Myths of Capitalism

Return to The Wondrous Free Market

Part 3: Neoliberal free-market fundamentalism

Over the last 50 years, Neoliberalism in both propaganda and bureaucratic circles has taken helm of the capitalist faith. Its an ideology that is a resurgence of 19th-century ideas associated with laissez-faire economic liberalism and free market capitalism. You would think that with these ideals, that nowadays the governments of the world use a light touch with all industrial/business endeavours. They will surely let companies rise and fall without any obligation other than to the free market ideas. As we have seen previously with the original free-market era, this just means removing obstacles for employers and in fact helping them out continuously, via state protection of their property, policies to ensure continued profitability plus an enormous amount of subsidies and bailouts. Which within the structural limits of capitalism, is needed to ensure capitalism as a system survives.

A telling document written by a Virginia lawyer (and future U.S. Supreme Court justice) Lewis Powell to a neighbour working with the U.S. Chamber of Commerce, in 1971, foretells the coming period1. The Powell memo came after a period where politicians, like Ralph Nader2, successfully promoted extensive restrictions and requirements on business in areas from the environment to occupational safety to consumer protection. This enraged the free-market ideologues so that people like Powell, encouraged business owners to lobby government officials to get what they want, in terms of policies. This was very effective and led to Maggie Thatcher and Ronald Reagan, both exemplifying leaders embracing Neoliberalism, becoming leaders of their countries. With events such as the financial Big Bang3 bringing privatisation into almost every sector has resulted.

With it’s roots within Hayek’s Mont Pelerin4 society, free market fundamentalism flourished throughout the 70’s and 80’s. The deregulation of certain sectors, removal of capital controls and austerity measures have engulfed seemingly the whole world. This is despite its application giving rise to results that have often been the opposite to what their gospel espouse. When the opposite effects occur and lead to compromising the whole capitalist system, it is then left to the governments of the world to bailout the employers5.

For example, when Chile had a US-led coup, this was seen as a prime location for the Chicago boys – Chilean economists that had a background studying at the Chicago university – to implement what they learnt6. This led to thousands of deaths7 and concentration camps but was all for the supreme neoliberal good – the minimum wage was abolished, unions were outlawed, pension system privatised, taxes on wealth and business profits abolished, public employment diminished, privatised 212 industries and 66 banks and ran a fiscal surplus. By 1983, the unemployment rate was 22% and real wages had declined by 40%, the wondrous free market helped increase inequality substantially8. The Chilean government had to renationalise many sectors after the privatised versions defaulted. The prophet Milton Friedman9, declared the Pinochet regime as an ‘economic and political miracle’ in 198210.

Time and time again, neoliberal policies have led to various governments bailing out and subsidising private companies. Deregulation of savings and loans associations led to the savings and loans (S&L) crisis of the late 1980’s11,12. The deregulation of S&Ls in 1980, by the Depository Institutions Deregulation and Monetary Control Act signed by President Jimmy Carter on March 31, 1980, gave them many of the capabilities of banks without the same regulations as banks, without explicit oversight. This led to widespread abuses of the incentives created by government policies and eventually huge losses occurred. After banks repaid loans through various procedures, there was a net loss to governments of approximately $124–132.1 billion by the end of 1999. When Chrysler got into trouble in 197913, the US government approved a $1.5 billion loan package to help out. Under the free-market system, whenever a company is large enough, it can ask the government to bail out their business14.

On November 12, 1999, President Clinton signed the Financial Services Modernization Act that repealed Glass-Steagall15,16. Congress had passed the so-called Gramm-Leach-Bliley Act along party lines, led by a Republican vote in the Senate. The repeal of Glass-Steagall consolidated investment and retail banks through financial holding companies. It is said that this contributed to the 2007-2008 financial crisis17.

Neoliberal politicians in place during the financial crisis, seemingly forgot the core doctrines of their philosophy and bailed out everyone they could. As we have seen previously {monetary system}, money is created out of thin-air and directed by the people with the powers to create the money (governments, central and private banks), to any areas of society that they deem worthy/necessary for their beliefs and power to flourish.

