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When I read liberal pundits, I often get the impression that they have no idea how much the neoliberal revolution has affected their worldview. As you know, Krugman often argues that it was a sort of right-wing plot adopted by a racist Republican Party. Many younger and fairly rational progressives have the view that “of course sensible liberals have always favored a market economy, we just don’t support laissez-faire capitalism.” In fact, in the 1970s sensible liberals did not support a market economy, nor did sensible conservatives, nor did right-wing conservatives. Here is John Gray on the 1979 Thatcher election manifesto:

Thatcher did not begin with the full-blown neoliberal policy agenda with which she was later identified. There was no mention of privatisation in the 1979 election manifesto, which focused on reining in inflation and limiting the power of trade unions.

In 1979 the British government owned many of the large manufacturing firms in industries like autos and steel. Even a candidate as conservative as Thatcher dared not suggest that perhaps the government had better things to be doing than manufacturing cars. (BTW, in Britain the election manifestos are taken much more seriously than in America.) In the 1950s, Eisenhower presided over 90% income tax rates. Until the late 1970s the US government set prices in many industries.

So it is not true that liberals have always believed communism is a bad idea, if by communism you mean an economic system where the government owns the major industries, sets prices, and has confiscatory tax rates on wealth. Of course they never bought into the (totalitarian) communist political system, but they most certainly did buy into its economic system. Samuelson’s textbook once predicted the Soviet living standards would surpass the US by 1990. If true, shouldn’t we adopt a democratic form of socialism in America?

We’ve come a long way. Right-wingers should not get too discouraged about the regulatory “reforms” being considered. Of course the crackdown on derivatives will probably do more harm than good, but the key point is that the harm it does will be trivial compared to the harm done by policies in the 1970s that even conservatives bought into.

The reason everything changed after the mid-1970s is that most economies hit a brick wall around 1974. And it wasn’t just the oil shock; most economies downshifted permanently into a much lower real GDP growth rate. Italy went from around 7-8% growth to around 2-3% growth. The more statist economies were often the ones that suffered the most. This is important keep in mind, as those who aren’t old enough to remember this period might draw misleading conclusions from time series data. For instance, here’s something I found in Tyler Cowen’s blog:

Stan Tsirulnikov forwards to me this very interesting paper (JSTOR, gated for many of you). Here is an excerpt from the summary: “For twenty years up to 1974, Greece enjoyed rapid growth, high investment and low inflation; during the next twenty years, growth and investment collapsed and inflation became high and persistent.” After 1974, debt and deficits rose sharply as well, and later EU transfers helped postpone the necessary fiscal adjustments. At this same time Greece was becoming more democratic, in part because the previous autocratic arrangements were collapsing. The figure on p.150, representing the difference between the two periods, is a knockout. And after 1974, the average rate of gdp growth goes from 7.1 percent to 2.1 percent.

In other words, the Greek economy slowed after 1974 pretty much as lots of other middle-income, statist, corrupt economies slowed after 1974. Democracy may have played a role, but how would we know that? After all, countries as diverse as Italy, Brazil and Japan also slowed sharply after 1974, and without any change in political system. And note that Italy and Greece are both relatively statist and corrupt economies in southern Europe.

Of course there are a few economies that did not slow sharply, such as Chile, Britain, and America. Those few countries bucked the tide of history, and kept growing just about as fast. And how do progressives interpret that fact? Well obviously the neoliberal policies of Pinochet, Thatcher, and Reagan (and yes Carter and Clinton) were a complete failure, after all, growth did not speed up.

A few countries even grew faster after 1974. I hope I don’t need to explain what happened in China.

Counteractuals are tricky. Without a plausible alternative timeline, a before and after comparison is nearly meaningless. Growth in the Soviet Union slowed sharply after the 1960s, and then again after the 1970s and 1980s. By 1992, when free market economic reforms first began, Russia was already in a deep depression. What caused the depression? Obviously economic reforms! It doesn’t matter that the more aggressive Soviet bloc reformers did better than Russia. It doesn’t matter that those slowest to reform (the Ukraine) did even worse. Or that those communist countries than never reformed (North Korea) did even worse than that. It must have been the reforms.

The 1970s were the turning point in modern history. Statism was exposed as a flawed economic system. The more idealistic countries like Denmark and New Zealand reformed most rapidly when new information showed that markets worked better than government. You’ve heard me talk ad nauseum about Denmark, which is number one in all sorts of rankings, from free markets to happiness to equality to civic virtue. But I actually looked at all 32 economies with per capita income above $20,000/year (i.e. as rich as Portugal.) Interestingly, just as Denmark was number one in both markets and civic virtue, the same country placed dead last in both the free markets and civic virtue rankings. And what is the country with both the lowest level of civic virtue and the least reformed statist economic system among 32 developed countries on four different continents?

You’ve probably guessed it by now . . . Greece.

PS. I recently visited Greece, and love the country.

PPS. I used to hate older guys that told me I just didn’t understand how things were in the old days. Now I’ve turned into that jerk.

Update 5/3/10: I see that a Tyler Cowen link is bringing more people over. This post on Denmark explains the methods I used in constructing free market and civic virtue indices. In the post I call civic virtue “liberalism”, but I thought that my be too confusing here and didn’t want to spend a long time explaining why.

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This entry was posted on May 02nd, 2010 and is filed under Misc., Neoliberalism. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



