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Red Flag Manuscript: The Decline of Western Market Fundamentalism

[Editor’s Note: Qiushi Online republished an article from Red Flag Manuscript on Western Market Fundamentalism. The article claimed that the recent global financial crisis has proven that Capitalism is approaching its end; that the Wall Street oligarchs and the U.S. government launched an unprecedented disaster affecting everyone on the planet; and that the world is turning to Marxism for a solution. The author, Yu Zurao, is a guest researcher at the World Socialism Research Center, Chinese Academy of Social Sciences. The following is a translation of the article.] [1]

Since the 1970s, Neo-liberalism has replaced Keynesianism as the mainstream economic theory for the West’s ideology and economic policies. It gradually became a tool in the hands of the U.S. government to push its hegemony on the rest of the world, to carry out peaceful revolution in Socialist countries, and to implement neo-colonialism in developing countries. In modern economic history, no economic school has had such a big impact on the international political and economic environment as Neo-liberalism. However, the global economic turmoil that started in September 2008 swept away Neo-liberalism’s power and prestige. This global financial and economic crisis heralded the bankruptcy of Neo-liberalism. Looking at this recession that has caused such a major catastrophe, scholars, politicians, and even the general public around the entire world are reflecting on the situation and trying to find new solutions.

I. Capitalism’s Comprehensive Crisis: Wall Street Oligarchs and the U.S. Government Launched an Unprecedented Disaster Affecting Everyone on the Planet

In August 2008, Lehman Brothers declared bankruptcy. This symbolized the start of the most severe recession since the 1930s. The crisis started with the broken financing of credit in banks, but quickly spread to the real economy. At the peak of the recession, 140,000 companies and 140 banks in the U.S. declared bankruptcy, U.S. industrial production decreased by 46.2 percent, and the Western world’s industrial production decreased by 37.2 percent. The recession caused severe damage to the Western countries’ economies: their bubble economy burst, the stock market collapsed, and their assets decreased in value dramatically. According to the Asian Development Bank’s report on March 9, 2009, in 2008, global financial assets lost over US$50 billion in value, the equivalent to the total GDP for the entire world for one whole year. For the past five years, the average U.S. household’s net worth has dropped 36 percent, from US$102,900 to US$66,800. About 11 million households became insolvent (e.g. the mortgage was higher than the market value of the house). According to the Federal Reserve’s statistics, the recession has wiped out American’s wealth accumulated over the past 20 years. The number of unemployed has increased dramatically. The International Labor Organization’s report showed that about 50 million jobs have disappeared since the recession started in 2008. By the end of 2011, 196 million people throughout the world had lost their jobs. The number is estimated to have risen to 202 million by the end of 2012; the global unemployment rate is expected to reach 6.1%. The employment rate in developed countries is not expected to recover to its pre-recession level of 2008 until the end of 2016. For one period, the unemployment rate in the U.S. climbed to nearly 10 percent and later settled at around 8 percent. Unemployment in the European Union (E.U) reached 24.7 million in the first quarter of 2012, adding 193,000 from the previous quarter and 2.1 million from the previous year. The austerity policy that the E.U. adopted caused a further deterioration in the employment situation in Europe: a large number of unemployed people joined the ranks of those below the poverty level.

The recession exacerbated the polarization of the rich and the poor. The previously wealthy society showed signs of getting poor. With the bursting of the economic bubble, homeowners’ assets have shrunk dramatically and the middle class faces a harder time. Some media have said that the middle class is disappearing. Those with mid to low incomes were hurt the most. According to Mexico’s El Universal Online‘s report on January 24, 2012, the most recent census data in the U.S. showed that the recession has left 46 million Americans living below the poverty line, creating a new high for the past 52 years. The U.S. Congressional Budget Office’s report on October 25, 2011, claimed that, from 1979 to 2007, the after tax income for the richest one percent of families increased 275 percent, but only 18 percent for the poorest 20 percent of families. In 2010, the U.S. poverty rate climbed to 15.1 percent. In 2009, the number of people who lived on food stamps in the U.S. reached 32.2 million.

The recession did not just hurt the working class in the developed countries; the people in developing countries were hurt even worse. After the recession, the U.S. and the European countries used economic and administrative means to transfer the crisis to developing countries, compounding the catastrophe.

The crisis has lasted for five years. Each government has tried to rescue its own economy, but they have not yet fully recovered, and unemployment rates are staying high, governments’ spending is greater than their incomes (and thus governments stay in deep debt), bailout initiatives are like drinking poison to quench thirst, and social conflicts are exacerbated. Thus, the West is full of “uncertainty.”