The bailouts emanating from the 2007-2008 financial crisis18,19 were the largest in recorded history (even allowing for inflation). It is estimated that the FED’s bailout contribution alone, is in excess of $29 trillion20 [$16 trillion – 2011 figure reported by the USA Government Accountability Office21] (twice the US annual GDP). All central banks slashed interest rates to close to zero, implemented widespread buying of assets and unprecedented lending to financial institutions at near 0% rates (TAF, Q.E, TARP, TARF)22-25. Bailout aid was sent to banks in Mexico, Bahrain and Bavaria, billions of dollars were sent to several Japanese automobile companies, Citigroup and Morgan Stanley each received $2 trillion in loans and billions were sent to millionaires and billionaires with addresses in the Cayman Islands26. Every man and his capitalist dog had a bailout or special loans in this period. Some companies that took direct bailouts or were backed by government guarantees were AIG, Ford, Chrysler (again) and General Motors, Bear Stearns, Fannie May and Freddie Mac.

The Federal Deposit Insurance Corporation (FDIC) closed 465 failed banks from 2008 to 201227. In contrast, in the five years prior to 2008, only 10 banks failed. In Great Britain, billions of government cash was used to buy shares of RBS, Lloyds TSB and HBOS to essentially bail out the failing banks28. This was supplemented by more Q.E. to ensure asset prices remained steady. The EU had several member states (mainly Ireland, Cyprus, Greece, Portugal, & Spain) were unable to repay or refinance their government debt or to bail out over-indebted banks under their national supervision without the assistance of third parties like other Eurozone countries, the European Central Bank (ECB), or the International Monetary Fund (IMF). Over 550 billion Euros were needed to bailout these states initially29.

Bailouts are not the only way in which governments help reinforce the capitalist enterprise. The amount of subsidies given each year to private companies is staggering. I will not claim to have found all the subsidies in existence and this list is not exhaustive – I could probably research and write for the next 500 years and only have a fraction of the direct and indirect amount.

There are various methodologies in calculating subsidies, with the World Trade Organisation30 (WTO) mentioning five types31:

  • Cash subsidies, such as the grants mentioned above.
  • Tax concessions, such as exemptions, credits, or deferrals.
  • Assumption of risk, such as loan guarantees.
  • Government procurement policies that pay more than the free-market price.
  • Stock purchases that keep a company’s stock price higher than market levels.

Let’s take the subsidies given out by the USA, as the capitalist nation par excellence. In the year 200632,33, the Cato institute estimates that the federal government spent $92 billion in indirect and direct subsidies, 2002 & 200334 were $92.6 & $86 billion respectively. This was a normal year before the big bailouts of 2007-08 and by 2013 they were $97 billion, so no real change after the bailouts.

The IMF35,36 found that direct and indirect subsidies for coal, oil and gas in the U.S. reached $649 billion in 201537. Accordingly, the world spent $4.7 trillion – or 6.3 percent of global GDP – in 2015 to subsidize fossil fuel use, a figure it estimated rose to $5.2 trillion in 2017. Corporate welfare accounts for nearly half the total income in some parts of US agribusiness, with billions of dollars in cotton subsidies, for example, going to a few rich farmers – while lowering prices and increasing poverty among competitors in the developing world. An especially egregious form of corporate special treatment is that afforded to drug companies. Even though the government is their largest customer, it is not allowed to negotiate prices, thereby fuelling an estimated increase in corporate revenue, and costs to the government – approaching $1 trillion over a decade38.

The milk, peanut, honey and sugar industries get their own government programmes39,40, as well as farming and horticulture in general. Agribusinesses get subsidised for storage facilities, subsidised incomes for when ‘the market’ doesn’t deem their produce of high enough quality and provides credit facilities. Between 2001 and 2006, farm subsidies tapered off a bit, averaging $19 billion a year. Between 1995 and 2010, farm subsidies had ballooned to $52 billion a year on average41. Housing subsidies promote home-ownership and support the construction industry. They total about $15 billion a year.

Although a large amount of tax is taken from companies, if you take for example, the 2015 figures for corporation tax in the USA – $344 billion42, this is dwarfed by the previous IMF figure for the oil, coal & gas industries received for that year in subsidies – $649 billion. Indeed most nations run with a structural deficit (structural budget position43,44: the amount in taxes received minus the amount of government spending). In 2019, most EU member states were projected to end the year with a structural deficit45.

It is sometimes suggested that subsidies are needed to ensure smaller companies to survive, though one report by ‘Good Jobs First’ tracks subsidies in the USA and around 75% go to just 965 large companies46. The same site provides a fairly comprehensive database of subsidies and tax-breaks, in 2017 they estimate over $21 billion of subsidies and over $15 billion of tax breaks were provided from state and federal government to private companies47.

