioned in the previous sub-chapter that during the Golden Age there was an important development regarding technological innovation: the creation, in the hegemonic country, of a more advanced technological innovation paradigm.  This in turn produced the Information and Communication Technology (ICT) revolution, which greatly contributed to the disruption of the fourth Kondratieff wave (and the stalling of the next wave). As a result of this new innovation paradigm, which takes the technological race a notch up, nowadays technologies need to be envisioned in advance in a much more deliberate and strategic manner than in the past.  This is in line with the general trend of the capitalist system: the further it progresses, the more it tends to incorporate within the control of policy makers (be they ‘state controlled’ of ‘elite-controlled’) an increasing number of crucial aspects of life that can no longer be left to chance – technology being possibly the most fundamental one – but let’s go back to the Golden Age to find out how the new technological innovation paradigm was developed. 

The new technological innovation paradigm

The Golden Age inherited many new technologies from the war effort that were put to use in order to create the consumerist growth model previously outlined.  The states played a major role in co-ordinating with their private sectors the widespread transformation of these technologies into consumer products.  As part of this effort, the policy makers of the more advanced countries became active putting in place the institutions, networks and facilities necessary to constantly keep the pace and ideally move ahead of the competition by improving on both products and processes.  This applies to what we could call ‘ordinary innovation’(that is, within the existing frontiers of knowledge).  There was, however, another aspect of innovation that was the preserve of the hegemonic country: envisioning and influencing the direction of future research – This is what we could call ‘strategic innovation.  The hegemonic country, thanks to its huge resources (deriving from the ‘exorbitant privilege’ of exercising international seigniorage) and its much more strategic approach, took the innovation effort much further than its rivals, by initiating very long term projects of ‘blue sky’ research.  The aim was to develop entirely new fields, in technological areas selected for their strategic potential, that is, the potential to gain further geopolitical advantages by shaping the world of the future.  The selected fields of research had to involve technologies that could potentially influence or transform many sectors of the economy in a direction desirable for the people in power.  This type of innovation we can call ‘strategic innovation’.  By contrast, ordinary innovation is the one we are familiar with, the one in which competition between big companies and between countries is to some extent mentioned in the general media and discussed in more detail in academic or more specialised publications.  While this takes place in full daylight, the more strategic sovereign countries need to think about the world of the future well in advance, and to start pouring money into fields of investigation that might eventually bring it about.  The USA is the country that pioneered this innovation paradigm.  I will now analyse both types of innovation during the Golden Age and the rest of the fourth Kondratieff wave.  I will base my analysis mainly on a famous book by Mariana Mazzucato (professor of economics at University College London) ‘The Entrepreneurial State’.

Ordinary innovationIndustrial policy – For what concerns ordinary innovation the above book tells us that the basic secret for success consists in developing a national system of innovation.  This was true also in previous times and it helps us to understand the rise and fall of different economic powers in history: for example it explains the rise of Germany as a major economic power in the nineteenth century, as a result of State-fostered technological education and training systems.  It also explains the rise of the United States as a major economic power in the twentieth century as a result of the rise of mass production and in-house R&D.  The first half of the twentieth century was a time in which, although states were very active in promoting innovation, private companies were also playing an important role and invested quite important amounts of money on R&D and on developing their own systems of innovation. They had important labs, such as Xerox PARC (which produced the graphical user interface technology that led to Window’s and Apple’s operating systems) and Bell labs – both obviously highly co-financed by US government agency budgets.  

Once we reach the middle of the twentieth century a simple approach of funding R&D was no longer sufficient and a more sophisticated approach was needed.  According to  Mazzucato ‘what is needed is to create a highly networked system of innovation so that new knowledge and innovation can diffuse throughout the economy.  These systems require the presence of dynamic links between the different actors (firms, financial institutions, research/education, public sector funds, intermediary institutions) as well as horizontal links between similar organisations and institutions’. 

The book highlights how during the GA the most successful system of ‘ordinary innovation’ was probably the Japanese one. The Japanese ‘Developmental’ state directly intervened in the economy with strong planning promoted by a relatively independent state bureaucracy, which also promoted a close business-government relationship.  ‘The Japanese Miracle was in essence the coordination of the Japanese economy through deliberate and targeted industrial policy instituted by MITI, the Ministry of International Trade and Industry.  In addition to the Japanese developmental state support for industry, it was the strategy, organisation and finance internal to Japan’s leading firms (such as Toyota, Soni, Itachi) that transformed them from entrepreneurial firms into innovative firms, thus challenging the competitiveness of the most advanced economies. […..]  Japanese companies sent people abroad to study Western technologies and then developed internal routines that could reproduce those technologies and eventually surpass them’.

To sum up the role of the state within these system of innovation: ‘the state’s role is not just to create knowledge through national labs and universities, but also to mobilise resources that allow knowledge and innovation to diffuse broadly across sectors of the economy (it does this by rallying existing innovation networks or by facilitating the development of new ones, thus creating a system of innovation rich in horizontal and vertical networks)’.  

Strategic innovationIndustrial policy – However, ’at the frontiers of knowledge simply having a national system of innovation is not enough.  Over time, more impressive results can be achieved when the State acts as a catalyst for change, developing strategies for technological advance in priority areas.’  The importance of strategic innovation is not just economic but it has strong implication for the geopolitical positioning of the country involved.  According to Mazzucato the state increasingly needs to lead the way, envision various fields that may be promising for strategic reasons, and start to pour money to do the initial riskier research, then mobilise the networks of knowledge to transform the initial findings into workable products as quickly as possible and finally help the firms involved in production also for what concerns the phase of commercialisation.  It was the USA that devised this top-down and far-aiming (at entirely new fields) innovation paradigm which allowed this country to create not just new industries but to reshape the world we live in.  

Creation of a new innovation paradigm – We have seen in the previous sub-chapter that the US does not have an official industrial policy and that R&D spending is part of the military budget (itself a rather indicative fact).  This set-up was a natural outgrowth of WWII. In the words of Mariana Mazzucato: ‘The role that military engagement has had for economic growth and development does not differentiate US history from other modern countries [….] the Second World War victory relied heavily on State-sponsored-and-organised technological developments [….] The relationship between government and science was further strengthened by the Manhattan Project (the major scientific effort led by the US, with the UK and Canada, which led to the invention of the atomic bomb in the Second World War).  The US made special use of this experience and from this point on, it became the government’s business to understand which technologies provided possible applications for military purposes as well as commercial use. [….] [An acceleration in this process happened  when ‘the launching of sputnik in 1957 by the Soviets led to an eruption of panic among US policymakers, fearful that they were losing the technological battle.  The creation of DARPA in 1958 was a direct result. [….] DARPA (the Defense Advanced Research Projects Agency) was set up to give the US technological superiority in different sectors, and has always been aggressively mission oriented. [….] Its structure is meant to bridge the gap between blue sky academic work, with long time horizons, the development of ideas that may not produce results for ten or twenty years, and the more incremental technological development occurring within the military. Through the formation of DARPA a portion of military spending on R&D was now designated to ‘blue-sky thinking’ – ideas that went beyond the horizon in that they may not produce results for ten or twenty years.   As a result of this mandate, DARPA was free to focus on advancing innovative technological development with novel strategies’.  

‘Another key event during this period was that a group of scientists and engineers (often referred to as the ‘traitor eight’) in 1957 broke away from an existing firm and went on to form Fairchild Semiconductor, a new firm that owed its growth to military procurement, that advanced semiconductor technology and that continued ‘a process of economic fission’.  The spin off business model became viable and popular but would not have been possible without the state involvement as a major early customer.  A new paradigm emerged that resulted in innovative ideas moving from labs to market in far greater quantity.  Before this, government officials’ leverage in generating rapid technological advancement was limited, as large defence firms still deflected the pressure and demands for innovation with the tremendous power they wielded.  The leverage government officials had was also limited by the small number of firms with such capabilities.  Bonded by a shared interest in avoiding risks, large firms resisted pressure for innovation.  However, in a new environment with ambitious start-ups, competition changed the culture and large firms had to get on board with this quest for rapid innovative breakthroughs.  