II. In the West, It Has Been a Trend for People to Reflect on the Recession, Criticize Neo-liberalism and the Washington “Consensus,” Challenge U.S. Hegemony, and Denounce Financial Monopoly Capitalism.

A. On September 17, 2011, the “Occupy Wall Street” movement started in the U.S. It demonstrated a change in the dissatisfaction that the lower class public in the West had with Capitalism and the government’s policies that bragged about freedom, democracy, and human rights. That dissatisfaction changed from a simple discussion to an organized political movement. This movement claimed, “We are the 99 percent and we will no longer tolerate the greed and corruption of the 1 percent.” [2] It was characterized by its extreme political position, directly targeting the Wall Street financial oligarchs, the U.S. government, and the neo-liberal economic policies that the government adopted. Though the “Occupy Wall Street” movement didn’t have an efficient organization or a political agenda, it did not stop there. None of the inherent conflicts in Capitalism that led to this political movement were solved. The crisis is not over yet.

B. In the West, many scholars, officials, and politicians in the Neo-liberalism school, after facing the recession and reality, and after reflecting deeply, were moved to criticize Neo-liberalism. A well-renowned Professor of Economics, Iwao Nakatani, looked back at the economic theory that he had learned and taught and said that he was really naïve to have believed in the value of Capitalist globalization and the market supremacy that he once promoted. He believed that if the Japanese could have a free economy like the U.S. had and become a society in which the market mechanism could fully function, the Japanese would be as rich and happy as the Americans. When he worked on government policies, he advocated having Japan adopt the U.S. economic system, policies, and structure. The recession destroyed that illusion. He finally arrived at the clear understanding that U.S.-style Capitalism is dying. He started opposing the adoption of the U.S.-style structure that abandons those who are weak.

Former Federal Reserve Chairman Alan Greenspan was in charge of the financial system through four administrations. He aggressively pushed Neo-liberalist monetary policies and was one of the culprits that created the recession. He admitted at a Congressional hearing on October 23, 2008, that he didn’t monitor the financial institutions closely enough when he was in charge of the Federal Reserve, which resulted in too much financial liberalization. He thought that was a “mistake.” He also thought that the current risk management model was moving in a wrong direction and his faith in the policy of loosening control had been “shaken.”

International financial predator George Soros’s criticism of market fundamentalism is exactly on point. He said that what happened was the result of the market fundamentalist theory of opening markets and letting markets adjust themselves. He believed that the crisis was not caused by external factors or by a natural disaster, but by the [Capitalist] system itself.

C. In the past few years, an important change occurred in Western ideology. Criticism of Neo-liberalism has evolved into criticism of the current Capitalist system. In the 1980s and 1990s, the world praised the Capitalist system and demonized the Socialist system. At the turn of the new century, however, the U.S., the number one Capitalist empire, failed to meet the world’s expectations. The financial crisis let people see what “the emperor’s new clothes” [or, the illusion of Capitalism] really is.

The crisis itself has ruthlessly laid bare many of the illusions about Capitalism. The “U.S. model” that many elites worshiped has lost its appeal and been discredited. Sharan Burrow, Secretary-General of the International Trade Union Confederation, believes that the Capitalism of the 20th century is out of date and does not fit the 21st century. World Economic Forum Founder and Executive Chairman Klaus Schwab raised the issue of “outdated and crumbling models.” He said that Capitalism, in its current form, is no longer suitable for the world around us. [3] IMF Chief Economist Kenneth Rogoff cited many problems with modern Capitalism and pointed out that the current Capitalism is, in essence, transitory in nature. The U.S.-U.K. model that leads the world will be replaced by other models.

The recession also exposed the corruption and fallacy inherent in the Western political system. On the surface, Western “democracy” is “by ballot,” but in reality it is “by money.” The U.S. economist Robert Reich supported the “Occupy Wall Street” movement and called for building a clean democratic system that would not allow money to corrupt it. He believes that when income and wealth are concentrated in the hands of only a few people, a very few wealthy people will have enough money to control that democracy and will inevitably destroy that democracy.