In the UK, subsidies are also handed out every year like clock-work. The fossil-fuel industry gets around £6 billion a year48, farmers often get paid more in subsidies than from actually selling produce49 (a lot comes from the EU, which could change shortly50). All businesses can be viewed as getting subsidies indirectly via tax credits and other welfare, e.g. housing benefit, due to lowering the required pay that is needed to ensure workers can cover living costs51,52(knowing full well that state handouts will supplement worker income). Most public service sectors in the UK have been privatised since Thatcher’s neoliberal revolution53-55.

The railways were split into freight, passenger and infrastructure (track, signalling and stations) sections, all handed over to private companies to manage, regulated by public offices56. By 2002 Network Rail57,58 was formed to take over the infrastructure part (due to Railtrack collapsing), with no shareholders and is a company limited by guarantee, nominally in the private sector but with members instead of shareholders and its borrowing guaranteed by the government. On 3 occasions passenger franchises have had to be taken temporarily into (indirect) government ownership when they have failed due to market conditions. In the 2016–17 financial year Network Rail’s net debt rose from £41.6 billion to £46.3 billion (now on the government’s books), with it receiving direct government grants of £3.8 billion in 2015/16. Train operating companies (TOCs) also receive subsidies (£2.4 billion in 2015/16), though received £3 billion in franchise fees in the same period, so a net total of £0.6 billion59. A classic example of privatising profits and subsidising losses that the neoliberal cult loves60.

Lobbying governments (implored by Powell et al.) lead to special arrangements and tax breaks for companies around the world. Most famously Vodafone has avoided paying large tax bills in both the UK and India, with a top British tax official meeting Vodafone’s financial advisers a few months before a very favourable tax deal was made61-66. This is on top of legalised tax breaks or loopholes put in place, so that companies pay as little tax as possible67-72. It is estimated that companies avoid paying $600 billion per year (40% of multinational profits), with most ending up in tax havens73,74.

Another way that corporate life is inextricably linked to the state, is through the process of regulatory capture75,76. This ensures that government positions dealing with certain legislation are occupied by people with history within the sectors that the government agencies are responsible for overseeing; or when the agencies are lobbied extensively by interest groups to achieve beneficial policies.

The neoliberal paradigm came to fruition – mimicking the high-priests of religions: for the plebs, free-market confusion/competition and for the ordained ministers – consolidation of money and power. According to historian Florian Schui, from University of St. Gallen, no austerity program has ever worked77. Schui particularly notes Winston Churchill’s attempt in 1925 and Heinrich Brüning’s attempt in 1930 during the Weimar Republic. Both led to disastrous consequences. Other studies have concluded that economic development incentives fail their intended goal78. Nonetheless, Neoliberals ram austerity down the throats of all people, regardless of consequences. Unabated, companies continue to enjoy handouts from the state, while professing that private companies are the most efficient modus operandi in existence79-86.

Like the Franciscans87 bringing back preaching of penance and poverty back to the opulent Roman Catholic Church, the Neoliberals brought the free-market belief back into capitalist cannon with devastating consequences (even within their own model88). They did it so well, that even left-leaning people can repeat verbatim many words and phrases of their beliefs; sometimes believing they are undeniable truths.

‘May the Lord bless and keep us, May his face shine upon us and be gracious to us, May the Lord look upon us with kindness and give us his peace and may the Lord bless us, in the name of the Father and of the Son and of the Holy Spirit – Amen’.

‘Where will the money come from? Leave everything to the free market. Trickle down economics will bring prosperity to all. There is no alternative to capitalism, forever and ever – Amen’.

 
 
