Social EuropeeBooks Can Neoliberalism Be Saved From Itself? Chapter 4 of 5
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Can Neoliberalism Be Reformed?

While governments inspired by neoliberalism make compromises with public spending and regulation all the time, they do so solely as a reluctant recognition of pressing, hopefully temporary, political realities; their default preferred position is always to make government as small as possible, apart perhaps from its defence and security activities. In 2014 the Conservative government in the UK announced its determination to return to the public spending levels of the 1930s – that is, before the construction of the modern welfare state. In the US, the Trump administration has already begun to unravel the regulation of the banking sector that had been put in place following 2008 to try to prevent a recurrence of the financial crisis. In several countries, banks that in the wake of the crisis had trumpeted their conversion to the pursuit of less hectic short-term trading have returned to their pre-2007 ways of doing business.

Readiness of neoliberals to accept a need to reform their model rather than just make occasional temporary concessions would have to result from a perception that the model itself was embarked on a self-destructive path. That however assumes the existence of persons and institutions in a position to take strategic action on the basis of such a perception. For market neoliberal thinkers, like Hayek, the beauty of the pure market was precisely that no one was in a position to take strategic action: life would be guided by the mass of tiny individual acts of sale and purchase. Market neoliberals have no answer to major malfunctions of the model itself. The position of corporate neoliberalism is rather different; some corporations and very wealthy groups are capable of either taking strategic action themselves or of urging governments to do so. Therefore the first question that needs to be addressed in assessing neoliberalism’s capacity for reform is: who would be the strategic actors in such reform? We can then go on to address two key areas where such actors might in principle be motivated to take action: the threat posed to capitalist economies by growing inequality; and the challenge to neoliberalism of xenophobic nationalism.

Corporate neoliberalism’s strategic actors

In The Communist Manifesto (1848) Karl Marx and Friedrich Engels asserted that ‘the executive of the modern state is but a committee for managing the common affairs of the bourgeoisie’. It was intended as a criticism of the limited social responsibility of governments in 19th century capitalism. A sharper criticism might be made against early 21st century capitalism: it is losing the capacity even to have a committee to manage its common affairs. The mid-20th century German Ordoliberalen saw government as essential in setting and subsequently maintaining a perfectly competitive order; it was then necessary to ensure that governments did not do much else. Over subsequent decades intellectual leadership of the neoliberal project passed to US economists who have viewed the state as inherently incompetent, and have therefore wanted to limit its role even further. Their vision has been impossible to realise in practice, but their intellectual success means that contemporary neoliberals are in difficulties when confronted by needs for action that go beyond the market’s own capacities. The major differences here between market and corporate neoliberals can be explored by considering the different answers given by both to two sets of questions:

  • Does emphasising the importance of the market mean that as many aspects of human life as possible should be brought within its scope? If so, what kind of power has to be wielded to force life into such a mode? If not, how are parts of life that remain outside the market to be protected from it?

  • Is neoliberalism compatible with the pursuit of long-term goals? Can its institutions protect the long-term from the short-term?

The market or nothing but the market?

The Ordoliberalen were very clear that major areas of life had to be protected from the market, though they insisted that within the economy as such it had to reign supreme. Their formative years having taken place during the final crisis of the Weimar Republic, its struggles between communists and others, and the eventual triumph of the Hitler regime, they hoped for a world where community life, religion and leisure pursuits could be beyond the reach of both economics and politics. As Bonefeld has made clear, this was what they meant by the ‘social’ market – not, as the term is used nowadays, to refer to a market softened by a welfare state. Once again, as leadership of neoliberal thinking passed to US economists and as economic theory became more sophisticated, this stance changed radically. Neoliberals increasingly sought means of extending the reach of the market, applying market concepts to penetrate institutions like the family. Organisations in most areas of life (for example, churches, cultural bodies) have been persuaded by neoliberal governments and sponsors to structure themselves as though they were profit-making concerns. Young people have been encouraged to value education mainly in terms of the income it might bring; and there are many other examples.

