Twenty-sixteen was a rather fascinating year not only for us here in the Caribbean but the citizens of Europe and the United States of America. One can easily argue that Brexit and the election of Donald Trump were two of the most enthralling events of the past year because first, neither was predicted by most pundits; and second, given the uncertainties for the world economy because of both.
To gain some insight into what a post-Brexit and Trump world may look like, it is important for us to ask two critical questions: What was the dominant socio-economic philosophy and policy before neoliberalism? What, by way of policies, is likely to emerge under Brexit in the United Kingdom and Trump in the USA?
To appropriately answer, one first has to take a trip down memory lane to the pre-1980s world of economics and politics.
Prior to the 1980s, there was a spirit of national unity in Britain during World War II with Nazi Germany. A coalition government was set up to prosecute the war, in which the Labour Party formed part of the government even though the Conservatives under Winston Churchill had a parliamentary majority.
In many critical respects regarding economic and social policy, the national consensus developed during the war remained.
This was manifested in the fact that the Conservatives largely supported the demands of the Labour Party and the trade union movement in Britain for the establishment of a welfare state in education, health, social security (unemployment benefits, pension and disability benefits, and many other benefits). That is a policy of inclusiveness rather than political divisiveness. Part of this national consensus involved a steeply progressive income and estate tax system in which the wealthy provided a substantial proportion of the government revenues collected to run the state.
Of special note, this was also the period when Maynard Keynes’ economic philosophy and prescriptions, which came to be known as Keynesian; and later, neo-Keynesian economics, were dominant in America and Britain. Indeed, Keynes has been widely credited with saving capitalism itself from implosion, in the context of the 1929-1933 Great Depression.
The building up of fiscal surpluses during booms (almost never achieved in practice) and deficit-spending during slumps or recessions; or better yet, to forestall the advent of a recession, were hallmarks of Keynesianism. The role of government, especially its fiscal levers in the economy of any country, was central to preserving and in expanding the economy.
Whereas government’s role, and fiscal levers in that context, were central to the Keynesian approach, monetary policy, and specifically the role of money supply in directing the economy, was the distinguishing characteristic of “monetarists” such as Milton Friedman and the Chicago School, and partially adopted by the Margaret Thatcher and Ronald Reagan administrations. This latter school of thought eschewed the Keynesian approach of increasing/decreasing taxes and decreasing/increasing government expenditure, depending on whether the economy was in a boom phase, or heading for a recession.
Instead, the monetarists recommended the tightening of credit/money supply when the economy was in danger of overheating and the slackening of credit/increasing the money supply when the economy was in danger of slowing down too much. I have presented the positions of these two camps rather starkly. In practice, though, the two schools advocated some use of both fiscal and monetary controls; but in different ways, and with hugely different emphases.
The series continue next week with a look at the differing roles of government under these economic philosophies.
Email: bfrancis@uwi.edu.bb