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The following article appeared in Left Business Observer #64, June 1994. It was written by Doug Henwood, editor and publisher. It retains its copyright and may not be reprinted or redistributed in any form - print, electronic, facsimile, anyt hing - without the permission of LBO.

Anti-market forces

This is an edited transcript of a talk given by Doug Henwood to the Grant's Interest Rate Observer spring political conference, New York City, June 8, 1994. Grant's is an elegant, thoughtful, and quite right-wing newsletter focusing on the credi t markets.


When Jim Grant called to invite me to speak here, I gasped a bit before saying yes. I'm never one to shrink from argument, or a chance to propagandize for my cause -- and as a free-lance left-wing journalist, I need the money too -- but I had the feeling that I was walking into a lion's den. When Jim told me the topic, political threats to the laissez-faire ascendancy, I immediately thought of Alexander Cockburn's description of his appearances on Nightline -- that he was invited not for his opinio ns, but as the embodiment of the evil under discussion. So here I am, horns, pitchfork, and sulfurous aura.

Yes, the laissez-faire ascendancy, which I'm sure was never pure enough for you, is under challenge, both from its own internal economic and social contradictions and from the political realm as well. The bad news, from my side, and the good news, from yo urs, is that the challenge is weak, diffuse, and uncertain. While a "No" to the fading orthodoxy is gathering force, there's not much of an idea of a "Yes" to put in its place.

So a review of some of those challenges would be a good place to start. Let me start close to home, with the theory and practice of Wall Street. Since I'm writing a book on the economics and politics of finance, some of these issues are at the front of my mind right now, so I'll share some of them with you.

The political revolution that we can date to 1979, when Margaret Thatcher moved into 10 Downing Street and Paul Volcker into the Federal Reserve -- though in the U.S. the deregulatory movement really got going under Jimmy Carter -- drew great inspiration from a number of developments in economic and financial theory. Monetarism moved from being a marginal doctrine promoted by oddballs to one broadly accepted by the mainstream. And a set of interrelated financial dogmas, like the Modigliani-Miller theorem and the efficient market hypothesis, lent enormous prestige to the wonders of self-regulating markets. This new orthodoxy replaced one promulgated by John Maynard Keynes 40 years earlier -- though Keynes's original ideas were banalized by the very mainstr eam that was now turning on him. Unleashing what Reagan called the magic of the marketplace would cure stagflation and propel us into a new era of growth.


Dead dogmas

These doctrines, which seemed so fresh not 20 years ago, now lie broken. Take monetarism, for instance, which was perhaps the first to suffer from a confrontation with reality. In the early days of the Thatcher regime, Ian Gilmour's memoir Dancing Wit h Dogma reports, Milton Friedman assured the Dominatrix of Downing Street that British inflation could be reduced to insignificance without the pain of recession -- in Friedman's words, "only a modest reduction in output and employment." All that was needed was to get the money supply under control. Instead, the economy collapsed while money growth didn't. In 1979, the broad money supply grew 11.6%; it rose to 15.2% and 22.0% in 1980 and 1981, and stayed in the double digits until 1991. Industrial pro duction swooned and didn't return to 1979 levels for 7 years. Inflation fell sharply, yes, only to rise again in the late 1980s, and fall with the worst recession in 60 years. On every count, monetarism failed its highest-profile real world test. Of course, a few monetarists remain on Shadow committees and stuffed in nooks and crannies along Wall Street and in the City, where they mutter incoherently about long and variable lags, but that's about it.

Monetarism is a strange dogma. On the one hand, Friedman and other monetarists profess adherence to one of the hoariest doctrines in economics, that money is a neutral medium of exchange that affects nothing in the long run. Long term, they argue, it's real-world phenomena that matter -- technology, wage levels, trade regimes, government regulation. Yet on the other hand, they're obsessed with inflation and control of the money supply. Let's forget about that for now as one of those foolish consistencies that intellectuals worry about but not policy wonks. But since money is allegedly of no importance, you can control inflation simply by controlling money, with no real world effects. It didn't work. In both Britain and the U.S., inflation was controlled the old-fashioned way, by creating a deep recession.