The original ordoliberal vision of major parts of life being sustained outside the market but also without state support remains attractive to some neoliberals. A recent British example was the policy of a Conservative prime minister, David Cameron, to encourage a ‘big society’. This referred to the mass of voluntary organisations that perform tasks that would otherwise fall on public social services and require government finance; releasing the energies of the big society would therefore reduce the need for public spending and consequently public employment. Unpaid volunteers would replace public service workers. Following an initial high-profile launch, the strategy quickly evaporated. Cameron’s New Labour predecessor, Tony Blair, had a similar vision, when he announced that his ‘Third Way’ political movement had natural affinities with the ‘third sector’, the name given in the UK to the voluntary sector, outside both market and state. Little came of it.

While societies are certainly made richer and more attractive when citizens are engaged in a large number of activities to help each other, there are major difficulties if governments seek to encourage them as part of a strategy to reduce their own spending and activities. Ordoliberalen would have been suspicious of government becoming at all involved in society in this way, as they would have feared that it would be unable to resist the temptation to seek to control voluntary activities. This is indeed what happens, especially when governments’ main motive is to use volunteers to do work that would otherwise fall on the state. This demotivates volunteers, as they observe not only that the state is turning them into its agents rather than allowing them to develop their own priorities, but that their action is being used by government as a reason to reduce its own activities, leading to no net increase in the services provided.

Another form taken by voluntary action is philanthropy: the use of private wealth to fund activities outside the market and without a profit motive. A wide range of activities from social need to high culture and scientific research are funded in this way, enabling these to thrive in a manner that would not be possible under strict market rules, activities on which neoliberal governments do not want to spend money. However, so attractive are these possibilities that governments do indirectly share in the financing of philanthropic activities. They do this by offering not to tax individual and corporate income that is used for nominated philanthropic purposes. This certainly releases funds for activities that might otherwise be neglected, but it comes at a price. If government offers tax rebates, it has less available itself to spend. This serves the neoliberal preference for low taxes, but it means in effect delegating public policy-making to very rich people, who are able to direct a proportion of public spending to projects that they rather than any political processes have chosen. Not only do the rich become ever richer, and not only does the reach of their wealth keep extending as more things are brought within the market, but they also have a large say in how residual public spending is used.

Outside the philanthropic activities of the very rich, most voluntary activities take the form of a mass of actions by ordinary individuals, who have to find funds in order to keep going. Set beside the giants of corporate wealth and the state, these are tiny, and constantly struggling to make ends meet. They increasingly have to appeal to corporations and the rich for financial help, which means that the voluntary activities that secure most support are those that do things of which the wealthy approve.

Similar points apply to the practice of corporate social responsibility (CSR), where firms accept responsibility for the negative externalities that their activities produce. For example, they may choose to abide by certain environmental standards or avoid various forms of labour exploitation. Less frequently, banks might abjure irresponsible trading practices. In principle these activities will make a firm less profitable, though their protagonists have various arguments that suggest that this may be untrue. There may be reputational gains from pursuing ethical practices, and the kind of innovation often associated with that pursuit might also characterise a corporation as more generally innovative; socially responsible firms are usually high value-added ones. But corporate responsibility shares the problem of other forms of voluntary action, that decisions as to which responsibilities to acknowledge (and which to ignore) are taken by a very small number of corporate leaders and wealthy individuals. Despite these limitations, CSR can help deal with some negative externalities.

For extreme market neoliberals, all these social market activities are problematic. If the market represents the peak of human rationality and the perfection of individual choice, then no institution should stand outside it, as all would have their efficiency improved by partaking in it. From this perspective the voluntary sector is just as unattractive as the public one. This should in theory be as true of relations between children and parents, or sexual partners, or among friends, as those between the buyers and sellers of fruit and vegetables. An initial problem faced by advocates of this view is that many of these institutions have long existed outside the reach of the market. To bring them into it would require government action to prevent access to the resource in question that does not take a market form. This has certainly been done in the past; the privatisation of much common land in the 18th century was a major example. The shareholder value maximisation form of corporate governance is a still current instance. This reform has been part of neoliberals’ attempts at reducing the role of powerful senior executives, who were seen as having interests separate from those of shareholders. It therefore constitutes a victory of the market form over the corporate version of neoliberalism. Linked to it is the current practice of having a large part of senior executives’ remuneration take the form of profit-related bonuses, tying them into shareholders’ interests, and accounting for a good deal in the extraordinary rise in executives’ remuneration in recent years. Originating in American and British corporate law, shareholder value maximisation has been imitated in many other countries, creating problems for their former practices. For example, it threatens the German concept that a firm has responsibilities to its workforce and local community as well as to shareholders.

