Kicking Away the Ladder, Part 1

Also the Reagan administration openly pioneered illegal labor practices. This was well recorded in Business Week , which pointed out that the Reagan administration effectively instructed the business world that they were not going to enforce the laws, which led to a sharp increase in illegal company actions to prevent union organizing. That was continued by Clinton who had another way of doing it called NAFTA . One of the predicted effects of NAFTA was that it would undermine union organizers by giving employers a way to threaten workers who were trying to organize: if you keep trying we’ll move to Mexico. That worked too. It’s is illegal, but when you have a criminal state, and the business world knows that it enjoys the benefits of a criminal state, it can carry these activities out. But unions not only improve the lives of working people, they’re a powerful democratizing force. So threatening them harms working people and also harms democracy. 

What about the miracle of the market under Reagan? Well, that’s a standard line too—overlooking the fact that Reagan was the most protectionist president in post-war U.S. history. In fact he practically doubled protective barriers, more than all post-war presidents combined. There is a reason for that. If you go back to, say, the late 1970s there was a great deal of concern in the business world that U.S. companies could not compete with superior Japanese manufacturers. U.S. managers hadn’t understood the new techniques of production-on-time and other measures that had developed in Japan. U.S. industry was falling apart and there were calls in the business press to “reindustrialize America.” Well, how do you do that? You do it by keeping out superior Japanese and South Korean products and by calling on the usual savior, namely, the Pentagon. Which has happened before. 

A century earlier the biggest business operation in the United States was railroads. It was beyond the competence of private industries and the Pentagon took it over. Of course I say the Pentagon, but the U.S. Army took it over. It has often happened before and it happened again with Reagan who called on the Pentagon to design what they called “the factory of the future,” a modern factory. This would teach backward U.S. corporate managers how to use computers, on time production, and all of the techniques that the Japanese had invented. 

This has many advantages, calling on the Pentagon. For one, they could design the factory of the future so that it empowers managers and de-skills workers. That has been pretty well studied. David Noble, who was on the faculty of MIT, did major work on this, particularly with regard to automation. He showed that under military auspices, automation was designed to insure that decisions were taken away from skilled mechanics and put in the hands of supervisors and managers to de-skill the workforce and empower management. There was no reason—efficiency or even profit, as it sometimes harmed profit. It did not matter. It was very important for class war to ensure that the working class was de-skilled and passive and that power was in the hands of the managers and supervisors. 

There is nothing new about that either. It goes right through history. I’m sure you heard of “Taylorism,” a concept that was introduced about a century ago essentially to turn working people into robots, in effect control every motion to make sure everything is maximally “efficient.” It was designed in U.S. military production, armories, and so on. That gives you plenty of funding to do whatever you like—no controls, no constraints—and you can implement class war very efficiently. The Reagan administration broke new records in this. 

Let’s turn to a broader look at democracy and development. The two concepts are closely related in many respects. One respect is that they have a common enemy—loss of sovereignty. In a world of nation-states it is true by definition that decline of sovereignty leads to the decline of democracy and the decline in the ability to conduct economic and social policy. That in turn harms development, a conclusion that is very well confirmed by several centuries of economic history. That same economic history shows quite consistently that loss of sovereignty leads to imposed liberalization—imposed, of course, in the interest of the designers, not the subjects. 

In recent years the imposed regime is commonly called “neo-liberalism.” It is the reigning economic orthodoxy of the past decades. It’s not a very good term, incidentally, as it is by no means new and it is not liberal, at least not in the sense of “liberal” as understood by classical liberals—Adam Smith and others. 

The very design of neo-liberal principles is a direct attack on democracy. One component is privatization. You take something out of the public domain, put it into the hands of totalitarian systems, which is what corporations are, and obviously that reduces democracy. Let’s move on to the current primary theme, what is called “trade in services.” It has nothing to do with trade in the usual sense. It’s privatization of services. It’s called “trade” so they can fit it into the trade agreement. It just means selling off services. 

What are services? Well, services are anything that a human being could be interested in—education, health, water, air, energy, and so on. “Trade in services” now means putting all of these into the hands of unaccountable totalitarian institutions. If that is achieved, you can have formal democracy quite openly—clean elections, etc.—but it doesn’t matter much because there is nothing for people to have any decisions about, nothing that matters, at least. It’s somewhere else in the hands of unaccountable institutions under the name of “General Agreement on Trade in Services.” That is the leading theme of the current trade negotiations. 

