american economy

To Confront China, The West Must First Repudiate Neoliberalism

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Shanghai (image by Baycrest via Wikimedia Commons)

Neoliberalism, understood as the doctrine of a self-regulating market separate from government intervention, is the root of the West’s political and economic weakness. Ever since it emerged in the 1970s, neoliberal ideology has undermined the achievements of the Golden Age of Capitalism (1950-1970), when Western countries grew at a rapid pace, successfully reduced unemployment and inequality, and consolidated democracy as a political system.

For example, between 1950 and 1970 real per capita income in the United States grew by 2.25% a year. Millions of Americans entered the middle class, and were able not only to buy a home, but also to purchase a variety of non-essential goods such as cars, home appliances, as well as afford to take vacations.

After 1970, expansion came to a halt. In 2014 the average hourly wage had about the same purchasing power as it had in 1979. The average wage peaked in 1973 at $4.03 (equalling roughly $22.41 today). Meanwhile, income inequality has risen. From 1970 to 2015, the share of adults living in middle income households has declined from 61% to 50%.

The shift from regulated economies to “free market” economies opened up Western countries to the unfair competition of state-capitalist economies such as Japan, Singapore, South Korea, Taiwan and later China. The doctrine of the self-regulating market, however, had also political consequences. If the government – as market dogmatists claim – is inefficient and oppressive by nature, and if it cannot and should not interfere in the economy, then the government is not only incapable of bettering people’s lives, but its actions are also per definition intrusive and dangerous.

Market dogmatists have nurtured the belief in the inherent evil of government intervention, thus depriving the democratically elected representatives of the people of the legitimacy to act in a positive way on behalf of their constituents.

Market dogmatists maintain that the only legitimate area of government action in the economy is the dismantling of the state itself. The ones who benefit are a small number of corporations and professionals, while the majority of the people are pushed back into indigence.

On the other hand, countries like China have grown thanks to their mixed economic system, showing that democracy is not a precondition for development (as market dogmatists claim).

The West has weakened itself by turning the “free market” into a religion and a state ideology, instead of debating which regulations work best. As shown in a previous post, the US itself used to be a heavily regulated economy. Though the American economy wasn’t free from problems, up until the 1970s, when the process of deregulation began to be carried out, it was a dynamic, rapidly expanding economy. And it was strong enough to prevent people from falling for Communist propaganda.

When the US economy levied import duties on foreign products, American consumers had to pay more for what they bought. Yet at the same time, tariffs benefited American companies and workers, and gave the public the feeling that the government was in charge.

Read: The United States and The Myth of Free Market – The Role of the Government In Historical Perspective

Neoliberalism has elevated the “market” to the status of a deity that operates outside of rational public scrutiny. No one would argue that traffic or airport security should be deregulated. Everyone intuitively understands that individuals do not always know what is best for them, and that experience with regulations can show governments which regulations work (airbag legislation is an example of it). The market is no different from traffic or airport security. Right-wingers push for anarchy in the economy, and brand regulation “socialism.”

Lowering tariffs, deregulating the financial sector, privatizing infrastructure and other neoliberal reforms have not achieved the promised results. Many people feel insecure and powerless. The rise of populist leaders like Donald Trump, Marine LePen, Matteo Salvini etc. shows that people want the state to be in charge. They want politicians to improve their lives and give them stability. That is why they elect them. Market dogmatists dismiss people’s concerns and tell them that only the “market” knows best. They thus advocate a policy of religious faith in the goodness of the market. This has led to increasing frustration and alienation of large sections of society, which in turn paves the way for the rise of demagogues.

China, on the contrary, has pursued an interventionist policy that combines market and government regulation. The country now has the leverage not only to suppress democracy within its borders, but also to hasten the demise of democracy abroad. The combination of China’s rise and the West’s decline might prove fatal for democracy.

The last example of China’s global authoritarian reach is a recent order issued to Cambridge University Press (CUP) to purge hundreds of articles from the China Quarterly, a leading journal of Chinese studies.

CPU published a list of the more than 300 removed articles, which clearly shows the Chinese Communist government’s concern with “sensitive” topics such as the 1989 Tiananmen massacre, the Cultural Revolution, Hong Kong’s democracy movements, Taiwan, Xinjiang and Tibet.

Under the leadership of Xi Jinping, China has not only restricted freedom of speech, but also embarked on a campaign of Communist indoctrination modelled after the ideological propaganda of the Mao era.