Its effectiveness as a means of asserting shareholder rule has been weakened, partly because many shareholders are themselves large organisations closer to corporate than to market neoliberalism, and partly for the opposite reason that much share trading is carried out by computers, where a shareholder might hold a firm’s assets for a brief period of time, with no human being actually knowing that the asset was held. On the other hand, it has helped produce the high level of mergers and acquisitions typical of contemporary capitalism, where firms that fail to maximise profits are rapidly vulnerable to takeover. Ironically, this has led only to reduced competition in some sectors and has therefore strengthened corporate over market neoliberalism. We shall return to some further problems raised by this when we consider the issue of short-termism.

One type of capitalist organisation that has been harmed by the shareholder maximisation model is that known as the ‘mutual’. This is where a firm is owned by its members rather than by shareholders, all profits being invested back into the enterprise to improve members’ benefits. It is a form taken by many pension, insurance and housing organisations, the last in the form of building societies. It operates fully within the capitalist market economy, but does not follow the neoliberal rule of shareholder maximisation. Neoliberal governments have therefore encouraged mutuals to turn themselves into profit-maximising companies. At the very time that British New Labour governments were celebrating a third sector, they were encouraging the transformation of the building societies from mutuals into profit-maximising banks. Some of those that did so were at the heart of the collapse of British banks that was among the triggers of the 2007-8 crisis.

Strict market neoliberals are more likely to insist on rigorous conformity to market rule than corporate neoliberals, who advocate corporate leaders taking political and social initiatives outside the strict frame of a firm’s market activities. Only corporate, not market, neoliberalism therefore provides potential strategic actors in the form of corporate ‘statesmen’ capable of perceiving general problems and challenges for the system as a whole – as is the case with some prominent business exponents of CSR. In general we have in these pages identified corporate neoliberalism as a rather corrupted form that loses the characteristics of pure competition that are among the attractions of the market, and as making possible the dubious lobbying links between corporations and governments, anathema to market neoliberals and left-wing critics alike. Is this the nearest we can get today to a committee for managing the common affairs of the bourgeoisie? An instructive example of this confusion in neoliberalism is the on-going history of food safety regulation in the UK. Until 2011 the country had a standard bureaucratic and scientific approach to this. Committees dominated by food scientists would prepare rules for safety standards in the cultivation, manufacture and sale of food products; and the regulations were enforced by local government. For pure neoliberals this is unacceptable; food standards should be left to the market and the rule of caveat emptor (let the buyer beware). But this is politically impossible given the difficulty consumers have in knowing what happens in the food chain. Faced with this problem but insistent on dismantling the public regulation system, the neoliberal Conservative and Liberal Democratic coalition government embarked on a course of reducing the scale of the Food Standards Authority’s work, diluting its scientific membership with representatives of the food industry; and weakening local authority inspection capacity, privatising much of it and promising light-touch regulation to the main food companies. In this highly incoherent way, corporate neoliberalism emerged as a compromise between public regulation and market neoliberalism.

Under neoliberalism governments have lost confidence that they are competent to play much of a strategic role themselves; do the corporate leaders and wealthy individuals who have access to them have any incentives to persuade them to work for some general interests rather than just pressing their own concerns? But this represents a major compromise for the idea of market dominance, and becomes a key question as neoliberalism faces major problems of its own viability. The extreme goal of bringing virtually all human life into market exchanges is impossible to realise. But, given the enormous dominance of the market in a society that has been reformed by neoliberals, what protects the viability of those areas of life that remain outside it, especially once neoliberals have also succeeded in residualising the role of government? The mechanisms that some neoliberals offer – volunteers, philanthropy, CSR – seem either puny or to compromise the market neoliberal ideal.

Neoliberalism and the long term

A fundamental attraction for neoliberals of the market is that it avoids the need for long-term planning – an activity that they see, not without reason, as belonging to a powerful central state, which is almost certain to get things wrong, as it cannot anticipate innovation and therefore tends to inhibit it. The neoliberal long term emerges from the mass of tiny, individual, short-term transactions that constitute the market. If we can assume that actors are rational, they would be able to see when an accumulation of such transactions was leading in a less profitable direction, and would adjust accordingly. (For example, if investment in stocks in technology companies shows signs of excessive optimism about long-term prospects, wise investors will start selling shares in them, and the market will eventually normalise.)