D. The huge financial catastrophe that the U.S. oligarchs, politicians, and media caused completely laid bare the illusions about U.S. society and its system, model, and direction. Lies will never become the truth no matter how many times people repeat them. Professor Meghnad Desai at the London School of Economics and Political Science pointed out that Capitalism has entered its final stage and the used-to-be-vibrant Capitalism is moving to the East. However, the West’s recession is also an uneasy thing for the East. He said that many countries leaned towards adopting Capitalist policies when they were planning their path to future prosperity; but that path is more dangerous than any other. He thinks Capitalism might be the worst economic system for Asian countries. Former German Prime Minister Schmidt is an old friend of the Chinese people and the promoter and practitioner of a “Social Market Economy.” When former World Bank President Zoellick and other U.S. people threw out the “top-level design” reform plan with the ultimate goal of crumbling China’s state economy and implementing total privatization, Schmidt made a profound statement: “State-owned enterprises are the lifeblood of the Chinese people. They should reject privatization.”

E. Western academia has not only directly challenged Neo-liberalism, but students in the top schools have also rebelled against the Neo-liberalist economists. On November 2, 2011, students at Harvard University held a strike, which shocked academia not only in the U.S. but all over the world. Students refused to take a class offered by Harvard “star professor” Gregory Mankiw, a master of Neo-liberalism. Mankiw’s book Principles of Economics was translated into over 20 languages and sold over a million copies worldwide. He once served as Chairman of the President’s Council of Economic Advisers during George W. Bush’s administration. The striking students said they were expressing their dissatisfaction with the deep-rooted prejudices in this introductory economics course. They echoed the “Occupy Wall Street” movement and left the university to join the “Occupy Boston” demonstration. The demonstrators also went into Harvard Yard and displayed a red banner, “We hope the university will serve the 99 percent!” The students on strike believed that a true and reasonable study of economics should include criticism of both the strengths and weaknesses of each economic theory, but Mankiw’s class offered almost no other alternative in the study of economics.

F. The world economic crisis led to the decay of Neo-liberalism and to the ideology crisis in the West. Given these circumstances, the West has been paying more attention to Marx’s writings and theories after its previous chilly political reception. Now “Marxism fever” in the West can no longer be ignored. One can see a strong contrast between the decay of Neo-liberalism and the popularity of Marxism. Today, Marxism has become a main character in Western political life.

In the West, after the disintegration of the Soviet Union, there was a wave of anti-Marxism. Marxism was denounced, criticized, and treated coldly. At that time, Fukuyama claimed that the change in the Soviet Union and Eastern Europe represented the end of history, which meant that, with Capitalism, human society had reached its best stage and Capitalism was irreplaceable. Fukuyama said, “What we may be witnessing is not just the end of the Cold War or the passing of a particular period of postwar history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.” [4] However, facing the brutal reality of the recent financial crisis, he had to admit that this crisis exposed the instability of the Capitalist system, that U.S.-style Capitalism has fallen off the altar, that this crisis is the end of the U.S.’s ability to take the economic leadership in global affairs, and that the U.S. is no longer the only authority for social policy innovation.

“Marxism fever” swept through the West as the global recession expanded. After the Great Depression in 1930s, countries adopted two different approaches: The Soviet Union focused on industrialization, modernization, and the enhancement of people’s material and cultural lives to expand domestic demands and to fully seize the opportunity of the Western recession to bring in advanced equipment, technologies, and talented people. The Western approach was to adopt Keynesian theories on monetary policies, military expansion, and the New Deal to get the economy out of danger. When it came to the 1970s, due to economic stagnation, Keynesianism was replaced by Neo-liberalism. However, it didn’t last long. Entering the 21st century, the global financial crisis destroyed Neo-liberalism’s reputation. This crisis made people start looking at “the century’s great man,” Karl Marx.

Another characteristic of “Marxist fever” is that it spread widely to many countries, from Europe to America to Asia and from financial empires to developing countries. It has also affected people from every social strata, from scholars to politicians, from entrepreneurs to managers, from young students to ordinary workers, and from clerks at churches to ordinary people.

The emergence of “Marxist fever” has not been organized but, rather, has been a purely spontaneous development. Had there been no global recession and had Neo-liberalism not decayed, “Marxist fever” would not have spread so quickly in the West. The revival of Marxist thought shows the inevitable trend of the development of world history. However, we must also be clear: the emergence of “Marxist fever” does not mean that Neo-liberalism and its leading scholars will give up their position. The struggle [between Marxism and Neo-liberalism and other Capitalist theories] will be long-term, with many ups and downs.

[1] Qiushi Online, “The Decline of Western Market Fundamentalism,” December 25, 2012.
[2] Occupy Wall Street Online.
[3] Xinhua, “Capitalism in current form no longer fits world: WEF’s Schwab,” January 18, 2012.
[4] “The End of History?” by Francis Fukuyama.