[…] It was the government support for technological advancement in the computer field that led to the establishment of a new paradigm for technology policy. This is a quick overview of what DARPA did in this field:

  • In the 60s DARPA funded the formation of computer science departments at various universities in the US. By increasing the number of researchers DARPA was able, over an extended period of time, to accelerate technological change in this area.  Following this, the computer industry’s boom in Silicon Valley and the key role of DARPA in the massive growth of personal computing received significant attention but has since been forgotten by those who claim Silicon Valley is an example of ‘free market’ capitalism.
  • In the area of computer chip fabrication during the 1970s  DARPA assumed the expenses associated with getting a design into a prototype by funding a laboratory associated with the University of Southern California.  The personal computer emerged during this time with Apple introducing the first one in 1976.  Many of the technologies later incorporated in the design of the personal computer were developed by DARPA-funded researchers. (Abbate 1999).
  • DARPA oversaw the early stages of the Internet.  The Internet grew out of the small Defense Department  Network Project  (ARPANET) of connecting a dozen research sites in the US
  • Also, during the 1970s, significant developments took place in biotechnology. The decentralised form of industrial policy that played such a crucial role for personal computing was also instrumental in accelerating growth and development in biotechnology.  
  • DARPA also provided start up firms with early research support, 
  • DARPA contributed to semiconductor research and support to human-computer interface research, 

The role of DARPA in the computer industry was not a unique or isolated case of success.  Block (2008) identifies the key characteristics of the DARPA model.

  • Small offices, given considerable autonomy to support promising ideas.  
  • Proactive, they set the agenda for researchers in the field, with the goal to create a scientific community focusing on specific technological challenges.
  • Funding provided to a mix of university-based researchers, start-up firms, established firms and industry consortia.  
  • Basic research and applied research deeply intertwined. 
  • The agency’s mandate extends beyond research funding and goes all the way to helping firms get products to the stage of commercial viability
  • Part of the agency’s task is to link ideas, resources and people in constructive ways.
  • Public sector officials work directly with firms in identifying and pursuing the most promising innovative paths.  In so doing, the government is able to attract top minds.

Therefore, to sum up the state of the technological race during the Golden Age and beyond: while the other advanced countries had a more official industrial policy which relied heavily on SOEs (State Owned Enterprises) but also on close co-operation with private corporations, the US had a stealth industrial policy, non declared but quite visible nevertheless, and ‘disguised’ as military budget (itself a rather ominous sign).  The US industrial policy was not only ‘disguised’ but it was also much more massive in scale, based on military spending (and therefore very ‘strategic’ in its approach) and on close collaboration with private enterprises, increasingly also small ones, start-ups, spin offs etc.  Within this unofficial but massive and very strategic industrial policy a new innovation paradigm was devised. This new innovation paradigm produced a very strategic cluster of new technologies, the Information and Communication Technologies (ICT), which greatly contributed to the the success of the ‘neoliberal revolution’.  We must now turn to analysing how this revolution unfolded.

Looking at the neoliberal ‘adaptation’ as a series of covert wars

While the new technology which turned out to be fundamental for the success of neoliberalism, the ICT, was being developed in the 60s and 70s, the new economic paradigm started to take its first steps after the 1971 end of the dollar/gold standard and the 1973 oil crisis.  This change in economic paradigm can be seen as a form of covert warfare in and of itself, but there is more to it.  In the next paragraphs I will try to trace the outlines of how the whole neoliberal revolution actually unfolded as an intertwined series of covert wars in various realms. In other words, a combination of regime change and subversion operations (covert wars in the narrow sense of the term) carried out especially (but not exclusively) in third world countries together with cultural and psychological manipulation techniques deployed mainly in the advanced ones, managed to obtain the consent necessary for the change in the economic (and geopolitical) paradigm.  The new economic paradigm, in turn, worked itself as a long undercover economic war.  The objective of this war was to take capitalism from the state-controlled and redistributive 2.0 form of the Golden Age to a financial elite-controlled and highly unequal form resembling the capitalism of the origins, along with the reconstruction of an undercover empire. In short, an updated and high-tech version of a very old and familiar configuration. This character of enhanced warfare that the whole neoliberal phenomenon assumes corresponds to what Paul Mason would call, in his model, ‘adaptation on the cheap’ on the part of ‘the system’.  An adaptation taking place each time a Kondratieff wave enters its declining phase.  However, at this very advanced stage in the management of capitalism, what took place was obviously a lot more than a simple adaptation on the cheap: it was a very organised, sophisticated and all encompassing onslaught.  This is in line with the much higher complexity reached by the system, and it could happen thanks to the fact that power in this historical phase becomes increasingly concentrated – therefore we no longer have a war between roughly equal forces, this is now an asymmetric war. This onslaught would lead to a complete U-turn in the ‘naturally’ progressive course of events.  So far wave upon wave of technological innovation had been driving capitalism in a progressive direction; however, once reached the declining phase of the fourth cycle, technology becomes highly instrumental to a backward journey towards nineteenth century-type of arrangements.  Therefore what we see at this stage is the predominance of a single player (the one percent elite) able to seize the new technologies to its exclusive advantage, and with their help able to impose a backward turn of events on all other players, thanks to its superior ability in the continued employment of covert war techniques and in the techniques of controlling the economy and the monetary system, but also in the techniques of mass manipulation (all of them greatly advanced and refined during the Golden Age). Therefore the difference – compared to the previous Kondratieff waves, in which the adaptation on the cheap did not succeed, and the system was forced to adapt by shifting to a higher gear of technological development – is that the highly sophisticated and multifaceted ‘adaptation on the cheap’ that was neoliberalism did succeed, and for the first time in history the new technologies were used in a regressive, rather than in a progressive manner.  This is the full spectrum of the neoliberal onslaught in very simplified terms:

  1. capturing states via regime change operations (interference, subversion, terrorism etc, but also overt wars in many cases)
  2. disabling their sovereignty by infiltrating their institutions (the phenomenon known as the ‘deep state’) while at the same time strengthening the power (and changing the remit) of the Bretton Woods supranational institutions and international treaties
  3. Disabling their economies by imposing the neoliberal economic paradigm
  4. Disabling their culture by imposing a consumerist mass culture accompanied by massive disinformation (obtained via the control of the mass media) and manipulation of academic knowledge (obtained by infiltrating academia)
  5. Disabling their society with a variety of social engineering techniques

In the next paragraphs we will trace in more detail the long journey in reverse gear (towards a type of capitalism similar to 1.0 and towards rebuilding an undercover empire) which started from the 1970s and continued until 2016, when a change in direction started to take its first uncertain steps. In the chronological reconstruction that follows I will cover mainly the economic warfare aspect of neoliberalism, but also the geopolitical one, the capturing of countries – as it is tightly intertwined with economics.  Once finished with the chronological reconstruction I will give a rough sketch of the institutional warfare (the ‘deep state’ disabling political sovereignty) as well as the cultural and social aspects of the neoliberal onslaught.  To mark the main legs of the economic/geopolitical warfare I will draw, among other things, on the narrative provided by Ha-Joon Chang in the book ‘Economics: the Users’ Guide’.  I will use this narrative to trace the long neoliberal war predominantly in its geopolitical and economic aspects, with some references to the cultural aspects as well.

Part I – The unfolding of Neoliberalism as economic & geopolitical warfare

Balance of power in the early 70s – our journey starts in the 70’s when the financial elite/deep state starts to gain the upper hand. The USSR is weak and on its way to dissolution, workers are no longer particularly revolutionary (thanks to consumerism but also to more blatant episodes of open warfare such as the ‘witch hunt’ of the 1950s). US presidents that might have stood in the way have been killed or disgraced, along with other charismatic figures  – this for what concerns the USA.  In addition, the network of hidden power that this country exercises around the world is getting stronger (thanks to CIA sponsored regime changes and interference operations of various type). The time is ripe to dismantle the Keynesian paradigm and regain full control of society.  The perfect opportunity is offered by the economic turmoil of the 70s. Here is how Ha-Joon Chang summarises those events:

1970s – Interregnum of crises’  The Golden Age started to unravel with the suspension of US dollar-gold convertibility in 1971.  This marked the end of the Bretton Woods currency union and the return to fluctuating exchange rates, with currencies becoming increasingly subject to currency speculation.  There was an interregnum of instability which started with the First Oil Shock in 1973, in which oil prices rose fourfold overnight, thanks to the price collusion of the cartel of the oil-producing countries (OPEC).  Following the Oil shock inflation shot up.  The next several years were characterised by stagflation – a new phenomenon seeing prices rise during a recession (rather than the normal trend which is to have rising prices during a boom).  Now the economy was stagnating but prices were rising fast, at 10, 15 or even 25 percent per year.  The Second Oil Shock of 1979 finished off the Golden Age by bringing about another bout of high inflation and helping neo-liberal governments come to power in the key capitalist countries, especially Britain and the US.  This period is often depicted as one of unmitigated economic disaster by free-market economists but this is misleading, growth in the advanced countries at an average of 2 percent per capita per year during 1973-80 was still much higher than any period up to WWII and slightly higher than what followed in the next three decades of neo-liberalism (1.8 percent for 1980-2010 and highly unequally distributed).  The unemployment rate, at 4.1 per cent average, was higher than that of the Golden Age (3 percent) but not by much.  Still, there was enough dissatisfaction with economic performance during this period for there to be radical changes in the following years’.  