In this vision shareholders are investors who rationally consider the substantive prospects of the stocks they purchase, though externalities as well as public goods that cannot be included in firms’ decisions are ignored. Let us now make some different assumptions. Assume that investors purchase stocks purely with the intention of packaging them with others and selling them on as quickly as possible, and in some cases the investors are computers. Firms that fail to make a quick profit, because they are investing in long-term projects, will see their share prices fall and will be vulnerable to takeovers by firms promising to deliver higher dividends by dropping long-term projects. Under these circumstances the accumulation of masses of individual transactions is unable to produce a satisfactory long term. It certainly cannot do anything about problems of environmental damage and climate change.

Following the neoliberal deregulation of financial markets that occurred in the 1980s, first in the UK and US but later across the world, that latter model became increasingly the realistic one. Deregulation led to an explosion of new ideas for risk sharing through secondary and derivatives markets. It became possible to leverage loans on very little collateral, and the number of participants in the markets was growing as deregulation spread across the world. Traders could buy private and public debt and sell it on in parcels to other investors, with larger numbers of players involved at each stage. The share of any one risk borne by an individual investor or bank became smaller at each new iteration. It seemed that scarcity had been abolished, and that the rules of classical economics no longer operated. The market had floated free from itself. Operators in these markets had little incentive to check the exact nature of the risk in any bundle of debt they were purchasing, as they intended to sell it on very rapidly to a large number of other purchasers; the market’s need for fully informed participants was not met but was felt to be unnecessary in this constantly expanding financial universe. A flaw in the system was that, although any one bank’s holdings of one particular risky debt was small and in their hands for only a short period, at any one moment they were all holding very large numbers of these small shares. Sooner or later a doubt over some debts was bound to lead to a loss of confidence in some banks. When this happened, trust in banks’ integrity spread rapidly across the system, creating the chaos that was the 2007-8 crisis.

Many critics have argued that it was bankers’ greed and irresponsibility that caused the problem, and that the solution lies in higher standards of corporate ethics. This is however extremely difficult to do within a free market. As Chuck Prince, the CEO of Citigroup bank famously remarked in an interview with the Financial Times in July 2007, on the eve of the crisis: ‘As long as the music is playing, you’ve got to get up and dance’. Any firms that had withdrawn from the trading frenzy while it lasted would have become less profitable than their rivals who continued indulging in risky trades; their share values would have fallen; and they would have been vulnerable to takeover by other banks willing to act irresponsibly. In several cases the dance lured many of the world’s leading banks from insouciant irresponsibility into serious criminality, as the subsequent mass of legal cases and fines have demonstrated. Far from being self-correcting, the market’s incentives made everything worse. There was, in sum, a major collective action problem: everyone stood to gain from some regulation of behaviour, but the market excluded any participants within the system from taking steps to end what was going on. Governments and central banks, acting in concert across the world, had to intervene, initially to stem the crisis and afterwards to reconstruct a new regulatory framework.

Technically, there are no difficulties in designing such frameworks. The Basel Committee on Banking Supervision (BCBS) – an international committee of central banks and banking supervision authorities - is seeking to toughen the rules on banks’ capital adequacy ratios (the relationship between a bank’s assets and the speculative trades it conducts). But the BCBS lacks international statutory powers, and in any case tends to stay as close as it can to the neoliberal rule that the markets know better than public authorities. It uses measures of risk developed by banks themselves and by the private credit ratings agencies that were among those responsible for failing to appreciate the extent of banks’ problems in 2007. During the period of the Obama administration in the US there had been an attempt to get tougher. The Dodd-Frank Act of 2010 raised capital holdings requirements on banks and regulated their risky investment activities. However, early in the life of the Trump administration (June 2017) Congress voted to weaken many of Dodd-Frank’s provisions. Very few bankers involved in recent criminal scandals have been imprisoned: ‘too big to jail’, as some observers have commented.