 1) Powell memo: https://billmoyers.com/content/the-powell-memo-a-call-to-arms-for-corporations/ 
 https://dy00k1db5oznd.cloudfront.net/wp-content/uploads/2012/09/Lewis-Powell-Memo.pdf 
 2) https://en.wikipedia.org/wiki/Ralph_Nader 
 3) https://en.wikipedia.org/wiki/Big_Bang_(financial_markets) 
 4) https://www.desmogblog.com/mont-pelerin-society 
 5) http://speri.dept.shef.ac.uk/2019/06/05/neoliberalisms-unfailures/
 6) https://www.theguardian.com/business/1998/nov/22/observerbusiness.theobserver 
 7) https://en.wikipedia.org/wiki/Valech_Report 
 8) https://decompressinghistory.com/2018/02/18/pinochets-inequality-miracle/ 
 9) https://en.wikipedia.org/wiki/Milton_Friedman 
 10) http://www.dollarsandsense.org/archives/2007/0107reuss.html
 11) https://en.wikipedia.org/wiki/Savings_and_loan_crisis
 12) https://www.investopedia.com/articles/financial-theory/banking-crisis-1980s.asp 
 13)  https://www.thoughtco.com/chrysler-bailout-overview-3367827
 14)  https://www.thoughtco.com/government-financial-bailout-history-4123193
 15) https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_legislation 
 16) https://www.thebalance.com/glass-steagall-act-definition-purpose-and-repeal-3305850 
 17) https://www.usnews.com/opinion/blogs/economic-intelligence/2012/08/27/repeal-of-glass-steagall-caused-the-financial-crisis
 18)
 https://web.archive.org/web/20090223132656/http://www.foreignaffairs.org/20090101faessay88101/roger-c-altman/the-great-crash-2008.html 
 19) https://en.m.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008 
 20) http://www.levyinstitute.org/publications/29000000000000-a-detailed-look-at-the-feds-bailout-by-funding-facility-and-recipient
 21) https://www.sanders.senate.gov/imo/media/doc/GAO%20Fed%20Investigation.pdf 
 22) https://en.m.wikipedia.org/wiki/Economic_Stimulus_Act_of_2008 
 23) https://en.m.wikipedia.org/wiki/Term_Asset-Backed_Securities_Loan_Facility 
 24) https://en.m.wikipedia.org/wiki/Term_auction_facility 
 25) https://en.m.wikipedia.org/wiki/Troubled_Asset_Relief_Program 
 26) https://www.rollingstone.com/politics/politics-news/the-real-housewives-of-wall-street-246430/
 27) https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_United_States_(2008%E2%80%93present) 
 28) https://en.m.wikipedia.org/wiki/2008_United_Kingdom_bank_rescue_package
 29) https://www.britannica.com/topic/Debt-Crisis-in-the-Euro-Zone-The-1738869 
 30) https://en.wikipedia.org/wiki/World_Trade_Organization 
 31) https://www.wto.org/english/res_e/booksp_e/anrep_e/wtr06-2b_e.pdf 
 32) https://www.cato.org/publications/policy-analysis/corporate-welfare-state-how-federal-government-subsidizes-us-businesses
 33) https://www.cato.org/sites/cato.org/files/pubs/pdf/PA703.pdf
 34) https://object.cato.org/sites/cato.org/files/pubs/pdf/tbb-0205-7.pdf
 35) https://www.imf.org/en/About 
 36) https://en.wikipedia.org/wiki/International_Monetary_Fund
 37) https://www.imf.org/en/Publications/WP/Issues/2019/05/02/Global-Fossil-Fuel-Subsidies-Remain-Large-An-Update-Based-on-Country-Level-Estimates-46509
 38) https://www.smh.com.au/business/us-could-cut-deficit-and-gain-but-thats-unlikely-20101207-18oew.html
 39) https://www.nal.usda.gov/topics/agricultural-subsidies 
 40) https://www.ers.usda.gov/topics/animal-products/dairy/policy.aspx
 41) https://www.thebalance.com/government-subsidies-definition-farm-oil-export-etc-3305788
 42) https://www.taxpolicycenter.org/statistics/amount-revenue-source
 43) https://en.wikipedia.org/wiki/Government_budget_balance 
 44) https://en.wikipedia.org/wiki/Structural_and_cyclical_deficit 
 45) https://www.europarl.europa.eu/RegData/etudes/BRIE/2017/587388/IPOL_BRI(2017)587388_EN.pdf 
 46) https://www.goodjobsfirst.org/subsidizingthecorporateonepercent
 47) https://www.goodjobsfirst.org/subsidy-tracker 