The labour turmoil of the 70’s was both the product and the cause of this dissatisfaction.  In the end Margaret Thatcher in the UK and Ronald Reagan in the US managed to win the elections also, according to Paul Mason, ‘by appealing to that part of the working class which always existed, that prefer law and order above all else’.  Once in power, they started the dismantling of the existing economic arrangements from the centre of the empire.  

For a better understanding of the turbulent and crucial events that took place during the ‘interregnum’ of the 70s, which have been misrepresented ever since (for obvious reasons) you can go to chapter 1b (‘Summary of the book The Global Minotaur’) and also to chapter 2a (‘Petro-Dollar vs Golden Yuan’).  It is important to understand that the crises of the70s (ostensibly caused by the OPEC cartel, but in reality a lot more complex…) were deliberately used by the establishment in power to kick off a reversal of the global financial flows towards the main financial centres (Wall Street and the City), and to shift the world economy to a new paradigm.  This was done to achieve a double objective: a) to prolong American hegemony (and the hegemony of the dollar) despite the rise of economically powerful rivals and b) to wrest control of the world capitalist economy from democratically elected governments and place it firmly in the hands of the oligarchic ‘financial markets’ –  this is the basic fact that needs to be understood.  In the 70s the reversal of the financial flows was decided, and the first moves in that direction were a number of measures aimed at dismantling the Bretton Woods architecture; then with the advent of the Reagan and Thatcher administrations the plan started to be implemented in earnest.  This is how Ha-Joon Chang describes the reforms that were introduced by Margaret Thatcher and Ronald Reagan:

1980s: neoliberalism takes hold in the centre of the empire – A major turning point came with the election of Margaret Thatcher as the British prime minister in 1979.  Thatcher began a radical dismantling of the mixed economy starting with: 

  • lowering higher-rate income taxes, 
  • reducing government spending (especially in education, housing and transport), 
  • introducing laws reducing union power  
  • abolishing capital control (restriction on the cross-border movement of money).  
  • the most symbolic move was privatisation – sales of SOEs to private investors.  Gas, water, electricity, steel, airline, automobile and parts of public housing were privatised.  
  • interest rates were raised in order to reduce inflation by dampening economic activities and thus demand.  
  • the high interest rate attracted foreign capital, driving up the value of the British pound, thus making British exports uncompetitive.  

The result was a huge recession, as consumers and companies retrenched, between 1979 and 1983.  Unemployment soared to 3.3 million people.  During the recession, a huge chunk of British manufacturing industry, which had already been suffering from declining competitiveness, was destroyed.  Many traditional industrial centres (such as Manchester, Liverpool and Sheffield) and mining areas (North England and Wales) were devastated.

Ronald Reagan became the US president in 1981 and passed the same sort of policies, but even outdid Margaret Thatcher.   The Reagan government: 

*aggressively cut the higher income tax rates, explaining that these cuts would give the rich greater incentives to invest and create wealth

*At the same time, subsidies to the poor (especially in housing) were cut and the minimum wage frozen, so that they would have a greater incentive to work harder.  (This was a curious logic: making the rich richer in order to make them work harder but making the poor poorer for the same purpose.)  This logic, known as supply-side economics became the fundamental official belief of economic policy for the next three decades in the US and beyond.

*As in the UK, interest rates were jacked up in an attempt to reduce inflation.  Between 1979 and 1981, interest rates more than doubled from around 10 percent to over 20 percent per year.  A significant portion of the US manufacturing industry, which had already been losing ground to Japanese and other foreign competition, could not withstand such an increase in financial costs.  The traditional industrial heartland in the Midwest was turned into ‘the Rust Belt’.

The hike in interest rates of the 80s, in turn, was highly instrumental in producing a severe recession with high unemployment leading to lower wages, as well as attracting vast amounts of capital to the financial markets, lured by high interests and high profits. The effect of all the above ‘reforms’ was to produce the reversal of global financial flows, as described by Varoufakis in the book ‘The Global Minotaur’: whereas previously persistent trade deficits had been causing a drain of money from the USA (leading to the 1971 default), now there would be a massive influx of capitals to Wall Street and the City, which would allow not just to carry on with the same hegemonic arrangements, but actually to expand the twin deficits (trade and government budget) and use the resources thus acquired to deepen the hegemonic reach of the leading countries. In the end the economy of these two countries recovered only thanks to this reversal.  Having destroyed a good chunk of their manufacturing capacity, from now on these two countries would live off the money that would flow to their over-inflated financial systems from the trade-surplus countries, from the oil exporting countries and from the financial safe-havens. This enabled the USA to pass a perversely Keynesian (= demand side economics) program of massive military spending and the UK to maintain enough good paying jobs and grant enough welfare payments to the old devastated industrial centres to keep the country together.

The reforms had another intended effect, as we will see later: producing the economic ruin and geopolitical capture of many weaker states, but before we get there we need to reflect on how the consensus was gained for the new economic course.

Misrepresentation of the market economy to gain consent – At this point, to understand how such anti-working class and anti-welfare state reforms could win an electoral majority, comes in handy one of our familiar categories:  the official mis-representation of the market economy which had not been seriously challenged during the Golden Age.  As neither the official narrative of the textbooks and the media nor the ‘alternative’ narrative of the Marxists had fully come to grips with the true nature of capitalism 2.0 (full state management as the only remedy so far invented against the chronic instability of capitalism), it was relatively easy to blame the problems of the 70s on state meddling in the economy and make the case that a capitalism left free from state intervention would solve all problems.  In other words, the official narrative blamed the economic turmoil caused by the 1971 dollar default and the inflationary management that had been done of it (via OPEC sponsored price hikes) on Keynesian economics (thus gaining consent for paradigm change), on organised labour’s excessive power (thus obtaining a good excuse to pass anti-union legislation), and on lack of monetary discipline on the part of governments (thus gaining a good excuse to jack up interest rates). 

Real state of the market economy – The Thatcher and Reagan administrations started dismantling an economy based on demand management (= avoiding recessions by making sure, with redistributive policies, that there would be enough spending power in society to buy the goods that the economy produced) and ostensibly replaced it with trickle down (or supply-side) economics, based on the idea that the best approach is to allow the wealthy to accumulate ever more wealth, because this way they would invest in productive activities and create jobs and wealth for the whole economy.  This dichotomy is indicated in the economic debate as ‘demand side’ vs ‘supply side economics’, and many people have probably heard about it.  In reality an economy to work properly needs to pay attention to both.  In the short term policy makers need to ensure that enough money is circulating in the real economy to buy the goods that are produced and this way attenuate cyclical downturns; while in the longer term they need to maintain and upgrade a productive structure able to meet society’s needs and to pay for necessary imports.  However, there is one important detail conspicuously missing from supply-side economic theories, and that we have by now well understood: in a modern economy which is highly capital intensive and necessitates to constantly keep up with a fierce technological race, the state is the main investor and the main force that can build a successful economic infrastructure.  Private initiative can also play an important role, but only within a framework put in place by the state. 