Neoliberals argue that these post-2008 attempts to rein in bank irresponsibility serve only to hamper trading, making it more difficult to share risk, and therefore hinder innovative activity. They might also point out that types of investor who manage to stand outside the short-term share price model, such as venture capitalists, depend on an ability to keep some funds in volatile markets in order to have the resources for longer-term projects. But these advantages have to be set against the overall loss in welfare that occurs when an unregulated system collapses, as it did in 2008. Market neoliberals also claim, with considerable justification, that the expectation that corporate neoliberal governments would bail banks out – that they were ‘too big to fail’ – encouraged them to take irresponsible risks, and that the post-2008 bail-outs will only give banks incentives to take even bigger risks in future. But here too one has to set the damage done by bailouts against the danger of a total collapse of the global economy had nothing been done to stem the haemorrhage of share values that was taking place. Calculations must be made of the trade-off between the gains and losses from deregulation, but although neoliberals talk the language of calculation and opportunity costs, in practice they always make the a priori assumption that costs of regulation and public intervention outweigh any benefits.

The situation is one commonly met in game theory: where there is short-term competitive gain from dangerous behaviour but long-term loss, it is rational to seek external regulation to protect oneself from one’s own behaviour. The example usually given concerns participants in dangerous sports. (For a good discussion, see Robert Frank’s The Darwin Economy.) If individuals are given a free choice whether to wear protective equipment that will protect them from serious injury, but which will impede their performance against competitors who do not wear the equipment, the great majority of players will abjure the protection. But the same players will, completely rationally, support the general imposition of a rule that everyone must wear it.

The market itself cannot enable its participants to make choices of this kind, but large corporations and associations of firms have a degree of autonomy from the short-term pressures of the market, which should enable them to act strategically. Large banks, fearing another crash, but unable to miss profit-making opportunities if they arise, should support regulation designed to prevent the situation getting out of control again. As with the discussion of ‘the market or nothing but the market?’, corporate neoliberalism might paradoxically hold out a better prospect of responsible business behaviour than the market form.

The evidence on whether or not they do this is mixed. The weakness of plans to improve the BSBS Basel agreement suggests that banks’ immediate interests carry considerable weight with regulators. Plans for a financial transactions tax (designed to reduce extreme velocity of financial transactions) by the EU have been watered down following intensive lobbying by the financial sector. (For a detailed account, see Lisa Kastner’s 2017 study.)

There has been a different experience with the submission of banks to statutory ‘stress tests’. Central bank officials test the ability of banks to be able to confront a range of shocks. If they fail the tests, they can be required to change their capitalisation base or seek a merger with another bank. Such tests have been required by the European Central Bank, the US Federal Reserve Bank, and the Bank of England. They are compatible with moderate neoliberalism, as they amount to a shadow testing of market pressures, but they are unwelcome to extreme neoliberals, as they involve public authorities intervening rather than allowing market forces to work by themselves. Banks in general seem to have welcomed them, as they protect the system from risky banks. A collapse of banks’ confidence in each other had been a major aspect of the immediate aftermath of the crisis.

The restoration of trust has also been a major feature of the European Central Bank’s financial compensation scheme (a similar measure has been introduced by the Bank of England). This scheme is designed to restore the confidence in financial institutions of small savers. Banks are required to contribute an insurance scheme, which compensates investors in financial firms up to a maximum of €100,000. Institutions do not oppose the scheme and contribute to the funds, because they know that, in the absence of something of this kind, in the wake of the crisis they would have difficulty persuading small wealth holders to part with their money. This is a further example of a reform to the neoliberal model that seems to require state (i.e. central bank) initiative and therefore external regulation, but which tends to the preservation of the market economy.

These differences in the finance industry’s responses to various post-crisis initiatives show what might be expected: where a public policy provides financial firms with assurances that help themselves, it is welcomed; where it seeks to restrain their risk-taking, they oppose it, even though they might seem to have a long-term interest in such measures. The problem is that neither banks nor governments have a strong interest in the long term. Banks wanted to get back to making very large profits out of high-risk activity; if they can make enough money in a short period, they can probably sit back on their piles of wealth when the next crash comes. Also, since the sector as a whole and certain banks within it, are essential to the functioning of the system, public authorities will have to bail them out at public expense if they fail, as happened after 2008. For their part, governments have been desperate for banks to get back to being profitable as soon as possible, so that the bailouts can end. The quickest route to that has been through tolerating a return to high-risk lending.