Financial Liberalization 

A nother component of the neo-liberal package is financial liberalization. It means governments, for example, can’t control capital flight, currencies aren’t regulated, and so on. It’s very well understood by economists what that leads to. Financial liberalization creates what some international economists have called a “virtual senate” of investors and lenders who carry out a “moment-by-moment referendum” on social and economic policies. If they don’t like those policies, they destroy the economy by capital flight, by attacks on currencies, by selling bonds, and so on. The policies that the virtual senate doesn’t like are anything that is “irrational.” “Irrational” means it’s helpful to people, not to profits, and the virtual senate keeps an eye on this second by second. If the government makes the mistake of being irrational, you get huge capital flight, attacks on currency, and so on. It happens all the time and it keeps the countries in line. It means that governments have what is sometimes called a “dual constituency,” one of them is the voters and the other is the virtual senate. You can guess who wins. 

All of this is coming to a head right now in what are called “free trade negotiations,” which have practically nothing to do with free trade. There is what is called the Doha Round. Poor countries, the so-called “developing countries”—a euphemism for the former colonial countries—are trying to escape the grip of imperial violence and destruction. They are called “developing countries” whether they are developing or not. They have blocked the Doha Round. But in the West, among the rich, it’s considered a kind of no-brainer; of course we have to implement the Doha Round, we have to bring it to a successful conclusion. Popular opinion is generally opposed, often strongly opposed, in the rich countries too and that is no surprise. If you look at the proposals, which are usually kind of secret—people are not supposed to look at them—they provide great benefits for investors, lenders, and management who are free to set working people against one another all over the world. It’s called “globalization.” The main theme is to set working people against one another so it will naturally follow that wages are lowered, benefits decline, working conditions are harmed, environment is destroyed. It’s a problem for our grandchildren, but planners don’t worry about it. There are also tremendous privileges for management. One component of these agreements is what is called “national treatment.” It means that if, say, General Motors invests in Mexico, they have to be treated like a Mexican company. Better than a Mexican company, because the treatment of General Motors has to meet international trade conditions. 

In contrast, if a Mexican comes to the United States, a Mexican of flesh and blood, he or she cannot demand national treatment, obviously. Try that and you might end up in Guantanamo, if you’re lucky. But corporations are different; they have the rights of persons, granted by state power, but rights far beyond those as persons. The so-called “free trade agreements” extend those rights in numerous ways. What all of this means for the so-called “developing countries,” often, is to lock them in to their current state of underdevelopment, at least if they follow the rules. 

Climbing the Ladder 

T here is a name for this in economic theory. It’s called kicking away the ladder. First climb up the ladder of development yourself and then kick it away. You make sure no one else uses the measures you used to climb to the top—protection of domestic industries, targeted investment, reliance on the state sector for research and development, production and procurement, and a whole bunch of other devices. It’s called free trade. 

What the developing countries are supposed to do is pursue comparative advantage. It is supposed to be a wonderful thing. The problem is that “development” means changing comparative advantage, not pursuing it. Development is changing your comparative advantage to a different comparative advantage. Take the history of the United States right after it won independence. Suppose it had followed the advice and pursued its comparative advantage in exporting fur and fish and so on. The scattered population that would live here today would be doing that. But they did not pursue their comparative advantage, they did not follow the rules. What they did was create very high tariffs to prevent superior British textiles from coming in, later superior British steel, and superior industrial machinery. That way the United States was able to change their comparative advantage and become the world’s leading industrial society. 

In the 19th century, right up to the mid-20th century, the United States was far in the lead in protectionism, violating all the rules, far more than other industrial countries. That is consistent throughout history. So consistent that a leading economic historian has actually concluded that protectionism enhances trade. It sounds kind of like a paradox, but it seems to work and has a rationale. Protectionism increases growth and growth increases trade. So protectionism seems to enhance trade. A similar conclusion, incidentally, holds into the post-WWII period when other forms of market interference became more prominent. The United States, by pursuing not only protectionist policies, but reliance on the state sector for research and development, became by far the world’s leading economic power. 

By 1950 the United States was the richest and most powerful state in history. U.S.-based corporations, and the state that caters to their interest, at that point were willing to sponsor limited free trade, knowing the playing field was not level and they were going to win—so maybe free trade would be okay. But that commitment was hedged with crucial restrictions to insure that the powerful would prevail. The most extreme restriction, which is rarely discussed by economists, is reliance on a dynamic state sector as the engine of growth. It covers practically the whole high-tech economy—computers, Internet, lasers, commercial aircraft. You can go across the board and find that the state sector is critical in development. In the case of computers and the Internet, they were basically in the state sector for about 30 years before being handed over to private power. 