What in reality took place under neoliberalism, both in terms of ideological propaganda and in real terms was: a relentless attack on the real supply side, the states and their ability to conduct an industrial policy, which became associated with corruption and inefficiency.  The states were thus induced/forced to shrink and sell those parts of the economy that they controlled, thus seriously undermining the long term prospects of their economies.  At the same time, glorification and mystification of the supposed supply side, private entrepreneurs and the wealthy, in order to convey ever more money to them (via reducing their taxes and selling public assets at bargain prices). The money thus acquired by the wealthy, would eventually find its way into the financial markets, via various incentives designed to increase financial returns way above ‘real economy’ returns, starting from the interest rate hikes of the 80s. As they started to attract more and more of the world financial flows, the financial markets would eventually be in a position to manage the whole world economy in a centralised manner, delocalising production where it was cheapest and directing money to finance the aggregate demand of the newly de-industrialised countries.  In a nutshell, the new management of the world economy took care of the supply side by delocalising production in a number of low-cost countries while centralising strategic technological innovation in the hegemonic centres; at the same time the demand side was taken care of by ensuring financial flows to the newly de-industrialised countries in the form of easy credit for consumer loans.  We will see in the following paragraphs how this arrangement would play out over time. 

Second phase of institutional change – With the reform of the banking system in the core countries (USA, UK and the rest of the 5-eyes)  the neoliberal paradigm started to take shape. The reform consisted of shrinking loans to enterprises and forcing them to resort to the financial markets (this way forcing them to live with the constant threat of hostile take-overs), and at the same time diverting credit to consumer loans and mortgages instead. At the same time financial deregulation took place, with the so called Big Bang, paving the way for an economy based on delocalisation of productive activities and on inflating asset bubbles. These reforms forced companies to merge in order to be quoted in the stock market, the only way to have access to sufficient funds. This led to a rapid increase in hostile takeovers, (companies taken over against the will of the existing management) and changed the whole corporate culture in the US.  Many of those taking over were ‘corporate raiders’ only interested in asset stripping (the sales of valuable assets regardless of the impact on the long-term viability of the company).  To avoid such fate, firms had to deliver profits faster than before.  Otherwise impatient shareholders would sell up, reducing the share prices and thus exposing the firm to greater danger of hostile takeover.  The easiest way for companies to deliver quick profit was through downsizing and delocalising – reducing the workforce and minimising investments beyond what is necessary for immediate results, even though these actions diminish the prospects of the company in the longer run  – this way committing them to a vicious circle of further downsizing and delocalisation in the future to keep up the profit rates that the financial markets demanded. The reduction of public pensions with the consequent shift into private pension funds, whose managers went along with the logic of corporate raiders, greatly contributed to this regressive turn of events.  The whole new arrangement (based on dismissing production and relying on foreign capitals instead) was highly unsustainable, but it was sustained for a long time thanks to massive monetary manipulation, which consisted in gradually decreasing interest rates in order to keep debt rising, asset prices rising, and financial flows going in the direction of Wall Street and the City of London, even though the underlying economy was in real terms going towards bankruptcy (but in monetary terms artificially kept on rising.…).  Over time the result was to make the real economy dependent on imports and hostage of the financial markets while dispossessing the working and middle classes and slowly turning them into debt slaves.

A brief overview of how neoliberalism really works – I have already described how this paradigm works, seen mainly from the point of view of the neoliberal core countries (US/UK) in the chapter dedicated to it.  Now I will quickly sum up the basic mechanisms, and then add the role of the other countries to the picture. Before we proceed, one thing needs to be clarified. As the dismantling of the previous regulatory architecture (the Keynesian paradigm, or capitalism 2.0) progressed, the system in reality was not left at all in the hands of the ‘free market’  (as continually claimed by the official propaganda).  On the contrary, state management of the economy was slowly substituted by management by the ‘financial markets’ or the transnational elite that hides behind this conventional definition.  What during the Golden Age had been a mixed economy (partly public and partly private) now became increasingly privatised, and because of this it was called, with a misnomer, ‘free market’ capitalism – this is one of the greatest misconceptions of our time, equating privatisation with free markets.  With the favour of this basic misunderstanding, a relentless ideological warfare started against state intervention in the economy, against union power and against any other form of interference with the supposed perfection of the market mechanisms. However, in reality the agents who managed the economy behind the scenes, were certainly not the invisible hands of ‘free markets’ but a combination of state institutions,  supranational institutions, central banks (ostensibly ‘independent’ but in reality controlled by the transnational elite) and the ‘financial markets’ (as well controlled by the same elite, along with their self-appointed rating agencies).  In an underhanded but highly coordinated manner this combination of institutions managed the world economy by controlling global financial flows. We have already said that this maverick economy, increasingly able to shun production  and thrive much more easily by moving capitals around, in reality was thriving parasitically on: 

  • the continued sell off of state owned enterprises and the welfare state in general (later on this would come to include also wealth accumulated in other countries, which eventually would find its way into the financial markets via a mix of fraud, coercion and orchestrated financial crises, used in order to capture formally independent countries), 
  • the ‘Walmart model’ of enterprise, which used the combined effects of increased productivity (due to better technologies) and delocalisation (or the threat thereof) to minimise wages and maximise profits (along with legalised tax elusion with profits parked in safe havens and directly recycled in the financial markets)
  • tapping into the accumulated wealth of the middle classes by supplementing their shrinking wages with consumer loans
  • Eventually, outright financial fraud and monetary manipulation, courtesy of the exorbitant privilege of international seignorage acquired by the US dollar as a result of winning WWII.  Manipulation and fraud became prevalent after the turn of the millennium when, in absence of economic growth and having depleted a good chunk of previously accumulated wealth, neoliberalism started to drive bankrupt also the economies of the core countries.

In essence this economy was based on dismissing production and its associated costs (industrial policy, R&D, infrastructure, education and training etc.), creating unemployment, lowering wages as well as selling off assets, and with all these tricks generating enough returns (high interests initially, high profits, bargain prices of sold off assets etc. – eventually in prevalence capital gains produced with monetary manipulation) to attract the capitals necessary to pay for the resulting trade deficits.  At the same time the capitals attracted to the financial markets were used to maintain enough economic activity (based on consumption rather than production) in the newly de-industrialised countries and avoid another Great Depression.  Basically the money of the countries with trade surpluses (and the tax-free profits earned by big Western corporations and parked in safe havens) was redirected by the ‘financial markets’ (name hiding the elite now controlling the world financial flows) to subsidise the consumer demand of the deficit countries (often also by inflating asset bubbles) with unsustainable debts, and this way delaying another 1929-style collapse and Great Depression which would crash the system.  This was an economy based on consumption (or demand-side), despite the supply-side rhetoric, and the demand was based not on good wages but on debt.  At the same time the productive capacity (the supply-side) was being dismantled, resulting in substantial short term savings which were conveyed to the financial markets, and re-lent to the very same economy, saving it from short term depression while committing it to long term decline.  This arrangement, beneficial to rentiers of various type (including many ordinary people who benefited from various types of financial and real estate investments) was in any case very detrimental for most salaried workers and for the recipients of public services, that is, for the vast majority of the population.  The only reason why it could gain consent was that it was wrapped up in layer upon layer of misrepresentation, and there was no serious effort at debunking the misrepresentations either, possibly in part because those opposing it were taken by surprise and in part because the intricate functioning of this arrangement was not well understood at the beginning.  In any case, a masterful exercise in deception was carried out successfully.