As in the previous discussion of the extent of the role of the market in society, we confront a tension between the market and corporate forms of neoliberalism. To the extent that the former dominates, we have a system that imposes certain kinds of responsible behaviour – profits can be made only by providing goods and services that consumers want at prices they can afford – but which is incapable of producing measures that will safeguard longer-term interests that cannot be achieved within the market itself. To the extent that corporate neoliberalism dominates, corporations may sometimes have an incentive to deal with externalities, to support causes that cannot be helped by the market, and assist the pursuit of long-term concerns. But they do this without any systematic market or regulatory constraints on pursuit of their selfish concerns. This incoherence within neoliberalism may serve to strengthen it rather than tear it apart. Given that there are no rules guaranteeing the dominance of either form, and that the difference is barely recognised, the system can shift and adjust, and probably ensure its survival. But capacity for strategic action remains weak. We shall explore this in relation to the two issues of rising inequality and xenophobia.

Inequality and mass consumption

One consequence of governments engaging in a race to the bottom over taxation has been to shift an increasing share of taxation away from corporations and the rich on to lower and medium earners. For neoliberals of all kinds this has been a great achievement: the wealthy, whose interests they are mainly concerned to protect, are able to become richer, while taxes (and therefore public spending) are under pressures for reduction as the mass of voters resent their growing burden. But this resentment together with growing inequality is presenting certain major risks to the neoliberal model.

Partly for these fiscal reasons, partly because of other factors, the rewards of wealth (including the salaries of very highly paid executives) are already growing far more rapidly than the incomes of the rest of the population, as Thomas Piketty has shown in Capital in the 21st Century. Politically this change further favours neoliberalism, as the political power of wealth can be deployed to ensure that high incomes are taxed lightly and that business regulation is relaxed to help the interests of wealth holders. Michael Förster and his colleagues at the Organization for Economic Cooperation and Development (OECD) have calculated that in the USA the top 1% of income earners took 47% of total economic growth between 1979 and 2007. In the UK the figure was 26%. The OECD had access to similar data for only a few other (European) countries, but these suggest a lower figure, from 4 to 11%. The US and the UK are the two countries where neoliberal ideas developed and affected public policy with least restraint, but there is considerable evidence that similar policies have been spreading. What has happened in those two countries over the past 30 years should therefore be expected to be imitated elsewhere.

The OECD has probed the reasons for these increases in inequality in western countries. It found that large rises in incomes have been concentrated among senior managers and some professionals, particularly in the financial sector. Very high earners are likely to have their income source divided between salaries and investment earnings to a far greater extent than is the case of the rest of the workforce. The ‘bottom’ 90% have between 70 and 85% of their incomes in the form of wages and salaries; the top 0.01% in contrast have only 40% in this form. There have been strong trends in many countries for taxes on investment earnings to be reduced far more than those on wages and salaries. Between 1981 and 2010 taxation rates on the highest incomes across the OECD area declined from 66 to 42%; corporate as opposed to individual income tax has dropped from 47 to 25%; taxes on dividends from 75 to 42%. These numbers relate to taxation rates, and do not take account of any increases that might have taken place in the ability of wealthy people to avoid tax, though the deregulation of global finance that took place during the period has made legal tax avoidance easier.

Although inequality was rising in this way, and real incomes for ordinary workers had been static, consumers in the US and elsewhere were able to sustain their consumption. This was made possible by a considerable rise in both public and private debt, financed in turn by a growth of financial markets made possible by the global deregulation that was one of neoliberalism’s main achievements. Eventually the instability of this growth helped produce the crisis of 2007-08. It is for this reason that the IMF and OECD have become concerned at the rise in income inequality (see in particular the OECD’s 2015 report In It Together: Why Less Inequality Benefits All). They fear the consequences for future economic growth if the wealthy absorb too much of its proceeds, leaving middle-income households dependent on risky credit to sustain their standard of living, and discouraging lower-income families from taking up educational opportunities.

In Buying Time and in How Will Capitalism End? Wolfgang Streeck has argued that the indebtedness trap could threaten the model of capitalism to which we have become accustomed, one dependent on mass consumption. This is not the only historical form that capitalism has taken. Until the mid-20th century the mass of the population could afford only basic products: food, some clothes, a few sticks of furniture. Capitalists depended for opportunities to innovate and produce up-market goods on very small, but high-spending, numbers of aristocratic and bourgeois purchasers of luxury goods. One reason why pre-democratic elites resisted so strongly the demands of the growing industrial working class was that they could not see how such an economy could produce enough wealth to raise general living standards. Two major historical developments made possible mass consumption capitalism. First came mass production in the US motor industry in the early 20th century; second was Keynesian demand management in the Scandinavian, then the British and American economies either side of the Second World War. Together they helped create a mass population with money in their pockets. From that point the extraordinary rise in the consumption of goods and later services launched the unprecedented rise in prosperity that we have inherited and largely take for granted.

