Neoliberalism: Death of a pseudo-science

Ten logical objections and empirical arguments against persistently held dogmas in current economics

The principle of neoliberalism may be summarized in the following formula: The best way of guaranteeing a maximum performance for the economy is to keep government entirely out of its sphere. Its role should be confined to ensure the safety of personal property, which it does by using police and justice to this very purpose.

Neo-liberal scientists are wont to act on the following principles which may well be termed the “ten commandments of neo-liberalism“. On closer inspection each of these turns out to be logically false and historically untenable.

1 Unrestricted free trade increases general prosperity.

This view has long been disproved. Prosperity requires compliance with what I would like to call the golden of sound economics namely that the sum total of income earned within a given economic area (less savings) should be equal to the sum total of all produced goods (less investment). (1) Unless this condition holds true people are incapable of absorbing the goods offered to them. These would therefore remain unsold and incomes would shrink. However, the golden rule is no longer valid once states or larger economies mainly or exclusively export what they produce. Congolese mine owners producing gold, diamonds or coltan, need not pay wages beyond mere survival. Indeed, they need not pay any wages at all, as long as by sheer force they succeed in recruiting a sufficient number of workers. They are exporters who produce for outside markets. To them the golden rule has no relevance whatsoever. Far from enhancing the coming good, as neoliberals dogmatically claim, free trade may totally annihilate all welfare.

To my knowledge, this fundamental objection against free trade dogma is here raised for the first time. At least I did not find it elsewhere.

2 Consumers act in accordance with the common good, if government has no influence on what they buy. They should always be allowed to accept the cheapest offer in case there are no differences of quality.

The rule is markedly wrong. States that are at the beginning of industrialization, never conform to it since that would bar them from ever acquiring their own industries. Had the Northern part of the US not forced the South by civil war to buy home-made industrial products instead of British goods, the United States would never have risen to become a leading industrial power in less than half a century. Had the Japanese not been strict protectionists up to the nineties – the Chinese are so even today – the Far Eastern country would still be an agricultural state. Strong governments had to restrict the freedom of their citizens at the start in order to give them more freedom at the close – that is when their countries were sufficiently industrialized. If people could have bought industrial products from already established foreign pioneers at a time when their own industries were still in stage of infancy with prices high and quality rather doubtful, those incipient domestic industries would have been nipped in the bud.

The above statement is therefore logically false, and the very success of protectionist countries is a disclaimer of its empirical validity. This objection is not new. It was already made by Friedrich List and John Stuart Mill and has recently been confirmed by Ha-Joon Chang in his book “Kicking away the ladder”.

3 The same neo-liberal axiom with a different application

The dogma of the beneficial effects of consumption that is free from all government interference, is obviously false with respect to the onset of industrialization. But it is equally wrong when applied to fully industrialized countries that have attained the limit of quantitative growth. Here again neo-liberalism votes for unrestricted freedom of consumption. Consumers should decide on their own whether to buy relatively expensive homemade goods produced under conditions of high labor cost and high environmental standards, or to buy much cheaper goods from abroad produced by cheap labor and under conditions of environmental destruction.

No doubt that citizens profit in their capacity as consumers when allowed to choose the second alternative, but they are sacrificed in their capacity both as workers and income earners. Relying on industrial goods from abroad their own industrial base will be sacrificed, and hence incomes destroyed as well. This destructive process is already well advanced in the United States. The so called rust belt testifies to its impact. So this is an irrefutable proof against the empirical validity of the neo-liberal dogma.

Logically, it is shortcomings are quite obvious as well. Europe allows its industrial base to be destroyed by cheap Asian products (mostly of Chinese origin) which it pays for with high-tech goods (of mostly German extraction). The German export of high-tech products will however be gradually reduced over time, as Asian competitors advance at a rapid pace.

Cross-border trade promotes general welfare of all partners concerned only under certain quite restrictive conditions. Wages, environmental protection, social services and taxes should be similar. Only then trade is a means of progress and helps to create much greater wealth than any policy of seclusion.

This argument against the alleged benefits of free trade for early-industrialized countries was developed at length in my book, “Die Arbeitslose Gesellschaft”. In neo-liberal economic literature it is unknown – as it contradicts a staunchly held dogma..

4 Just as consumers contribute most to the common welfare if completely free of any control by government so entrepreneurs do most for the public good if allowed to follow only their own interest.

This sentence is true in exceptional cases, but otherwise false depending on how one understands the purpose of business. If a company understands its “raison d’être” as being the implementation of the above said golden rule, namely to provide citizens with an income sufficient to buy their share of manufactured goods, then corporate interest and the common good do in fact coincide. If, however, shareholders and the management working on their behalf are meant to become the main destination of a company’s profit, it is hard to see how this should enhance the common good. Companies will, for example, rationalize (replacing human labor by machines) even if thereby they do not reduce the cost of production. They do so for the simple reason that income is shuffled from labor to capital. Instead of paying wages to employees, they pay dividends and interest to the investors of their machinery.