Misrepresentation of the economy to retain consent – We have already mentioned how the consent was gained in the USA/UK for radical change (essentially by blaming the disruptions of the 70s on union power and on the Keynesian paradigm).  The question we will try to address now is: how was such consent retained over time, while the negative effects of neoliberal policies started to become ever more manifest? To answer this question we need to go back to the concepts of misrepresentation of the market economy and of cultural hegemony, and to be aware of the fact that over time this conceptual but also cultural/psychological war became ever more massive and ever more refined.  It was conducted by a powerful propaganda apparatus consisting of: the media, academia and the political community, all fed by a host of think tanks both long standing and newly created – (to gain a better understanding of this phenomenon you can read the book ‘The Establishment’ by Owen Jones).  This propaganda machine successfully managed to depict the new course, back in the 80s and 90s, as a really cool and potentially highly rewarding way of managing the economy: entrepreneurial, daring, creative, free from government hindrances, able to liberate  the ‘animal spirits’ of capitalism for the benefit of all.  This new economic freedom would unleash a new era of prosperity, it was promised – and it did, for many ordinary people, bring some results mainly in the 80s and 90s.  But unfortunately this had a lot more to do with asset stripping and wealth redistribution (on its way towards the very top) than with wealth creation. In the end the communication establishment (the media, academia and politics) managed to completely hide the true nature of the new economic paradigm: what was simply a more sophisticated version of 19th century economics twinned with good old colonialism in disguise, passed for a sort of ‘economic revolution’ that, although would regrettably increase inequality, in the process would make everybody better off by creating tons of new wealth.  This it would do by getting rid of that dead weight that is government interference and unleash the animal spirits of the private economy, the true force behind the success of capitalism.  Now, we have seen how this is the complete opposite of how capitalism really works, but to unsophisticated hears it appeared plausible, given also the presence of initial benefits arising from acquiring public assets (i.e. social housing) at bargain prices and benefiting from unsustainable returns in the stock market.  As these benefits accrued to many ordinary people as well, they seemed to confirm the prevalent representation of reality. Having described how the domestic audiences of the core countries were convinced, now we need to turn to the geopolitical aspect of this economic paradigm, the capturing of foreign countries into the neoliberal web which would eventually reduce them to debt colonies.

Rebuilding an undercover empire  & the international division of labour – As we have seen, the neoliberal economic paradigm relies heavily on delocalisation and therefore it needs a number of countries that follow opposite but complementary policies by concentrating on providing low-cost production.  Thus over time the neoliberal paradigm produces, roughly speaking, the following division of labour:  a) extraction of resources, concentrated in third world countries, to be maintained in a permanent state of underdevelopment and inferiority via covert wars and regime change operations, and patrolled by ‘peace keeping’ forces.  The hegemonic countries make sure that they fully control these ‘extraction’ countries, as having exclusive access to the main commodities allows them to hold the rest of the world to ransom;  b) low-grade production concentrated in low-cost countries (at the moment mainly China and other far east/south east Asian countries, but also Latin America and other ‘emerging’ markets), c) higher grade productions concentrated in more advanced countries (Western Europe – increasingly mainly Germany- as well as Japan and other advanced East Asian countries, such as South Korea, Taiwan etc.), c) the strategic technologies are concentrated in the core advanced countries (mainly the US); d) finance as well is concentrated in the core countries (the so called 5-eyes, as well as Western Europe and Japan, e) the most strategic aspects of finance are kept in the UK and US (also Switzerland with the BIS plays an important role) and the network of tax havens.  

Setting aside for the moment the extraction countries, we can see that there is a fundamental (although never emphasised) dichotomy in this arrangement, between what we could call ‘Neo-Mercantilist’ countries, where production is concentrated (these countries tend to adopt a ‘race to the bottom’ model of aggressively cutting costs, compressing wages and keeping their currencies undervalued) and the Neoliberal ones, which are slowly drained of all their resources and – this is the Achilles’ heel of the whole arrangement – the core hegemonic countries are part of this group.  Therefore we must keep in mind the non negligible detail that over time the Neo-mercantilist countries tend to conserve and increase their productive structure, while the centres of power where the elite is based tend to lose it (with all the implications for technological dynamics). The neoliberal arrangement (or world order) presents another – partly overlapping – dichotomy between current account surplus and current account deficit countries: Neo-mercantilist and extraction countries tend to be on the surplus side (keeping in mind that in third world countries this surplus is ‘stolen’ at source) while neoliberal countries are on the deficit side.

Given these basic dichotomies and imbalances, for the neoliberal paradigm to perpetuate itself it is essential that all countries remain under the control of the same management, increasingly a small elite within the US/UK/Western block, and be willing to send their surplus money to the financial centres.  The small elite which controls the financial centres in turn takes care of boosting (by creating new debt-money and toxic assets) and redirecting such financial flows as needed for the purpose of maintaining the neoliberal world economy performing reasonably well.  As this arrangement over time tends to give an advantage to the countries in which production is concentrated, it is not difficult to imagine that, to avoid unwelcome changes in the international pecking order, these countries must be controlled in various ways. The more advanced ones are controlled by a network of trusted (as well as blackmailed) people placed in their key institutions (the ‘deep state’) as well as by the neoliberal economic paradigm itself, enforced increasingly by supranational institutions (as we will soon describe); in addition, they are held to ransom by the Usa, the country imposing its currency for international transactions, controlling access to basic commodities and to basic infrastructure (such as the main trade routes, the gas pipelines, the international payment system and lately the internet), and ultimately also by the threat of its superior military power; in addition, they are also inundated with propaganda and disinformation.  It must be emphasised as well a crucial fact that goes largely unnoticed: they are impeded from developing strategic technologies via covert wars but also via economic warfare (the neoliberal paradigm itself, as we will soon describe).  The less advanced countries are kept in their place in part with similar methods, in part with various forms of destabilisation and covert wars.  This is a rough snapshot of the Neoliberal world order as it appeared once fully realised (from the late 90s until a few years ago).  Our job in the next few paragraphs is to describe how this undercover empire was rebuilt in the past few decades, by applying a mixture of covert wars and economic warfare (the Structural Adjustment Programs or forced introduction of the neoliberal paradigm).  We will now trace the main legs of this journey in reverse gear towards a high-tech remake of what is at bottom a 19th century-style (or British empire-style) configuration. 

1980s – exporting neoliberalism to Third World countries In the words of Ha-Joon Chang: ‘The most lasting legacy of the high interest rate policy in the US in the late 70s and early 80s – called the Volcker Shock, after the then chairman of the US central bank, the FED – was not in the US but in the developing countries.  Most developing countries had borrowed heavily in the 1970s and in the early 1980s, party to finance their industrialisation and partly to pay for the more expensive oil, following the Oil Shocks.  When the US interest rates doubled, so did the international interest rates, and this led to a widespread default on foreign debts by developing nations, starting with the default of Mexico in 1982.  This is known as the Third World Debt Crisis.  Facing balance of payments crises, these countries had to resort to the IMF for emergency borrowing.  The IMF granted these loans on condition that the borrowing countries implement [infamous] Structural Adjustment Programs (SAP) which required [to adopt the  neoliberal paradigm]:

*shrinking the role of the government in the economy by cutting its budget, [= giving up demand management and what little welfare state these countries had]

*privatizing SOEs [= giving up industrial policy]

*and reducing regulations [=protectionism], especially on international trade [allowing foreign competition to further destroy their industry and agriculture]

[the above measures amount to forcing these countries to put back on the whole colonial economic straight-jacket which slowly dismantles capitalism 2.0 and reverts it to 1.0]. 

 ‘As a result of these reforms most countries experienced dramatic growth slow down in the 1980s and 1990s.  Per capita income growth rates in Latin America collapsed from 3.1 percent in 1960-80 to 0.3 per cent in 1980-2000.  In Sub-Saharan Africa per capita income fell by 13 percent between 1980-2000.  The only success stories of this period were economies that used state intervention extensively and liberalised only gradually.  The best examples of this were Japan and the ‘tiger’ economies of East Asia (South Korea, Taiwan and Singapore) and, increasingly, China’.  

[to be noted: the good performance of some economies is not in contrast with the neoliberal paradigm, as this unbalanced system does need a number of countries to be used as world factories; Within the international division of labour these countries were going to take the Neo-mercantilist role, so they were allowed to have a functioning industrial structure.  But the caveat was that their export surplus money would have to be conveyed to the financial centres.  This ‘necessity’ was taken care of in the late 80s/early 90s for what concerns Japan, and in the late 90s the for what concerns the Tigers by inflating asset bubbles and then letting them burst – for further information on this you can watch the film ‘Princes of the Yen’]

Exporting Neoliberalism to the Western blockWhile neoliberalism was being established in the centre of the empire with the reforms operated by the Reagan and Thatcher governments in the 80s the dismantling of the Keynesian paradigm started in the other advanced countries as well.  Due to the fact that these countries were not really independent as a result of having lost WWII (with consequent infiltration of their institutions by the ‘deep state’) they went along with a series of highly damaging reforms along the same lines as those passed by the Thatcher and Reagan administrations, although the implementation was much more gradual than it had been in the US/UK.  The main initial reforms, following the collapse of the Bretton Woods monetary union, were: a) abolition of the obligation to cooperate in order to keep trade balanced, b) legislation granting the ‘independence’ of the central banks; c) interest rate hikes in tune with those passed by London and Washington DC, d) financial deregulation.  

