Neoliberalism is the dominant economic ideology in the world today.
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Musings Report 2019-24 6-15-19  The Sputtering Engine of the Global Economy: Neoliberalism


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The Sputtering Engine of the Global Economy: Neoliberalism

Neoliberalism is the dominant economic ideology in the world today, spanning socialist and free-market economies alike.

What does neoliberalism mean?

The core concept is the "liberalization" of the economy by freeing markets of stultifying state regulations and introducing global markets into places that lacked access to global markets of buyers, sellers, labor and capital, which in the current system includes not just savings to be invested but access to credit.

The core benefit promised by Neoliberalism is broad-based growth: Once markets are liberalized, i.e. freed of government control of supply and prices, and once local economies are opened to the global marketplace, widespread economic growth will result, boosting the prosperity of all participants.

The core driver of growth is the global marketplace, which introduces pricing and production efficiencies via competition, expands opportunities for workers to find paid work and higher incomes, and increases opportunities for capital to invest in fast-growing markets and enterprises.

A secondary driver is the introduction of credit to credit-starved economies: once people and businesses have access to credit, they can greatly expand their consumption and production, generating a self-reinforcing virtuous cycle of more borrowing, production, consumption, wages and profits.

In many ways, China's opening of many sectors of its economy to global markets over the past 30 years (1989-2019) is a textbook example of the benefits of Neoliberalism: China's fantastic expansion of consumption, production, income and wealth would have been impossible without a vast expansion of credit, capital investment and access to the global marketplace.

This is the "happy story" of Neoliberalism: workers who previously had little access to wage-work suddenly have income, and with that income they have access to credit. Enterprises that couldn't expand due to a dearth of investment could suddenly attract foreign capital and borrow money to increase production.

But there is a less happy story in Neoliberalism, too.  

Neoliberalism opens local economies not just to the benefits of global markets but to the negatives of global markets.  

Local producers can't compete with globally sourced goods and commodities, and so locally owned production collapses.  

Once local resources, labor and land are priced by global capital flows, prices soon rise out of reach of locals. Resources are snapped up by global corporations, financiers and oligarchs, none of whom have any loyalty to the culture, environment or community.  Their sole motivation is to maximize short-term profits by stripmining resources and exploiting global wage arbitrage (finding new pools of desperate labor who will work for very low wages).

These exploitive forces of global capital seek locales with lax environmental standards and corrupt governance, so their exploitation of the resources and land aren't hindered by enforcement of environmental and labor regulations.

The opening of local economies to global capital flows and low labor costs also pressures corporations: any company that's facing global competition on price has little choice but to join the race to the bottom lest they lose market share to the lowest cost producers.

These forces are not limited to the developing-world economies; they are equally destructive in developed economies: entire industries are offshored to lower costs, global capital bids up land and housing out of reach of local households, and the flood of global capital soon buys political influence via lobbying and bribes, known as "campaign contributions" in the U.S.

There are two intrinsic negatives in the Neoliberal ideology:

1. Markets are not inherently profitable. As management guru Peter Drucker observed, enterprises don't have profits, they only have costs.

As I've noted in previous Musings, the vast majority of China's corporations are not profitable. Profit margins in global supply chains are near-zero except for the corporation at the top reaping the cost savings, for example Apple.

2. Central states will always influence markets, creating winners and losers based on political influence, not price or quality.

Markets are not inherently profitable because competition lowers prices and profits. The only way to secure steady profits is to secure a monopoly or cartel control of supply and pricing.

In a completely free market, monopolies attract competition and the advantages of monopoly are soon lost. 

The only sure way to secure high profits is to lobby or bribe governments to regulate markets in ways that secure monopolies or cartels, i.e. limit competition to the benefit of a small group of participants, i.e. a cartel.

Once cartels are state-enforced, competition ceases to exist and the economy stagnates under the weight of rentier cartels. In the U.S., we see this in higher education, healthcare and defense industries--all cartels enforced by the central state, all exempt from real competition.

Neoliberalism promises the benefits of unfettered markets, but it also delivers the worst of all worlds: the systemic exploitation of everyone and everything that isn't politically powerful enough to protect itself from global capital, and the imposition of rentier-skimming politically powerful monopolies and cartels enforced by the central state.

These flaws are now outweighing the benefits of Neoliberalism, and so the engine of global growth is sputtering.


Highlights of the Blog This Past Week

Misplaced Pride: Most of the "Middle Class" Is Actually Working Class  June 14, 2019

The Self-Destructive Trajectory of Overly Successful Empires  June 12, 2019

A Stock Market Crash Scenario  6/10/19


Best Thing That Happened To Me This Week 

Harvested the first of this year's lychee crop--not much compared to last year's bounty but enough to share.


Musings on the Economy: What Do We Not Measure?

Longtime correspondent Michael M. recently submitted an excerpt describing something that I consider one of the most profound, and least understood, concepts in economics:  whatever we don't measure doesn't exist in our economic models, though it exists in the real world:

"The first step is to measure whatever can be easily measured. This is OK as far as it goes. The second step is to disregard that which can't be easily measured or to give it an arbitrary quantitative value. This is artificial and misleading. The third step is to presume that what can't be measured easily really isn't important. This is blindness. The fourth step is to say that what can't be easily measured really doesn't exist. This is suicide." 
Daniel Yankelovich 'Corporate Priorities: A continuing study of the new demands on business.' (1972) 


Much of my work focuses on social-economic forces that are not measured and thus don't exist, for example positive social roles and the relative decline of financial security.

The problem is that these conditions are not easy to measure, and may be unmeasurable in the conventional methodologies of quantification.  We have to employ other methods to describe them, methods that avoid quantification's illusion of precision.


From Left Field

How the Plague Reshaped the World: The bacterium that causes the plague emerged relatively recently, as bacterium go. And yet the pandemics it’s created have altered the world.

Sloughing off the costs of environmental damage (via Bruce T.) -- externalized costs end up being "paid" by non-customers and non-owners....

Highly Skilled Worker Migration -- countries scored by four factors (via Iris K.)

Huge Global Study Just Smashed One of The Last Major Arguments Against Renewables  (via Steve K.) -- water in reservoirs = stored energy... but the cost of building dams isn't cheap, either....

Unrivaled: Why America Will Remain the World's Sole Superpower (book)  (via Iris K.) -- not a story most politically correct people want to hear....

He Got Schizophrenia. He Got Cancer. And Then He Got Cured. (via Steve K.) A bone-marrow transplant treated a patient’s leukemia — and his delusions, too. Some doctors think they know why. -- fascinating and important...

Imperialism in the Twenty-First Century (via Brandonrox10) -- long read, but some worthy nuggets....

Automation Could Destroy Poor Economies, Says Historian-- and wealthy economies, too....

France is the world's most food sustainable country--tremendous variety of terroir and a long history of farming....

The End of the Supergiants: And What It Means --supergiant oil fields are depleting...

The Worst Patients in the World (via David E.) Americans are hypochondriacs, yet we skip our checkups. We demand drugs we don’t need, and fail to take the ones we do. No wonder the U.S. leads the world in health spending.

Seven Reasons Why We Should Not Depend on Imported Goods from China-- excellent analysis from Gail Tverberg...

"Success is not the key to happiness. Happiness is the key to success. If you love what you are doing, you will be successful." Albert Schweitzer

Thanks for reading--
 
charles
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