The largest remaining section of the Berlin Wall has been converted into the East Side Gallery at Potsdamer Platz. Photo / Provided, File
When the Berlin Wall fell in 1989, neoliberals seized the opportunity and euphorically declared the historic triumph of free market capitalism over socialism. It was nothing.
The end of the Soviet experiment marked
the ascendancy of the modern mixed economies of Western social democracies over totalitarian socialism.
Economic systems are distributed along a continuum from socialism at one end to free market capitalism or neoliberalism at the other. Between these two extremes lies the modern mixed economy.
Socialism and neoliberalism, based on ideology, greatly favor the fortunes of a tiny minority or a closed circle (the 1%); power and privilege under the first and immense wealth going to the second.
In contrast, the modern mixed economy pragmatically combines the state and the market in variable and adjustable proportions to achieve the greatest good for the greatest number over the longest term.
Socialism prescribes state ownership and control over all means of production, distribution, and exchange; all economic activity is directed by the state; no private sector or market activity is permitted. Socialist economies are also called planned or command economies.
The former Soviet Union is the best example of a socialist state. This experiment failed not because of an all-powerful, omnipresent state, but because of an extreme ideology that completely excluded the market.
In fact, an all-powerful and pervasive activist state setting broad macroeconomic (economy-wide) directions to achieve set goals is the distinguishing feature of the contemporary developmental state. Singapore’s dramatic economic and societal transformation illustrates the importance of a strong and militant state in the development process.
In neoliberal mythology, New Zealand was a socialist state before 1984. This is nonsense. Before 1984 we had a mixed economy with a moderate, sometimes high but never dominant level of state control and direction, like Singapore, for example, with its glittering, state-led, state-engineered prosperity .
The polar opposite of socialism is neoliberalism. While the complexion, duration and political contexts have varied, the neoliberal prescription contains seven essential components.
The first is the elimination of inflation, whatever the cost, as the sole objective of monetary policy.
The second is massive, indiscriminate, economy-wide deregulation and privatization.
The third is the removal of all subsidies and incentives (the infamous level playing field). The fourth is free trade or unregulated international trade (corporate libertarianism).
The fifth is unlimited openness to investment.
Sixth, labor suppression (flexible labor markets).
But the most critical is the small government; the role of the state, apart from national defence, police and justice, should be severely restricted. Small government, incidentally, explains neoliberalism’s prohibition of affirmative public action or state intervention to correct market failures or overcome obstacles to economic progress.
This brutal and medieval instrument of policy was implemented under the direction of the International Monetary Fund (IMF) and the World Bank by the military governments of the South American countries of the Southern Cone (Chile, Uruguay and Argentina) in the 1970s. .
The results were everywhere the same. Inflation has come down, but so has national production. Economic growth has virtually ceased. Unemployment and the national debt soared. Real estate and stock market speculation is raging. Savings and investment have simply evaporated. And inequalities of wealth and income have increased appallingly.
But the IMF/World Bank and the OECD hailed Southern Cone neoliberalism as an unqualified success.
By 1983, however, the ravages of the neoliberal prescription based on low inflation, balanced budgets, small government, and a blind faith in unregulated and unfettered market forces as inherently conducive to prosperity had been widely documented in economic literature.
But in 1984, the New Zealanders, although informed, chose to ignore the capital lesson of recent economic history and drew short straws. We live with the result.
• John Gascoigne is a Cambridge-based economics commentator.