In addition, European countries consented to tie themselves to the restrictive  (Neo-mercantilist) policies pursued by Germany by adhering to various ever tighter forms of common monetary arrangements, eventually completely renouncing their monetary sovereignty with the adoption of the single currency. The combination of these reforms amounted to the abolition of industrial policy and increasing dependence on the financial markets in order to fund both government and consumer spending. We must now analyse in more details the implications of these reforms for industrial policy, trade deficits and accumulation of debt.

The crippling of industrial policy in the western block – the Bretton Woods cooperative management of the world economy, as we know, was based on the principle that trade should be kept balanced.  Countries had to strive to achieve this objective – this meant that they had to spend money (of which a large part was created by their central banks) on industrial policy in order to keep up with technological upgrades but also, if necessary, they had to help  their trading partners who were lagging behind; in addition, governments spent money to boost their internal demand, indispensable to stabilise business cycles and to keep domestic industries in business.  The neoliberal reforms were designed to sabotage this difficult equilibrium by making difficult for governments to create money: central bank independence legislation meant that governments could no longer count on their central banks to finance their economic policies.  Financial deregulation meant that they could not count on domestic private capitals either, as they would be free to leave the country in search for better returns.  Therefore the governments increasingly had to resort to the financial markets instead, and this tended to push interest rates upwards, especially considering the general trend after the Volcker shock.  Abolition of the obligation to keep trade balanced finished off the job of dismantling the previous arrangements, by unleashing the typical neoliberal/neo-mercantilist race to the bottom. 

With these reforms sound economic management is turned upside-down.  The main aim of a  successful economy should be to retain enough money in its internal circuit (consisting of state pension funds and national banks, both public and private) and to re-invest it in its own productive structure to maintain and upgrade it. With the new arrangement, instead of balancing trade the obsession now becomes balancing the government budget.  This, provided that a state has enough of an industrial base and is able to pay for its imports, should not be a problem, because the central bank should act as lender of last resort and buy government bonds to finance public spending.  However, within the neoliberal economic paradigm states basically agreed to put themselves in a catch-22 situation: as the independent central banks no longer fund government spending, private capitals fly towards the financial markets and interest rates rise, governments start to get deeper and deeper into debt and no longer have the money to upgrade their productive structure.  As their productive apparatus starts to lag behind, then it becomes necessary  to compress wages and aggregate demand in order to contain trade deficits.  This results in slower GDP growth or even GDP decline, making the burden of debt even higher, and often being forced to sell off assets (such as SOEs and public banks) in order to remain credible with the financial markets.  This further impedes the possibilities of recovering competitiveness. Slowly but surely, the new paradigm started to cripple the state managed economies and would have probably led very rapidly to unsustainably high levels of unemployment and generalised rebellion if it had been left to play out without corrections.  However, past the first phase of recession, in the 90s interest rates started to go down and most weak countries gained access to abundant capitals that would create asset bubbles and the impression of economic growth (this effect was enhanced for many European countries in the 2000’s after they joined the single currency).  They would pay for this bonanza later on. On the other hand, the countries better able to compete would adopt the Neo-mercantilist approach: they would compensate shrinking government spending and consequent lack of internal demand (leading to slower GDP growth) with increased exports, and they competed for export markets by lowering taxes, regulation and labour costs (the typical race to the bottom) rather than by upgrading their technologies and infrastructure.  We will see later how these dynamics played out over time.  Now we must turn to the capture of other groups of countries, and for this, we return to Ha-Joon Chang’s narrative:

1990s – exporting neoliberalism to ex-communist countries – ‘In 1989 a momentous change happened: the Soviet Union started to unravel and the Berlin Wall was torn down.  Germany was reunited and most Eastern European countries abandoned communism.  By 1991 the Soviet Union itself was dismembered.  With China gradually but surely opening up and liberalizing since 1978 and with Vietnam also adopting its ‘open door’ policy in 1986, the socialist block was reduced to a few die-hard states, notably North Korea and Cuba.  In the next decade or so, the socialist countries in Eastern Europe made a headlong dash to transform themselves (back) into capitalist ones.  Many thought that the ‘transition’ could be made quickly by privatising SOEs and reintroducing the market system, which is after all one of the most ‘natural’ human institutions?  Most countries adopted ‘Big Bang’ reforms, trying to bring capitalism back overnight.  The result was nothing short of a disaster in most countries.  Yugoslavia disintegrated and descended into wars and ethnic cleansing.  Many former republics of the Soviet Union experienced deep depressions.  In Russia, the economic collapse and the resulting unemployment and economic insecurity caused so much mental stress, alcoholism and other health problems resulting in the premature deaths of millions of people.  In many countries, the old elite simply ‘changed their suits’ and transformed themselves from party apparatchiks into business men, enriching themselves hugely by acquiring state assets at knock-down prices through corrupt practices and ‘insider dealings’ in the privatisation process [it is rumoured that the money to buy the state assets was provided by the well known transnational elite..]…  The central European countries – Poland, Hungary, the Czech Republic and Slovakia – fared better, especially after they joined the European Union in 2004, thanks to being more gradualist int heir reform and to their better skill bases [but also thanks to the fact that their western European partners substantially subsidised their budgets, welcomed their workers, allowed them to keep their currencies, and delocalised factories in those countries – this whole arrangement besides lowering production costs in Western Europe allowed NATO to expand].  But even in the case of these countries, it is difficult to hail the transition experience as a great success.  The fall of the socialist block ushered in a period of ‘free-market triumphalism’. Some, such as the American neo-con thinker Francis Fukuyama, pronounced the ‘end of history’ on the grounds that we had finally identified the best economic system in the form of capitalism.

Mid 1990s – ‘globalisation’ takes off, exporting neoliberalism around the world – ‘By the mid 1990s neo-liberalism had spread throughout the world.  Most of the old socialist world had been absorbed into the capitalist world economy, either through ‘Big Bang’ reforms or, as in the case of China and Vietnam, through gradual but constant opening up and deregulation.  By this time, market opening and liberalisation had also progressed considerably in most developing countries.  In most countries, this happened rapidly due to the SAPs, but there were some others where it happened more gradually through voluntary policy changes, such as in India. Around this time, some important international agreements were signed that signalled a new era of global integration.  In 1994 the NAFTA was signed between the US, Canada and Mexico.  It was the first major free-trade agreement between developed countries and a developing country.  In 1995, the Uruguay Round of the GATT talks was concluded, resulting in the expansion of the GATT into the WTO.  The WTO covers many more areas (e.g., intellectual property rights, such as patents and trademarks, and trade in services) and has more sanctioning power than the GATT did.  Economic integration progressed further in the EU, with the completion of the ‘Single Market’ project (with the so-called ‘four freedoms of movement’ – of goods, services, people and money) in 1993 and with the 1995 accession of Sweden, Finland and Austria. [followed by the introduction of the single currency in 2002, leading to Germany outcompeting all its partners]. The combined result was the creation of an international trading system that was much more geared towards freer (although not entirely free) trade.  Also the idea of globalisation [‘neutral’ name disguising the reality of an undercover Empire] emerged as the defining concept of the time.  International economic integration had been going on since the sixteenth century but, according to this narrative, it had reached an entirely new stage.  This was thanks to the technological revolutions in communications (the internet) and transportation (air travel, container shipping) which were leading to the ‘death of distance’.  According to this narrative, countries now had no choice but to embrace this new reality and fully open up to international trade and investments, while liberalising their domestic economies.  Those who resisted this were derided as the ‘modern Luddites’. 