In the long term, I believe that Xi’s neo-authoritarianism will fail economically if the balance between state and market tips decisively towards the former, as it appears likely. Communist China’s debacle, however, would not help the cause of democracy if the major Western economies do not capitalize on it, if they do not discard market dogmatism and return to the path of high growth, rising living standards and equality.

The triumph of democracy after the Second World War was made possible by economic prosperity. For example, economic success was one of the reasons why democracy in West Germany succeeded. In 1957 British scholar Richard Hiscocks wrote:

The most widespread tendency [in Germany] was an unwillingness to face facts and discover the truth … The impulse for [a cultural] revival might have arisen naturally from a frank consideration of the Hitler era and its significance for Germany. But most people avoided the challenge.

They took refuge in an almost fanatical pursuit of material prosperity. The factory, the workshop, and the office became the mass means of escape from individual responsibility. From a social point of view restoration became the conscious or, more often, the subconscious aim: restoration of the standards, habits, and institutions of pre-Hitler days. Material success would bring not only the much-longed-for comfort and security, but the symbols of status and respectability that were almost equally desired … 

Owing to Marshall Aid and Adenauer’s successful policy, the government’s association with the Allies has increased rather than detracted from its prestige. The fact that the government has been led by so respectable and conservative a figure as the Chancellor, rather than by a Socialist, has also helped to make democracy socially acceptable.1 Material prosperity has reconciled the majority to a form of government under which they can live hi comfort (Richard Hiscocks: Democracy in Western Germany, 1957, pp. 226, 227, 231). 

Although most Germans after 1945 may not have believed in democracy, economic growth and material progress generated a consensus that prevented them from reverting to dictatorship. Power and wealth, as embodied in the United States, was a strong – though perhaps not morally gratifying – motive behind Europe’s and Japan’s acceptance of democracy as the best form of government.

A political system cannot survive if the majority of the citizens have no faith in it. Therefore, it is imperative for the Western world to rediscover the role of government in securing the conditions for private entrepreneurship, growth, job creation and high living standards. This doesn’t mean big government, but smart, effective, accountable government. It means economic experimentation, flexibility and competition of ideas.

The proposition that the market is a self-regulating entity is an argument against democracy, though most observers have failed to realize that market dogmatism erodes people’s trust in the government as a positive agent for progress. If the people believe that the government can’t do anything for them, they will turn their backs to it, and they will listen to the lies of populists. Thus do democracies perish.

In this context, Communist China represents the biggest external challenge for the West, both politically and economically. China has benefited from “free trade” more than any other country. It has promoted a regulated economy at home and free trade abroad, because that suits its own agenda. The Communist Party will become increasingly strong, damaging democracy in other countries. China’s trade surpluses will continue to harm Western economies, and the feeling of powerlessness in Western countries will increase. Moreover, Beijing’s soft power will exert its influence globally.

The fact that the West “needs” China economically has made it susceptible to accept moral compromises on the issue of democracy. For instance, Britain has often kowtowed to China in recent years. Brexit has further weakened the UK’s position, and London has little leverage now with regard to questions such as Hong Kong. On June 30, China’s Foreign Ministry spokesperson Lu Kang dismissed the Sino-British Joint Declaration signed in 1984, which guaranteed Hong Kong’s freedoms.

Kang stated that

the arrangements during the transitional period prescribed in the Sino-British Joint Declaration are now history and of no practical significance, nor are they binding on the Chinese central government’s administration of the Hong Kong SAR. The British side has no sovereignty, no power to rule and supervise Hong Kong after the handover. It is hoped that relevant people will come around to this.

The Sino-British Joint Declaration, which was registered at the United Nations by the Chinese and British governments on June 12, 1985, stipulated that Hong Kong’s “[r]ights and freedoms, private property, ownership of enterprises, legitimate rights of inheritance and foreign investment will be protected by law” for a period of 50 years. Beijing is now openly violating the Declaration, and Britain has no power or influence to enforce it. British institutions don’t even have the power to oppose Chinese censorship.

The West must rediscover the spirit of post-war progressive politics in order to avert the crisis of democracy that is threatening the world, including the United States and the United Kingdom. And the first step to achieve this goal is to repudiate market dogmatism, strengthen the West economically so as to recreate the ideological consensus and cohesion which a democracy needs. If the citizens don’t feel that they have a stake to defend in society, they are likely to demand radical, destructive change.

Read also:

Ha-Joon Chang: 23 Things They Don’t Tell You about Capitalism

The United States and The Myth of Free Market – The Role of the Government In Historical Perspective

Taiwan’s Economy and the Myth of Free Market


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