It is no mere coincidence that companies extol shareholder value as soon as they rely chiefly on exports. For then, as mentioned under head 1), they need no longer make a contribution to the domestic payroll (whether German or pan-European). They are free from any obligation to the welfare of their home market.

The neo-liberal claim that the common good is always best served if government (that is the public which it represents within a democracy) puts no restriction on the activity of companies, is an obvious lie. We should shake our heads in disbelief and dismay over the fact that a large majority of economic scientist still stubbornly cling to such lies.

5 The public good is best served if government leaves a completely free hand to companies to choose their place of production.

Even dogmatic neo-liberals value the quality of life offered to themselves and their families in particular states. They profit from cultural activities, from a decent health service and good educational facilities. Accordingly, they peruse international reports, which regularly assess the quality of life of great cities and countries where they might want to work. They implicitly assume that governments must and will levy the required taxes in order to be in a position to provide all these services. However, these taxes should fall from the sky or else be put on the average citizen. As for themselves big corporations would rather like to get rid of all taxes. They claim as a right, to immediately leave a given “location”, if a neighboring state proposes less taxes or even none at all. The result of this freedom is all too obvious. Free choice of location has made companies completely independent of the common good.

The above statement is therefore false. The only reason for its persistence is that neo-liberal ideologists succeeded in equating the company with its management. The people who work there contributing with their skills and knowledge to its success, are disregarded as being of minor concern. And this disregard equally applies to the cultural environment in which they thrive.

6 The common good is best served if money is allowed to freely move across the globe (free allocation of capital).

This again is a logically indefensible and empirically disproved dogma. In the second half of the 19th Century, wealthy citizens of former world power Great Britain invested their wealth in the emerging United States. In this way Britain has lost its once famous industries almost entirely. That’s what now happens to the United States in an analogous way and for the same reason when wealthy Americans do the same investing their money in China in order to reap much higher profits there. It should go without saying that domestic capital acquired by domestic labor, should be invested first and foremost in its country of origin. In this case Europe would have been spared its current crisis. Capital controls, which in Germany were finally abolished only during the 90s, would have prevented the current disaster.

Let me add that such an economic strategy would have been in the interest of so called Third-World countries as well. In this case early-industrialized countries could have freely transferred all their knowledge and skills to the less developed parts of the world. There would be no danger that their knowledge and skills would be turned back to them in the guise of cheap products which then ruin their own industries.

7 The damage to natural environment caused by modern industrial production – nowadays no less than a threat to human survival – may be efficiently counteracted by market-based mechanisms (without intervention of states).

This contention is untenable. In fact, the neoliberal program has turned out to be a formidable engine of active environmental destruction. Those companies or countries with least concern about the preservation of nature have a competitive edge as they reduce the cost of production. Even a successful realization of globally traded pollution rights is of little avail as long as all our efforts are being undermined by ever growing production volumes. Currently, we don’t find a single government that is not committed to quantitative growth – which means to increased pollution.

8 The problem of unjust distribution is solved by market mechanisms provided that governments leave them to their own working.

Again, we are dealing with a brazen distortion of truth in the interest of those who through their economic clout not only succeeded in putting politics but even economic science under their sway. It is an all too obvious fact – one that has been recorded all over history – that those who possess more than their equals tend to acquire still more due to the “economy of scale”. Wherever we find a starting point of relative equality, the social fabric inexorably shifts towards greater inequality –  that is unless wars, civil and others, invert this trend or government acting for the benefit of the majority assiduously works against it. This may be considered a historical constant in modern societies based on private property.

9 In capitalism the performance of individuals and states determines relative income and wealth. Modern society is a meritocracy.

Classical economic theory represented by Smith and Ricardo, already equated human labor with physical conditions such as land and capital (tools and machinery). The three were put on a par and termed “productive factors”. This theoretical aberration laid the groundwork for the present state of things where speculation has become a greater source of wealth than work for and within the real economy. It has also created the fundamental misconception of present neo-liberal theory which holds wealth acquired through speculation to be just as legitimate as wealth acquired through actual work.

In fact, they are fundamentally different. Profits accruing from dividends, interest, currency speculation, stock price fluctuations etc. are not due to what one earns through ones own personal work, but they are due to the labor of others (although the capital employed may well be acquired entirely by own efforts as is normally the case with small savers). Like any other revenue gained entirely without personal work and performance, it represents a direct continuation of gains obtained in slave economies. This is true whether you consider matters from a logical or a historical point of view. I am well aware that this statement may hurt delicate ears and appear to them pretty radical, but I do not see how to avoid this conclusion. (2)

In emerging countries such like China, individual performance still has the upper hand while in saturated early industrialized countries it gets more and more supplanted by incomes without work (that is by speculation). Prof. Dr. Horst Ehmke was alarmed by this fact already in the early 80s when he made the following statement to the Member of the Bundestag. “In 1981 Daimler-Benz made more profit from assets, mainly from interest payments, than from the sale of trucks and passenger cars. The same holds true for other large companies” (” Das Parlament”on 23. 10. 1982, No. 42, p.7). This predominance of speculation over the real economy has since increased dramatically.

