What’s the Neoliberalism Counterfactual?

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Since 2008 there’s been a lot of discussion of the status of neoliberalism, one of those amorphous terms that means everything and nothing depending on context but generally is short-hand for “market-oriented reforms”. It is generally agreed that neoliberalism is a predominately Anglo-American philosophy, was exemplified by Reagan and Thatcher before being incorporated by Third Way liberals like Blair and Clinton, and has been forcibly exported around the globe through the use of US-UK financial power and its control of international institutions like the IMF. From there the narrative differs. Neoliberals like to point out that the past 30 years have been the best in human history by probably any reasonable metric: success for neoliberalism! Anti-neoliberals like to remind us that income inequality has gone up in many places, environmental degradation has been a byproduct of capitalist production, and the system has produced numerous crises: neoliberalism is gonna kill us all!

What is discussed much less frequently is what the alternative to neoliberalism was, and is. In fact, the TINA principle has frequently been invoked: There Is No Alternative. Collectivism was tried and found wanting. Keynesian managementalism was tried in Bretton Woods and collapsed. What else is there? We’ve reached the end of history. The liberal market plus democratic welfare state nexus seemed like the only game in town.

As Noah Smith points out in Foreign Affairs, there has always been an alternative: Japan.

Faced with economic stagnation in the late 1970s and early 1980s, most of the world’s rich countries made a fateful choice. They lowered taxes; slashed government regulation in labor, financial, and other markets; opened their economies to global trade and finance; and privatized government functions. …

Buoyed by the last spurt of its postwar catchup growth, Japan managed to sail through the 1980s without having to face hard choices about the structure of its economy. As a result, its labor markets are still tightly regulated, with stringent protections for full-time employees, including strict regulations on firing employees. Its corporate taxes remain high, and many of its domestic markets are still shielded from imports behind a tall thicket of non-tariff trade barriers. Its financial system remains centered on large government-backed banks instead of on capital markets, and hostile takeovers are still prevented by the courts. There are no Gordon Gekkos in Japan.

As Smith recounts that hasn’t worked out all that well either:

Many features of the Japanese economy that are commonly attributed to culture are, in fact, the result of Japan trying to run a modern economy without neoliberal reform: powerful but inefficient corporations, little job mobility, low unemployment, a relatively equal income distribution, and a job market that is heavily rigged against women. Taiwan, which is probably the closest country to Japan in cultural terms, has much higher inequality, greater labor mobility, more gender equality, and a higher per capita GDP than Japan. Taiwan, of course, is a low-tax, low-regulation country that is heavily exposed to trade with China.

Smith goes on to describe the structural reform efforts that are currently underway in Japan, which are broadly neoliberal. The question is: why now? If entrenched interests blocked reforms for the past few decades how are they being overcome?

The first answer is poor performance. Japan’s “Lost Decade” — the amount of time that Japan’s economy has not grown — is about to turn twenty. Of course that simply leads to another question… why, after so long, is the poor economic performance intolerable now. I know little enough about Japanese politics that I am nervous about extending an explanation, but two primary factors stand out to me.

The first is the rise of China. While this has been happening for awhile, it was only recently that China surpassed Japan as the world’s second-largest economy. Japan’s turn to neoliberalism under the leadership of Shinzo Abe contains a sharp nationalist edge. Japan’s contemplation of the Trans-Pacific Partnership signals a desire for closer ties to the U.S. (even if it disadvantages some domestic interest groups). Abe’s push to revise the Japanese constitution in order to build up its military — which has been prohibited since 1945 — is perhaps the biggest signal that Japan is increasingly wary of China.

The second is the subprime crisis. The effects were not as pronounced in Japan as in Europe, but they were still significant. One of the major results was political: the Liberal Democratic Party lost the 2009 election, the first time in Japan’s postwar democratic history that the LDP had been defeated. They regained power in 2012 on a platform of nationalism and significant reform. Those reforms were neoliberal, of course: TINA.

The point of this discussion is not to debate the finer points of Japan’s monetary or regulatory policies, but to ask anti-neoliberals to consider what else should have been done in the early-1980s, or 1990s, or now. Neoliberalism was a response to stagnation in the late-1970s and 1980s. It is a response to stagnation in Japan today. Countries that did not enact neoliberal reforms, or enacted them haltingly, continued to stagnate. Given that, suggestions that our current situation is all the fault of Reagan and Thatcher seems to be overly-simplistic (and are probably simply wrong). Suggestions that we can fix all of our problems through tighter regulation and limitations on trade, immigration, and financial movements appear to be contradicted by Japan’s experience. Structural problems, like rising income inequality, would appear to be the result of structural developments in the world economy rather than idiosyncratic policies.

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6 thoughts on “What’s the Neoliberalism Counterfactual?