 48) https://www.independent.co.uk/news/uk/politics/uk-government-pays-6bn-a-year-in-subsidies-to-fossil-fuel-industry-a6730946.html 
 49) https://fullfact.org/economy/farming-subsidies-uk/ 
 50) https://www.economicshelp.org/blog/21641/agriculture/farming-subsidies-in-the-uk/ 
 51) https://www.citizensuk.org/subsidy_report
 52) https://issuu.com/citizensuk3/docs/citizens_uk_public_subsidy_briefing
 53) https://www.theguardian.com/commentisfree/2012/mar/29/short-history-of-privatisation 
 54) https://www.researchgate.net/publication/229625537_Privatisation_in_Great_Britain 
 55) https://marginalrevolution.com/marginalrevolution/2019/01/great-britain-land-privatization-fact-day.html 
 56) https://en.wikipedia.org/wiki/Privatisation_of_British_Rail 
 57)  https://en.wikipedia.org/wiki/Network_Rail
 58) https://www.networkrail.co.uk/who-we-are/how-we-work/how-were-governed-and-managed/how-were-funded/ 
 59) https://en.wikipedia.org/wiki/Financing_of_the_rail_industry_in_Great_Britain 
 60) https://www.investopedia.com/terms/p/privatizing-profits-and-socializing-losses.asp 
 61) https://fortune.com/2016/02/17/india-vodafone-taxes/ 
 62) https://www.reuters.com/article/us-vodafone-tax-idUSBRE85P0GH20120626
 63) https://en.wikipedia.org/wiki/Vodafone#Tax_avoidance
 64) https://www.independent.co.uk/news/business/news/vodafones-84bn-tax-avoidance-bonanza-nothing-for-taxpayers-in-verizon-deal-while-bankers-share-500m-8794169.html
 65) https://www.thisismoney.co.uk/money/news/article-1717070/Taxman-dined-with-Vodafone-advisers-before-deal.html
 66) https://news.yahoo.com/amazon-taxes-zero-180337770.html?fbclid=IwAR1XVnf6rrDodnp3_VxzGAZx6VTlS_6XIoedWVqVKTT21ym4sL45CAyPwnE 
 67) https://file.wikileaks.org/file/barclays-tax-avoidance-scm-censored-guardian-2009/
 68) https://file.wikileaks.org/file/barclays-tax-avoidance-scm-censored-guardian-2009/BarclaysBrazil.pdf 
 69) https://file.wikileaks.org/file/barclays-tax-avoidance-scm-censored-guardian-2009/BarclaysFaber.pdf 
 70) https://file.wikileaks.org/file/walmart-benefits-strategy-2005.pdf 
 71) https://www.goodjobsfirst.org/taxbreaktracker
 72) https://baltimorebrew.com/2011/07/14/tax-breaks-for-developers-economic-development-or-corporate-welfare/
 73) https://www.statista.com/chart/8668/the-global-cost-of-tax-avoidance/ 
 74) https://redflag.org.au/node/6418?__cf_chl_jschl_tk__=db0197c01764fc1b016c3c5e2895da74a9b76d85-1577463210-0-AXUIDyG10aX8mHMgaNazpnNAc6-tL53iJRkqmVZEqToPMfpWBfJwLL7N3legmhI22s31FalqB6wvonnWbjpbSpDPtfvhL_Ds2H0rB6V4usNpXoRrX6x9jJeomYD1lchcUUAkV1p79mr3Jydm23oCx6G94_ZlA-nIeUORzKbKr4xd5fgUIDztzkMJtZEdCBtCX7CnB3E0ex6i0jRfEKODkP9z4fiIZd7Z-hmUtDPO5lVl4gndotIZK6GKu7uIVBwkWNURnr7aSRz8b9cY1towF48
 75) https://en.m.wikipedia.org/wiki/Regulatory_capture 
 76) https://www.investopedia.com/terms/r/regulatory-capture.asp 
 77) https://sciencev2.orf.at/stories/1761231/index.html 
 78) https://www.tandfonline.com/doi/abs/10.1080/01944360408976336
 79) https://nationaleconomicseditorial.com/2017/11/27/americans-fiber-optic-internet/
 80) https://www.bbc.com/news/business-47120759
 81) https://www.msn.com/en-us/news/us/as-billions-flow-to-farmers-trump-administration-faces-internal-concerns-over-unprecedented-bailout/ar-AAH1UXa
 82) https://www.nytimes.com/2018/07/24/us/politics/farmers-aid-trade-war.html
 83) https://www.jsonline.com/story/money/2018/07/25/farmers-say-trumps-12-billion-farm-aid-wont-cover-their-losses-trade-war/836140002/
 84) https://www.reuters.com/article/us-usa-trade-farmers/u-s-government-to-pay-4-7-billion-in-tariff-related-aid-to-farmers-idUSKCN1LC23X
 85) http://www.wboc.com/story/38722681/local-farmers-react-to-12-billion-in-federal-soybean-aid
 86) https://www.usatoday.com/story/news/politics/2018/08/27/trade-wars-u-s-farmers-get-first-4-7-billion-relief/1114709002/
 87) https://www.britannica.com/topic/Franciscans 
 88) https://www.mit.edu/~thistle/v13/2/imf.html