To gain further insights, we could reword the above narrative in the following way: once the straight-jacket of capitalism 1.0 had been imposed on a good number of countries with various means, the elite in power made a bid to generalise its application via financial deregulation and free trade agreements (with the transformation of the GATT into the much more encompassing WTO). Abolishing trade barriers for countries that have difficulties competing is a sure way to get them into unsustainable debt, while liberalising the capital markets is a sure way of exposing countries to financial speculation, and get even otherwise healthy economies into trouble.  In addition, with these arrangements advanced economies tend to import cheap products produced in delocalised factories as well as immigrants, both developments leading to lower wages.  The overall winner in this generalised race to the bottom is, notoriously, the One Percent elite.  A typical example of how this set-up works can be seen with the NAFTA agreement.  The effect of this free trade arrangement was to destroy the Mexican agricultural sector and the livelihood and communities of a vast number of peasants, forcing them to move to the US, where they flooded the labour market with cheap labour and displaced the locals.  At the same time many factories were moved south of the border in free economic zones (the infamous ‘maquilladoras’) making people north of the border jobless while providing only very low wages, no taxes and no technological transfers to Mexico.  The overall outcome was displacement and income reduction for a vast majority of people, while a small elite raked in the profits.

The Asian financial crisis – the beginning of the end – ‘The euphoria of the late 80s and early 90s didn’t last.  The first sign that not everything was fine with this ‘brave new world’ came with the financial crisis of Mexico in 1995.  Too many people had invested in Mexican financial assets with the unrealistic expectation that, having fully embraced free-market policies and having signed the NAFTA, the country was going to be the next miracle economy.  Mexico was bailed out by the US and Canadian governments as well as the IMF.  In 1997, a bigger shock came about with the Asian financial crisis.  A number of hitherto successful Asian economies – the so-called ‘MIT economies’ (Malaysia, Indonesia and Thailand) and South Korea – got into financial troubles.  The culprit was the bursting of the asset bubbles (asset prices rising well above their realistic levels, based on unrealistic expectations). While they had been more cautious than other developing regions in opening up their economies, these countries opened up their financial markets quite radically in the late 1980s and the early 1990s [this was due to the high pressure brought to bear by the USA, the main export market of these export-led economies].  Now facing fewer restrictions, their banks borrowed aggressively from the rich countries, which had lower interest rates.  In their turn, the rich-country banks saw little risk in lending to countries with decades-long excellent economic records.  As more foreign capital flowed in, asset prices went up, which enabled firms and households in the Asian countries to borrow even more, using their now more valuable assets as collateral.  Soon the process became a self-fulfilling prophecy, as the expectation of ever rising asset prices justified further borrowing and lending .  When it later became clear that those asset prices were unsustainable, money was pulled out, and financial crises ensued.  The Asian crisis left a huge scar in the afflicted economies.  Output fell in 1998 by 16 percent in Indonesia and 6-7 percent in the other economies.  Tens of millions of people were thrown out of work in societies where unemployment means penury, given the small size of the welfare state.  In return from the bail-out money from the IMF and the rich countries, the crisis-stricken Asian countries had to accept a lot of policy changes – all in the direction of liberalising their markets, especially their financial markets.  While it pushed the Asian economies themselves on in a more market-oriented direction, the Asian crisis – and the Brazilian and the Russian crises that immediately followed it – actually planted the first seed of scepticism about post-Cold War free-market triumphalism.  There were serious discussions about the need to reform the global financial system, much of them along the same lines as the ones that we have seen following the 2008 global financial crisis.  Even many leading advocates of globalization started questioning the wisdom of allowing free international capital flows’.

To sum up: some countries were captured into the neoliberal web as a result of loans acquired during the 70s when interest rates net of inflation were low, and then they were suddenly jacked up in the 80’s, making those countries bankrupt and turning them into the loving care of the IMF, which imposed SAPs, in other words the neoliberal straightjacket (this model of getting countries into unsustainable debt and in need of IMF loans, with consequent imposition of SAPs, was later repeated again and again (according to a pattern described in the book ‘Confession of an Economic Hitman).  Some countries were captured in the turmoil and disarray that followed the fall of communism.  Some countries, such as China, Vietnam and India opened up gradually of their own accord (shrewdly taking the role of Neo-mercantilist economies). Some countries were captured by inducing them to adhere to the WTO (or other free trade agreements) – Some countries were captured by putting pressure on them to open up their financial markets – ‘an offer that they could not refuse’, given the political and market power of its promoter – then asset bubbles were inflated and they also ended in the loving care of the IMF.  Some countries such as Japan and the Eurozone were induced to make senseless economic choices (inflating asset bubbles in the case of Japan and joining the single currency in the case of Western Europe) due to the half century long domination by the same transnational powers.  Likewise, Latin American countries were captured because they have been under USA control for a very long time, achieved mainly via military coups (Chile being the most infamous case, and also the country that pioneered neoliberalism even before the US and UK).

The effect of all of this has been called globalisation, this way inducing the public to see the phenomenon as a natural evolution of the world economy, thus masking the multitude of covert wars that have actually brought it about.  The covert wars include not just political/military interference, but also the neoliberal paradigm itself with all its institutional architecture, as well as the information and cultural wars that have greatly aided neoliberalism in taking hold.  Over time the result has been the reconstruction of an undercover empire ruled by colonial management of the economy (= disabling the economies of the captured countries by reverting them to capitalism 1.0), achieved by means of covert pressures (and occasionally overt ones) as well as by massive doses of disinformation and manipulation.

In the fourth decade of this seemingly unstoppable journey in reverse gear, things start to go wrong for the people in power. Due to increasing amounts of debt coupled with sluggish economic growth, the centres of the empire become increasingly bankrupt and need to resort to massive doses of financial fraud and monetary manipulation in order to keep this economic/imperial arrangement in place. This is the last leg of the journey, in Chang’s words:

1999-2008The false dawn: from the dot.com boom to the Great Moderation – ‘When these crises [Asian/Russian/Brazilian] were brought under control, talk of global financial reform receded.  In the US, a major push in the other direction came in the form of the 1999 repeal of the iconic New Deal legislation, the 1933 Glass-Steagall Act, which structurally separated commercial banking from investment banking [this was necessary as the core countries were running out of ways to generate returns in their financial centres, therefore they needed to resort to massive doses of fraud in order to attract the capitals necessary to finance their trade deficits]. There was another moment of panic in 2000, when the so-called dot.com bubble – in which internet-based companies with no prospect of generating any profit in the foreseeable future had their shares valued at absurdly high levels – burst in the US.  The panic soon receded, as the US Federal Reserve intervened and cut interest rates aggressively and the central banks of other rich economies followed suit.  From then on, the early years of the millennium seemed to be going swimmingly well in the rich countries, especially in the US [bur also the UK, Australia, Canada – in reality the buoyancy of the economy was due to monetary manipulation, generating a boom via asset bubbles, this happened also in some peripheral countries such as Spain and Ireland, all courtesy of money created or re-directed by the financial markets].  Growth was robust, if not exactly spectacular.  Asset prices (prices of real estate, company shares and so on) seemed to be going up forever.  Inflation remained low [due to delocalisation putting a lid on wages].  Economists – including Ben Bernanke, the chairman of the Federal Reserve Board between February 2006 and January 2014 – talked of the ‘Great Moderation’, in which boom and bust had finally been conquered by the science of economics [in reality thanks to lowering interest rates and inflating asset bubble via credit creation]’.  Alan Greenspan, the chairman of the FED between 1987 and 2006 was revered as the ‘Maestro’ who had managed to achieve a permanent economic boom without stoking inflation or courting financial trouble.’  

While the West was enjoying a fake economic boom based on debt (having delocalised production, it was attracting the money of the trade surplus countries back into its financial markets to inflate asset bubbles) and carried on spreading misconceptions about the economy (the idea of having abolished boom and bust, while in reality they had simply managed to keep on lowering interest rates and sustaining aggregate demand with unsustainable levels of debt in order to stave off the inevitable readjustment via financial crash, a reckless operation that they could only get away with thanks to their political and military power) the first unintended effect of this economic warfare euphemistically known as neoliberalism took place: the so called ‘emerging countries’ started to have an impact on the world stage.