And now for those other philosophical pillars of the market counter-revolution. Another variant of the neutrality of money is the famed Modigliani-Miller proposition that corporate capital structure -- the level and mix of equity and debt -- doesn't matte r except maybe at extremes. This theorem, known as MM in the trade, was used by another MM, Mike Milken, to justify his experiments in leverage. For about a decade, the U.S. economy was turned into a vast laboratory testing the validity of the MM theorem, and MM failed miserably. Careful studies of hundreds of buyouts and thousands of U.S. corporations published over the last several years show that capital structure does matter immensely. Heavily indebted companies invest less, and do less R&D, than ligh tly indebted ones. It's common sense of course, but winning a Nobel Prize in economics, as M&M both did, requires the flouting of common sense.

Efficient casino

The U.S. economy also served as a laboratory for another economic experiment, efficient market theory, which, its elaborate mathematical structure aside, boils down to the touching faith that markets know all, and the stock market in particular knows most of all. Stock markets, since they instantly reflect the collective wisdom of "sophisticated" investors, are marvelously prescient instruments that guide capital towards its most productive uses. And if the real world were reformed to resemble the stock m arket, if impediments like regulations and unions and national borders that block the immediate adjustment of prices to available information, then efficiency would be served.

That doctrine too, which Michael Jensen once called the best-established fact in all the social sciences, is now on the ash-heap. A series of studies have demonstrated convincingly that market volatility far exceeds the volatility of the underlying fundam entals, that financial market prices swing to great extremes only to revert back to the mean, that anomalies in pricing (like better-than-average performance shown by stocks that are cheap relative to underlying corporate profits) persist despite the fact that theory claims they shouldn't, and that not all market participants are equally well-informed and can never be. Much of this is common sense, again, to anyone who watches Wall Street from anywhere but a university campus. But the fact is that efficient market theory has been heavily discredited in the very environment where it was once revered. And if stock markets are not the rational, efficient places that they were thought to be 10 or 15 years ago, what of the project of making the real world more like the stock market?

Curiously, the broader inference -- that if the stock market is a madhouse, those who want to make the real world more like it are engaging in a pretty strange enterprise -- has hardly been drawn. Far from it. Robert Shiller, the Yale economist who has do ne about as much as anyone to demonstrate that stock prices are far more volatile than underlying corporate profits, has just published a book in which he argues that we should establish futures markets for nearly every important economic number -- GDP, e mployment, housing prices, you name it. In other words, make the real world more like the stock market. And two other economists who've contributed importantly to the dethroning of efficient market theory, Larry Summers and Joseph Stiglitz, occupy senior positions in the Clinton administration, an administration that has made pleasing Wall Street one of its prime goals. So as I said at the beginning, we have a "No" to market dogma, but no "Yes" to take its place.

Valuing lives

Summers, conveniently enough for the structure of my talk, came to the administration from the World Bank. While at the Bank, he became briefly famous for a memo in which he suggested that Africa was "vastly underpolluted," and that economic logic dictate d that toxic activities be located in low-wage countries. Summers' argument, which its author called impeccable, was that since the costs of pollution are measured in earnings forgone by those injured by it, basic cash-flow analysis leads to the inescapab le solution that the costs of pollution were far lower in the Southern Hemisphere than the Northern. I doubt any market fundamentalist could disagree with Summers. So much for the anti-market credentials of the Clinton regime.

Even Summers academic work on financial markets had no effect on actual policy. Summers' tenure at the World Bank was a period when the institution vigorously promoted the role of stock markets in development. How one could reconcile the evidence that ins titutions that systematically and persistently give erroneous signals with the policy that they nonetheless should be promoted as development vehicles is beyond me. But I guess that's proof that I'll continue to publish an obscure newsletter while Summers goes from Harvard to the World Bank to the U.S. Treasury.