This has also been the period in which, as Piketty has shown, wealth and income became far less unequally distributed than at any time since the 18th century (which is as far back as records, mainly in France, the UK and the US) go. But Piketty then plots a resurgence of inequality since the late 1970s, the period of growing neoliberal dominance. Can capitalism based on mass consumption survive a period of intensified inequality without continued use of unsustainable debt among middle- and lower-income households? The question will become more pressing if, as some predict, digitalisation threatens employment in a wide range of middle- and even higher-income occupations. Of course, globalisation will be bringing new mass consumers among the vast populations of the rapidly industrialising populations of the Far East. Should we envisage a future in which the populations of the existing advanced economies become unimportant to global capitalism as either workers or consumers? Would their societies be able to remain even residually democratic under such circumstances? How would these ‘redundant’ populations react to their growing marginalisation? Do governments have the power to offset these changes, at least through fiscal policy? Would governments that increased tax burdens on capital or financial transactions find that firms left their borders for jurisdictions that did not do so? This is their principal fear. In a globalised economy it is not adequate for national governments even to be only committees for managing the common affairs of the bourgeoisie if they can manage those affairs only at a national level. The OECD and IMF – initially among the main institutions pressing adoption of neoliberal policies - have international competence and their staffs have already perceived the long-term dangers to global capitalism. In addition to arguing that the growth of inequality is damaging economies, they have criticised the Basel reforms for staying too close to banks’ interests (see OECD research paper by P. Slovik); and they have wondered whether neoliberalism has been ‘oversold’ (see IMF contribution from Jonathan Ostry and colleagues). In International Regulatory Co-operation the OECD has encouraged transnational regulatory co-operation as an essential step to gaining some purchase over global economic behaviour. But these bodies lack executive power, which they can derive only from their member governments. The future of democratic capitalism may well depend on major global corporations and super-rich individuals listening to these international bodies and being willing to allow governments to restrain the inequalities from which they have themselves gained so much profit.

Neoliberalism and xenophobia

We are already beginning to see one of the possible answers to the question of how redundant populations react to marginalisation. The process has begun around the peripheries of many, even most, advanced economies, where people are showing an anger that seems to have been ignited from the slow fuse of the financial crisis. It takes the form of xenophobic, anti-globalisation movements and parties. An important part of the rhetoric of these movements is to attack neoliberal elites, who, they claim, have damaged the lives of many people in the advanced world. Globalisation and deregulation, it is argued, have been used to export jobs away from the advanced world to developing countries; and immigration has been encouraged to put pressure on the wages and working conditions of native workers. To date, xenophobic movements are challenging neoliberalism more effectively than social democrats or greens have done. Should we therefore expect corporations to respond by accepting some regulation of their activities and some additional corporate taxation, in order to ward off this challenge and restore confidence in the globalisation project? Or do alliances with xenophobic movements enable neoliberals to achieve one of their main aims: to keep democratic politics at levels where it cannot reach the activities of major corporations – i.e. at the level of the nation state? Do neoliberals see the rise of xenophobia and nationalism as the source of allies against their critics or as a potentially fatal blow to their own project?

The debate in the UK over the country leaving the EU (so-called ‘Brexit’) illustrates the ambiguities of the business position. Most large British firms, as well as their key representative bodies (the Confederation of British Industry, the Institute of Directors, the Engineering Employers Federation and the National Union of Farmers) and the main media voices of the British business community (the Financial Times and The Economist) strongly supported the UK remaining in the EU. Despite its regulatory role in relation to business interests, it is seen as a business-friendly institution that promotes free trade. However, with the exception of the Financial Times and The Economist, they did not campaign very strongly in public for the Remain side. Perhaps they feared that their advocacy would strengthen populist opposition; perhaps they did not want to intervene strongly in an issue where their preferred political party, the Conservatives, was heavily divided. Meanwhile, hedge funds, that part of the financial sector, the highly short-term nature of whose activities causes particular instability in markets, and that therefore thrives on an absence of regulation, heavily supported the campaign to leave the EU with their massive funds. Far less importantly, small firms not engaged in exports and imports tended to be hostile to the EU as a source of regulations that they believed, rightly or wrongly, would not have developed under a purely national regulatory regime.