  1. Given the Alchain & Demsetz problem (and others) with measuring individual productivity in firms, and hence paying each worker his marginal product, it’s reasonable to entertain the idea that egalitarian (or not) mores shape compensation within firms, and hence the broader distribution of income. That effect is of course mitigated by strong forces like technological change (moving us to a service economy), and by the hefty degree of competition that DOES take place in markets, roughly allocating people according to their marginal productivity. But the degree to which people think income inequality outcomes are fair or not likely correlates to the degree of it we observe. In that sense, the normative (and often incorrect) interpretation of economic principles in the street probably has done some work to increase income inequality. Bear in mind that I usually fall on the “inequality is an inevitability and not a big deal” side of this debate, but that does not negate the importance of having a considered discussion over the issue, and coming up with a more consistent system of ethics than the debate which currently boils down to: “Greed is good.” “No it’s not, it’s bad!”

  2. “Many features of the Japanese economy that are commonly attributed to culture are, in fact, the result of Japan trying to run a modern economy without neoliberal reform: powerful but inefficient corporations, little job mobility, low unemployment, a relatively equal income distribution, and a job market that is heavily rigged against women.”

    Smith raises many valid points in this quote (particularly the point about women in the job market), but there are a few things I feel need to be pointed out. First of all, job mobility has increased significantly in my 10 years in Japan, though the nature of this is not exactly positive The idea of working at the same company for your entire career is largely a myth now, with the slow demise beginning in the wake of the economic collapse circa 1991-1993. Full time jobs in Japan still offer great job security, but the problem is that the number of these jobs is on the decline. In contrast, over the last 20 years Japan has seen a rise in dispatch/contract employees. They are expected to do the same amount of work, but receive none of the benefits (nor security) that full time workers employ. This is where the job mobility factor comes into play, for companies often refuse to extend the contracts of these workers for an indefinite period of time. Hence, after a couple of years they are forced to find work elsewhere. Thus, while the numbers seem to indicate that there is low employment, the “quality” of employment opportunities available is definitely less than what it was in the 80s. As for relatively equal income distribution, that is no longer true as well. Research has shown that the average “salaryman (Japanese English for company employee)” earns less now than he did 20 years ago, and yet companies now have record amounts of “horyuu-kin (literally “retention money”) for those “just in case” scenarios. They have the money available to offer their employees better salaries, but they continue to hold onto it. Abenomics was meant to entice corporations to pay out more to their workers, but so far all we have seen is major corporations benefit from the cheap yen. Salaries still have not gone up, and now consumers are faced with higher prices for commodities (cheap yen means higher costs for imports) and the looming consumption tax hike next year.

    But to get back to the point of your post… Abenomics is a response to stagnation, and a lot of the mantra is convincing people to believe it can work… If people have faith in it, then it just might succeed… There are some encouraging signs, but the dividends have yet to trickle down to the majority of the public.

  3. Dave,

    I was hoping you’d notice this and chime. All excellent points. If I were to sum them up, perhaps I’d say that at least in Japan’s case the move towards neoliberalism is a response to similar stagnation trends in income and quality employment that happened earlier in the US/UK. Or maybe the trends happened at similar times but the reaction just came later.

    Either way, thanks for filling in the gaps.

  4. No problem. Just doing my part to “fill in the gaps” about my adopted country.

    To further elaborate on the points you raised about China, Japan is not just increasingly wary of their continental neighbor, but one could argue they (at least Abe and his supporters in government) are rather intent on reclaiming their place as the number one economy in Asia and second fiddle to the US. I remember the fervent debate that swept the media channels here when the figures were announced a few years back (2010 I believe). It would suffice to say that Japan felt an urgent sense of crisis. Japan’s rise out of the ashes of defeat and miraculous economic recovery have become fully integrated within the fabric of the nation’s identity, an identity some feel began to unravel when China become the world’s second largest economy. One brilliant point brought up by Japanese movie director and author Tatsuya Mori is that the Imperial system still exerts a profound influence over the Japanese psyche and feeds this belief that Japan is destined for greatness. Here’s a quote from the close of his interview with the Asahi Shinbun last week (the English is my translation):

    “The Imperial system has a tendency to lead Japanese people to view themselves as a special race. This belief became one of the driving forces behind the nation’s efforts to modernize in the latter half of the 19th century, and gave rise to the nation’s sense of disdain and superiority towards other Asian nations. This feeling remained intact even after Japan was defeated in WW2. Thus, despite suffering double atomic bombings, the razing of its capital through firebombings, and an unconditional surrender, Japan successfully transformed itself into the world’s second largest economic superpower in less than 30 years of its defeat. Admittedly, that is nothing short of a miracle. Yet, since then China has usurped Japan and now boasts the world’s second largest GDP. In addition, the country has fallen victim to a disastrous accident at the hands of nuclear power, one of the supposed symbols of modernity. There is no question that Japan has entered an age of national “downsizing”, but the truth is it simply doesn’t want to face this fact. It doesn’t want to become “just another Asian nation”. It can’t water down this sense of superiority towards Asia that has secretly fermented over the years. The friction wrought by the collision between “reality” and “feelings” has manifested itself in a number of ways, such as hate speech (directed at second and third generation Koreans in Japan) and the sense of favor and expectation towards Emperor, who stands at the center of the “unbroken Imperial line” myth.”

    Note on Tatsuya Mori: He has shot a few documentaries about issues in Japanese society from which many shy away, such as the death penalty and the Aum cult (the people responsible for the sarin gas attacks on the Tokyo Metro in 1995). He has also worked on a documentary examining the Imperial system within the current constitution.

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