What might be called the stock market model has been all the rage in development circles for well over a decade now. The World Bank, which plays good cop to its bad cop neighbor, the IMF, has been telling its clients to deregulate everything in sight -- open the borders to capital and trade, get the state out of nearly everything, and liberalize the financial markets. It's telling that the Warsaw Stock Exchange now occupies the building that once served as the headquarters of the Polish Communist Party. H ere too the real world has been turned into an experiment in theory. This experiment has now run a considerable course, and it's been an enormous failure. If you don't believe me, then how else do you explain the 54% vote earned by the Communists in the r ecent Hungarian elections?

Three months ago, anticipating this Hungarian result, Newsday columnist Jonathan Schell interviewed a devoutly pro-market parliamentarian named G.M. Tamas. Schell opened the column with Tamas' pained complaint: "People just hate capitalism -- they prefer socialism!" Tamas' own party, the Free Democrats, had eliminated the word "capitalism" from their platform, even though they adore it, substituting euphemisms like "privatization" and "reductions in the cost of public administration." Tamas told Sc hell that Hungarians, as well as their neighbors, don't like the authoritarianism of the old regime -- they have no desire to return to censorship and secret police. But that doesn't mean they want to impose a regime of competitive individualism. They wan t, Tamas mourned, a communitarian society, a socialism without torture cells.

Tamas also recalled to Schell his days as a dissident, and his memories are very different from the propaganda we've been fed here. I quote: "One assumption that now has to be dropped is that the communist regime was imposed by force alone. The regime enj oyed support. I was a dissident for 15 years, and people did not merely think we were foolish for defying an overwhelmingly powerful regime, they disagreed with us. One begins to wonder: Did communism collapse in a great upheaval, or are we in fact seeing the continued reform of communism? The whole thing may be much more evolutionary than we thought."

In Russia, which has undergone one of the greatest economic and social collapses in history, the market model has been completely discredited. Western pundits still blame 70 years of Soviet Communism for the present mess, and certainly Soviet Communism has a lot to answer for, but the people of the former Soviet Union don't share this analysis. Even during the headiest days of perestroika, polls showed no great fondness for the capitalist transformation their leaders were engineering in partnership with t he West. As with Hungary, something between social democracy and democratic socialism was the preferred norm. Now even the Russian elite is moving away from radical capitalism. As Yeltsin's prime minister Chernomyrdin said some months back, "The era of market romanticism is over."



That obituary could be an epigraph for much of what is happening in the Southern Hemisphere. Nowhere can this be seen more clearly than Mexico, the poster country for neoliberalism. Even on its own terms, Salinastroika has failed disastrously. Comparisons with a country that went from quite poor to nearly rich in only a generation, South Korea, point this up starkly. South Korea has made remarkable strides in catching up with U.S. incomes; Mexico hasn't. South Korea has consistently invested at high level s; Mexico hasn't. What is most theoretically interesting about this comparison is that South Korea violated every rule of economic development ever promulgated by Adam Smith, Jeffrey Sachs, or the IMF. Foreign investment and imports were strictly limited, the financial sector was tightly regulated, investment was centrally allocated to favored sectors; and prices of important commodities were strictly controlled. Yet compare the press the two countries get. Mexico, at least until the Zapatistas took up ar ms, was loudly touted as a Latin replay of the German Wirtschaftswunder [economic miracle]. South Korea, I learned from a Wall Street Journal article a couple of months ago, was by contrast experiencing severe economic problems that pointed up the limits of its model. Yet last year, Korean growth was 13 times Mexico's -- 5.2% vs. 0.4%. And South Korea didn't experience an armed uprising, the assassination of a presidential candidate, or the kidnapping of two leading businessmen.

