There is an alternative to neoliberalism that still understands the markets
It is better to accept a more modest but sustainable growth path than unregulated capitalism offers. But is there the will to do so?
Many fear that neoliberalism will never be defeated. They may be right if their fears are that the interests sustaining the neoliberal system are too powerful. When they claim neoliberalism will prevail because there are no viable alternatives, however, they are quite wrong. The ideas are out there; they are widely understood and coherent; there are even good examples of them in action.
We know that when markets are extended they generate what is known as "negative externalities" – damage caused by market behaviour that does not enter into the cost calculations of those producing it. The most obvious and biggest examples concern pollution. Left to itself, the market only rarely gives a firm incentives to reduce any damage it causes to the general environment. But there are many other less obvious examples of such externalities, such as the anxiety caused to workers' lives by unregulated labour markets, or the general undermining of values and common decency produced by the single-minded concentration on profit maximisation.
Particularly important are externalities where the public damage done undermines the sustainability of business activity itself. The most important example of that today is the exaggerated and highly disruptive effect produced on the economy by the movement of vast funds of speculative finance. More generally, the unwillingness to accept taxation, regulation and collective action that marketisation brings in its train reduces a society's ability to generate the high-quality human and physical infrastructure that an economy needs, but which is only with difficulty achieved through the market itself.
Proposals for resolving these problems can be brought together under the coherent umbrella of tackling market externalities. This has a defensive component, in the protection of interests damaged by markets, and a proactive one, in taking measures to ensure a sustainability that the market cannot provide unaided.
Such a strategy is not hostile to markets. It accepts the benefits marketisation has brought but works alongside it to offset its negative effects. Also, merely identifying a negative externality is not enough to demand putting an end to its causes; sometimes it has to be accepted as a trade-off for the gains from marketisation. The alternative strategy has to assess this balance the whole time. Where either the weight of public opinion or an understanding of what capitalism needs for its own sustainability cry out for remedies, it marshals state and other forms of collective action to achieve them.
There is no mystery about what these measures need to be. We know how to reduce the degree of leveraging in financial markets, how to tax the volume of transactions in those markets, how to protect banks' main holdings from speculative activity. Some of these things were being practised successfully before the wave of banking deregulation. We know that it is not true that tax havens and other loopholes make it impossible to monitor international financial transactions, because when the world's authorities wanted to check the flow of finances funding terrorism they were able to move effectively. The means are not lacking, only the will.
It is true that a more regulated global capitalism would deliver fewer dramatic results than the Anglo-American model produced in the years up to 2008. But we now know that that model produced both a universal dependence on investment banking and periodic crises. Collective resources then have to be mobilised to rescue the bankers, at the cost of the private and public resources of the rest of the population. The social pact with unregulated finance capitalism is a Faustian one, and its price is the soul of the welfare state. It is better to accept a more modest but sustainable growth path, as Germany seemed to be doing during the years when the Anglo-Americans ridiculed them for their pedestrian banking habits.
We know that generous public spending and social policy can be used to improve the skills of the labour force and to maximise quality employment more effectively than do workfare strategies. The choice confronting us is not between supply side policies using the coercion of workfare and demand-side policies that talk of consumption alone and risk chronic debt. There are supply side policies that stress improvement and quality; these need to be sought out and developed. The evidence is there in the achievements of the social investment welfare states of northern Europe.
We know from the same countries that low levels of inequality, high levels of redistributive taxation and of public provision are associated with high levels of innovation and other indicators of economic success. This is not abstract dreaming: the record is there to see.
The recipe of the social investment welfare state may not seem to provide such an elegant master paradigm as neoliberalism. But if we look behind actually existing neoliberalism's superficial slogans about pure markets we find a distinct lack of internal coherence. Does sustaining market competition mean ensuring that all markets have multiple providers, or allowing the outcome of competition to lead to the dominance of oligopolies? Neoliberalism gives us no unanimous answer.
Are state-funded bank rescue plans compatible with the market economy? Why do neoliberal political movements usually need to make coalitions with very unliberal nationalistic, xenophobic or religious movements in order to win popular majorities? Is extensive political lobbying by corporations an expression of economic liberty, or an offence against the separation of state and economy that is central to neoclassical political economy?
The externality-confronting social investment welfare state certainly faces dilemmas over when more is to be gained from accepting an externality than from eliminating it; and politics will usually determine the outcome. But neoliberalism has no general advantage over it in coherence and elegance. The only superiority of neoliberalism lies in the power of the interests that sustain it.