Modern early-industrialized countries only partially rely on performance. An increasingly large part of income (the income of a privileged minority) is based on speculation. It is generated by the work of other people, which means that it is based on modern slave labor. Those 60% assets concentrated in the hands of only 10 percent of Germans, “do not work by themselves”, as often claimed, but their profits are pressed out of the labor of other people either at home or somewhere else in the world.

10 Science remains respectable even if its theories are useless as shown by their lack of any predictive value.

This sentence will hardly be pronounced by neoliberal scholars, but they justify it through their behavior. They will insist on their scientific authority, even if logic and empirical reality clearly denounce their theories as pseudo knowledge.

This sounds rather strange. What is the use of economic science if it is incapable of providing a true picture of economic reality and its further development? When science proves to be blind to cataclysmic changes that plunge entire populations into misery, when it is incapable to predict such tremendous events as the Great Depression of the past century and did not anticipate the three major crises that now afflict us, it is void of theoretical and practical value. Such knowledge is simply superfluous.

Reality blindness is the most distinguishing feature of present time neo-liberals. They did not anticipate the three great crises since 2007, and their predecessors did not foresee the Great Depression nearly one hundred years ago. Indeed, how should they? Then as now they are part of a system whose leading economic and political forces required them to provide scientific justification for their goals and actions. When they complied they were lavishly compensated with social prestige and material benefits, when they did not, they were denied all chances of a glamorous academic career. (3) By and large this subservient type of science was meant to legitimize political action and to make it immune against criticism. Pseudo-science reflects the subordination of unbiased perception to the requirements of power. (4)

All this raises a truly embarrassing question: How is it that scientists remain undisturbed in their offices, even if anyone may paste the prefix “pseudo” at their backs? Why are they allowed to insist on a privilege that exists nowhere else? If a managing director steers his company into the abyss, he will as a rule be dismissed (even if this happens with a golden handshake). If a physicist tries to establish a theory which only leads to erroneous predictions, his theory will be discarded. If he nevertheless insists, he will be rightfully declared a pseudo-scientist.

Not so with neo-liberals although they shoulder much more responsibility. Not only did they prove to everybody that they are blind to reality suspecting not even the biggest disasters of time. Their real fault deserves still greater blame: Through their false theories (examplified by the above “ten commandments”) they legitimized economic developments that led to those disasters. Politicians belonging to a failed political system are normally driven out of their offices and replaced by men without a record of failures. Why are pseudo-scientists not treated likewise? Shame should have induced them to quit the field voluntarily.

1 The French economist Jean Baptiste Say (1767 – 1832) even believed to have discovered a law to this effect.

2 You may get an idea of daily practiced Freudian repression in economics, if you hear that this most evident truth has been concealed by economists from the very beginning of their science. Only Marx has shown how in the working sphere wealth is transferred from the many to the few. And only the followers of Silvio Gesell have demonstrated how the same concentration of wealth is operated in the sphere of money by means of interest. Marx has been treated by neoclassic economists as if he was never born. Gesell was simply ignored by almost all economists with the notable exception of John Maynard Keynes. “Safe money” which puts an end to the accumulation of income from interest, represents an ingenious solution to an age-old problem. Unfortunately, it is an effective solution only with regard to the monetary system itself. The problem of wealth accumulation outside the money system remains unsolved as enrichment by dividends, currency speculation, stock price fluctuations, all kinds of capital gains remain entirely beyond its pale. It is for this reason that I turned away from a purely monetary approach. Instead I advocate an upper ceiling for personal assets, a ceiling to be democratically determined by the general public. This single measure would make all others entirely superfluous.

3 Of course, the direct dependence of political opinions and orders applies only to a small set of neo-liberal scholars. But it is sufficient that the most successful act of example, and all other forward in her wake.

4 The function of a pseudo-scientific firewall in the service of economic and political powers that have not only met the neo-liberal economists. With the lone exception of Böhm-Bawerk, there have been the neo-classicists Stanley Jevons, Léon Walras and Carl Menger managed to to ignore all thought that the powers that were dangerous. This deliberate ignorance, which can also be described as narrow-mindedness was related to Marx at that time – certainly one of the now even the most outstanding economic thinkers, if we reject his main theories as absurd.

This tradition of conscious disregard of all the powers challenging thinking continues to this day. The fact that no one among the trend-neoliberal economists foresee the great crises has its roots. He should not and must not anticipate at all! Yes they contradict his credo that there can be no serious crises (otherwise he would put the powers in the wrong). That’s why he refuses even to turn his attention to writings that describe such crises and their underlying mechanics realistic. My own work, “The Ponzi scheme,” in announcing the crisis and its causes have been analyzed, was indeed honored by a former farming practices, with a preface, but also has a discussion with their theories never took place. Understandably. The book provides no justification for the prevailing economic system, but points to his dangerous fractures.