In fact, the Mexican miracle has been based on a very insubstantial economic foundation -- low investment levels, heavy reliance on fickle hot money inflows, and, in recent years, fresh borrowing. In fact, about half the capital inflow of the last 4 years has been the result of new borrowing, a little-known fact. According to the Institute for International Finance, the Mexican government's official debt estimate of around $110-120 billion, which the World Bank dutifully parrots, is reached only by ignoring about $25 billion in government debt, meaning that debt is now at record levels despite official debt reduction programs. The eased debt burden on Mexico and its Latin neighbors has virtually nothing to do with the Brady debt-reduction machinations, an d nearly everything to do with lower U.S. interest rates. If Alan Greenspan keeps jacking up interest rates, then sounds of distress will soon emanate from below the Rio Grande.

Popular objections to Salinas' market revolution have been severely underreported in the U.S. For the last 5 years, virtually every central square of every major Mexican city has been occupied by protesters of some sort -- farmers, truckers, industrial wo rkers -- and almost constantly. The Chiapas rebellion didn't come out of nowhere, nor did its broad popular approval by most non-elite Mexicans. The reasons for this aren't hard to understand: a decline of around 50% in average real incomes during the 1980s, real unemployment rates of 25% to 50%, depending on which estimates you read, the loss of half a million manufacturing jobs last year, and the likely displacement of up to two million peasants as the NAFTA-inspired agricultural reforms begin to bite.

Betrayal and reaction

Ordinary folks, from Mexico City to Budapest, are way ahead of their leaders in their critique of what's been imposed on them, though the imagining of alternatives is highly underdeveloped. And I emphasize imposed. Everywhere the market revolution has hap pened, it has been done by force of the state. Yeltsin blasted a legally elected parliament with tanks. Salinas did his work in a one-party state. Globally, the IMF and World Bank have used the desperate indebtedness of poor countries to force unwanted re forms on scores of them.

And when people elect a new set of leaders who imply, if not promise, a change, the new leaders typically turn on them. The Polish neo-Communist government has continued to follow the IMF line. The Hungarians are doing the same. Cardenas, the leftish Mexi can presidential candidate, offers only the most tepid opposition to market orthodoxy -- for which he has been appropriately rebuked by the Zapatistas. Even in the U.S., people voted for something new in '92, and instead got government of, by, and for the bond market. Such betrayals can provoke volatile reactions.

So where do we go from here? In his book The Great Transformation, Karl Polanyi argued that while markets are features of every society -- they're places where people meet to exchange a variety of goods -- the doctrine of the self-regulating market as the measure of all things and the basic governing institution of economic life is a relatively recent innovation that has always to be imposed by force. We saw that in England, starting with the enclosure movements of the 16th through 18th centuries, which privatized previously common land, through the laws against vagrancy of the 18th and 19th centuries, both of which forced unwilling peasants into the labor market -- to the 1980s, in which a minority government (which never got more than 43% of the vote) smashed like a steamroller over all opposition to its radical agenda. We saw it in the U.S., when the air traffic controllers were hauled away in chains. And we've seen it throughout the Second and Third Worlds, where capitalist reforms have been im posed on an unwilling populace.

Polanyi also argued that the self-regulating market is so destructive and unsentimental a master that it results in profound social disasters. In fact, he argued, the depression, fascism, and war of the 1930s and 1940s could be traced to the laissez-faire , gold standard world of the late 19th and early 20th century. While we may not see a depression on the scale of the 1930s right now, much of the Southern Hemisphere has experienced just that, and the so-called prosperity of the Northern Hemisphere has be en experienced by many ordinary folks as hardly distinguishable from a slump. Is the rise of Zhirinovsky in Russia and neofascism in Western Europe a sign that Polanyi's script is repeating itself?

While everyone has been writing Marx's obituary, tremendous popular discontent with the free-market agenda has been building. If a leftish outlet for this discontent is blocked, through propaganda or betrayal, then the reaction may take even uglier forms. Let me close with a comment from Isaiah Berlin: "When ideas are neglected by those who ought to attend to them -- that is to say, those who have been trained to think critically about ideas -- they sometimes acquire an unchecked momentum and an irresisti ble power over multitudes of men that may grow too violent to be affected by rational criticism." So cheer the end of history at your own risk.

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