The rise of ‘emerging countries’– Most notably Russia and China, but also India and many South American countries.  The Russian state rather quickly, after the complete debacle of the 1990s, regains control of its economy and society while China, which had always remained in control of its rapid economic and social transformations, starts to become an important and potentially game-changing player. Here we resume Ha-Joon Chang’s narrative:

‘During the middle years of the 2000s the rest of the world finally started to feel the ‘miracle’ growth of China of the preceding two decades.  In 1978, at the beginning of its economic reform, the Chinese economy accounted for only 2.5 percent of the world economy.  It had minimal impact on the rest of the world.  By 2007 its share of the world economy had risen to 6 percent.  Being relatively poorly endowed with natural resources and growing at breakneck speed, it started sucking in food, minerals and fuel from the rest of the world, and the effect of its growing weight was felt more and more strongly.  This gave boost to raw-material exporters of Africa and Latin America, finally allowing these economies to make up some of the ground they had lost in the 1980s and 1990s.  China also became a major lender and investor in some African countries, giving the latter some leverage in negotiating with the Bretton Woods institutions and the traditional aid donors, such as the US and the European countries.  In the case of the Latin American countries, this period also saw a departure from the neoliberal policies that had served them so poorly in several countries’. [Latin American countries started to become more independent and Brazil became part of an emerging block of countries, the BRICS, which was seen as a potential countervailing power to the current world order]

The post-9/11 countermeasures – Meanwhile the US, along with the ‘coalition of the willing’ had already started their countermeasures since 2001. Seeing the emerging countries (especially Russia and China) becoming too independent, at the same time that the economy of the core countries was becoming bankrupt, after 9/11 a raft of wars and destabilisations is launched against various countries in the Middle East and central Asia, designed to surround the two major rivals (Russia and China) and tighten the control over the world major sources of energy and trade routes.  This is no conspiracy theory, as there is a well known interview given by retired US General Wesley Clark to Democracy Now in March 2007, revealing the existence of a plan to attack seven countries of that region in five years.  Along with the wars, in the early 2000s we also see the spread of terrorism and separatism across the region (including in some Russian republics and all the way to the muslim Western provinces of China).  All of this takes place at the same time that massive financial manipulation aided and abetted by various western governments and central banks is propping up the financial markets and the western economies by inflating asset bubbles.

State of affairs in the run up to the 2008 financial collapse:  The empire has been rebuilt, capitalism 2.0 has been reverted into a modified 1.0 version, we could call it 1.1 The modification is crucial – as it has permitted to avoid another Great Depression which would have been lethal – and it consists of propping up consumer demand with debt and then by sustaining the debt pyramid by means of massive financial manipulations aided and abetted by very accommodating monetary policies.  The covert empire is being kept together officially by international agreements, objective economic rules and transnational institutions helping to smooth out situations of crisis, in reality by covert wars, manipulation and debt slavery. The ICT revolution has been highly instrumental in achieving this feat of completely reversing the progressive compact of the Golden Age, equally  important have been the host of covert wars waged in order to take control of formally sovereign states.   

However, the very success of this massive operation has generated the seeds of its own destruction:  most notably a rival power block (the ‘emerging countries’ variously favoured by neoliberal delocalisation and coagulating around the strategic leadership of China and Russia) and slightly less visible but quite obvious after the 2008 financial collapse – the disabling of the economy in the centres of power and the generalised loss of faith in neoliberal economics that goes with it.  The most obvious effect of this disabling  – or, to use Paul Volcker’s expression ‘controlled disintegration’ – of the Western economy was the financial crash of 2008, whose responsibility was attributed to the greed of the ‘banksters’ by the media, but in reality was nothing other than the all too predictable unravelling of an unsustainable set up.  

Post-2008 state of affairs – The economic malaise that followed, now generally known as ‘secular stagnation’, is the consequence of obstinately wanting to prop up the neoliberal world order (or empire) with the only available means left: QE for the financial markets coupled with austerity for the real economy and destabilisation for an ever wider number of countries. Had a formidable rival (the China/Russia alliance) not emerged on the scene, the financial collapse of 2008 would probably not have been a problem, but it could actually have served as the final ‘coup de grace’ to the real economy of most countries, the final opportunity for the financial elite to appropriate an even bigger chunk of public and private assets than they have already done, and finish off their long reverse journey towards capitalism 1.0 and total global control.  In other words, they might have won their long covert war and succeeded in establishing their ‘New World Order’. But we won’t speculate here as to what might have been the end game of neoliberalism in the intentions of its promoters.  We will stick to the facts instead. After 2008, and with an acceleration after 2016, we have entered a phase of transition (which I have analysed at length in chapter 4.)  This is another way of summing up the unfolding of neoliberal globalisation, which amounts to the reconstruction of an empire, decade after decade:

  • 1970s: interregnum of transition starts after the 1971 default. The oil-shocks of 1973 and 1979 provide the opportunity to start dismantling the Bretton Woods arrangements and shifting towards a new paradigm
  • 1980s: Thatcher and Reagan introduce extensive neoliberal reforms. Various countries are captured
  • 1990s: The heyday of neoliberalism – many more countries are captured & neoliberalism is extended across the world with the WTO and other wide ranging agreements (i.e. Maastricht for the EU, NAFTA for North America)
  • 2000-08: massive financial fraud and monetary manipulation become necessary in order to prop up an unsustainable arrangement, ending up with the 2008 financial collapse
  • 2008-16: Neoliberalism kept on life support with massive injections of money for the financial markets and destabilisation operations (Arab Spring, Libya, Syria, Ukraine)
  • 2016 onward – Brexit referendum and Trump’s election mark the start of a new interregnum of transition, as the controversial intention of dismantling the neoliberal arrangements becomes manifest in the core countries

We have now finished tracing the chronological unfolding of neoliberalism mainly in economic and geopolitical terms. In the next section (the Chinese Green New Deal) I will be able to shed more light as to what may come next. Using the knowledge we have accumulated regarding the role of technology, I will be looking at the future through the lens of a rising power making a bid at world leadership by trying to ‘intentionally’ trigger the next Kondratieff cycle. Before we get there we need to analyse the other aspects of the neoliberal onslaught that we haven’t covered yet: disabling of state power, cultural disabling and social disabling.

Part II – neoliberalism as political, cultural and social warfare 

As previously mentioned, it is important to understand that as it evolves, capitalism becomes ever more managed.  Accordingly, neoliberalism is not just an economic paradigm but an entire way of managing capitalism which progressively tends to invade ever more aspects of life.  It is a way of managing capitalism in the declining phase of a cycle  (the declining part of the fourth Kondratieff wave), but also in a phase in which power is highly concentrated.  The combination of these factors – being an advanced (in terms of technology, knowledge and sophistication), declining (in terms of Kondratieff economic cycles), and concentrated (in terms of power) phase of capitalism – turns neoliberalism into a full blown covert war waged on many fronts, to entrench and finalise the hegemony of the USA and of the transnational elite.  The ‘end of history’ and the establishment of the New World Order is the aim of the neoliberal onslaught. Compared to the Golden Age, in which covert wars also played an important role, Neoliberalism has taken this practice a lot further by transforming ever more aspects of life into covert war battlefields, and by taking these wars to unprecedented levels of sophistication.  The reason why it has been so successful and why it has encountered virtually no effective opposition, is because it has neutralised possible opponents pre-emptively, before they could articulate a reaction.  The specificity of covert warfare is that it is very asymmetric: one side is fighting while the other is unaware.   We have said that the Golden Age had been criss crossed by all sorts of tensions (US vs USSR, industrial capital vs labour, US vs Western allies, Transnational Elite vs US state and vs other states etc.), the Neoliberal Age increasingly sees the presence of a series of covert wars fought only in one direction: Transnational Elite vs everybody else (all independent states as well as all of society – both labour and industrial capital, in economic terms).  We have mentioned that the plurality of interconnected covert wars which constitute neoliberalism can be grouped into 5 major areas:

a) covert actions of of political/military nature (regime change) aimed at capturing countries 

b) infiltration of the institutions of the captured countries by a network of hidden power, the so called ‘deep state’;

c) variously induced adoption of the neoliberal economic paradigm in order to disable national economies and ultimately nation-states 

d) cultural engineering, mass disinformation, and manipulation of knowledge in order to gain acceptance for the new economic and social order 

e) social engineering in order to disable civil society and prevent its reaction once the adverse effects of the new order become too obvious and the manipulation loses its effectiveness.  

Having described at length the economic and the geopolitical battlefields, now we need to understand the other, less obvious aspects of the neoliberal onslaught.  First of all we need to see the interconnections of all these aspects. 

to be continued…

 

Under construction …

 

Go to 7d) The Chinese Project