It may not be what you learn in economics courses, but this is how the world works. And it makes a lot of sense. When research and development and production and procurement are in the state sector, it means that the public is paying for it and taking the risk. If something works out, maybe 30 years later, like in the case of computers and the Internet, you hand it over to private power to make profits. It’s known as market society, free markets, capitalism, it’s the way things really work. 

Britain’s Narco-Trafficking 

T he United States did not invent it. If you look at the global dominance of England, that is the way they handled it. In 1846 England shifted to free trade after 150 years of protectionism, state intervention, and imperial violence, which had placed England far in the lead in industrialization, twice as high per capita as any other country. It seemed that competition would be relatively safe, like for the U.S. a century later. But like the U.S. the British hedged their bets. One way was to keep some protected markets, like India, to insure profits. One of the main reasons for conquering India was another form of market interference, trying to monopolize opium production. They did not quite make it—Yankee merchants got a piece of it—but the British came pretty close to monopolizing opium production. 

That was extremely important because England was unable to break into the Chinese market. China did not want British goods because they felt their own were superior, and British agents were complaining about that. But England hit on a brilliant way to do it, by developing by far the largest narco-trafficking industry in history. Colombia doesn’t even come close. They tried to monopolize opium production and then forced it on China with gunboats. The enterprise succeeded brilliantly. The China market was opened by what was called “the poison trade” and “the pig trade.” The poison trade meant opium brought in at gunpoint, which turned the country into a nation of opium addicts, creating a market for British exports. The pig trade brought kidnapped Chinese workers to the United States to build the railroads—making a big contribution to U.S. economic development in the 19th century (as well as providing us with the term “Shanghaied”). 

The profits from the narco-trafficking racket were enormous. They paid the cost of the Royal Navy, which was the mainstay of imperialism. They paid for administering India, a colony. They paid for the purchase of U.S. cotton—which fueled the industrial revolution, like oil today. That also was not exactly a free market miracle. It was created by extermination of the indigenous population and slavery, rather radical forms of market interference. 

But by the 1920s England was facing a situation like the United States did 50 years later—superior Japanese products were driving British products out of the market. Britain handled it the way Reagan did; they closed the empire to Japanese imports. Notice it’s similar to the Reaganite intervention to reindustrialize America in the face of Japanese competition in the 1970s. The general point is that free trade and democracy are just fine when you can make sure that the results come out the right way, otherwise you get rid of them. History is full of that. 

After World War II the picture pretty much conforms to the historical pattern. There have been two phases, roughly 1950 to 1975 and 1975 to the present, not exact, but approximately. The first phase was designed under great popular pressure for social democracy, for much more radical measures of democracy and social welfare. The system was designed to leave these options open. The system was designed with capital controls, regulated currencies, and government programs in the third world to stimulate production. It was called “import substitution” and continued roughly into the 1970s. That is a period that economists call “the golden age of capitalism,” state capitalism is a more accurate term. Economic results were better than ever before in history—and ever since. Take the United States. From roughly 1950 to 1975 this was the highest growth period ever in U.S. history and it was egalitarian; growth was about the same for the lowest and highest quintile. An interesting and important fact is that the social indicators that measure the health of the society—infant mortality, child abuse, and a whole collection of measures—rose along with growth. That continued until 1975. Since then social indicators have declined, though growth has gone up, not as fast, but it has gone up. Social indicators declined by the year 2000 to the level of 1960—that is after the very brief and shallow Clinton boom. But since then the record has become much worse in all respects. One startling fact that was just revealed in the business press is that during the current Bush years, the private sector has added no jobs outside of the health sector. One reason there are added jobs there is because it is a total catastrophe, it is the most inefficient public health system in the industrial world. But outside of that no new jobs. 

It’s the same in much of the world. In the mid- 1970s we switch to the neo-liberal period. There has been a sharp decline in almost every economic dimension—growth of the economy, growth of productivity, and others. The so-called Asian tigers, like Taiwan and South Korea, ignored the rules and grew very fast. The decline is correlated very closely with following the rules, following the programs. The countries that followed the rules most rigorously have the worst records, like Latin America. Probably worst in their history. 

India is a poster child. According to Thomas Friedman, the greatest place in the world, etc., and since 1990 it has partially followed the rules and there has been improvement for a substantial minority of the population. Also in the number of billionaires; it’s now eighth in the world. It is quite a rise. There is also something called the UN ranking for Human Development. Prior to this period in 1990, India was 124th. Now it has sunk to 127th. So much for the “grand economy.” 

Z  

Part 2 covers democratic challenges to neo-liberalism, mainly coming from Latin America . A DVD of the complete talk is available from www.zmag.org.