It would be possible for business interests to take a more cynically strategic view. In the UK a primarily xenophobic opposition to the EU could serve two business purposes. First, by taking the heat off banks and other financial institutions for blame for the 2008 crisis, Brexit could prove a valuable diversionary tactic. There is certainly evidence that an important element in the promotion of Donald Trump’s campaign to become president of the US came from billionaires worried about eventually being blamed for 2008, and seeing Trump’s invective against Mexicans and Moslems as providing useful alternative targets for rage. Immigrants, refugees and the EU provide safer targets for rage than the banks whose actions had actually caused the crisis. Many people, probably a majority, would fear the threat to their living standards and overall social stability if there were to be major political challenges to the power of big capital, on which they depend for their livelihoods. Second, if - as the Brexit campaign maintains - democracy should remain fixed at the level of the nation state and go no higher, then democracy and public regulation can never meet capitalism at the global level where it operates. Global business; national politics - that makes a useful slogan for evading an effective regulation that in an international economy. If such a hamstringing of politics and democracy can be presented as regaining sovereignty and taking back control, then so much the better.

However, flirtation with xenophobia is a dangerous game for neoliberals to play. The anti-global turn could begin to interfere with free trade, as the Trump administration clearly threatens to do. Stirring up popular rage can get out of control. Not surprisingly therefore, we find major divisions among capitalist interests. To the extent that those who are worried about instability dominate, important policy compromises can be done between neoliberals and social democrats, greens, social liberals and others who actively seek a regulated market order. To the extent that those seeking to make use of xenophobia dominate, the more dangerous is the world likely to become. There will be no progress on such issues as climate change and global labour exploitation, and continued low-level encouragement of ethnic and other cultural tensions. Given that crises of different kinds are producing major shocks in predominately Islamic parts of the world, producing flows of refugees and isolated acts of terrorism, the prospects for a secure world are bleak. These events impact further on opinion in the advanced countries, encouraging further inter-cultural hostility and widespread desires to close countries off from contact with the outside world.

Conclusion

This discussion of how neoliberal governments and corporations are likely to confront the dilemmas facing their project has revealed major problems for both neoliberalism itself and for its relations with the rest of society. Is the market the form of social organisation that all aspects of life should seek to join, or should some areas of life be kept free from it? If the former, through what means is extension of the market to be enforced? If the latter, what protects those areas of life that remain outside the overwhelmingly dominant market order? Is it acceptable if part of the answer is the good will of wealthy individuals and large corporations?

The market is unable to be self-correcting and take care of the long term, given the global nature of such issues as climate change and over-sophisticated financial markets. This does not mean that we should turn back to the idea of an all-knowing planning state, but it does mean that we need institutions capable of responding to major issues of externalities and public goods. These will necessarily mainly be governments. What role is it acceptable for corporations and business associations to have alongside them? They are capable of strategic thinking in a way inhibited by the pure market; but they are lobbies for their own interests. The fundamental antagonism between market and corporate neoliberalism rarely surfaces in open conflict, but it confronts the whole project with dilemmas that it is hard to resolve. On both the issue of the extent of the market and the capacity for long-term action, market neoliberals have a stance that is theoretically pure but far from the reality of the modern economy, while corporate neoliberals are far more practical but occupy a stance that is impossible to defend and possibly corrupt. The only development likely to make either of them accept something beyond tactical compromises is the threat to their dominance posed by xenophobic populism, but here neoliberal politicians and business people are cross-pressured by the temptation to use resurgent nationalism to push the powers of states into complete weakness.

Disputes over the governance of capitalism usually set free markets against the state. Advocates of the former stress the rights of individuals to choose; supporters of the latter point to shared, collective interests that cannot be achieved through a series of individual choices. But the reality of the situation shows both sides in a poor light. Many markets are dominated by small numbers of corporations who do not so much respond to customers’ demands as shape those demands through marketing strategies so that they suit what firms want to produce. On the other hand, not only is the state prey to takeover by politicians keen to advance their own careers and (sometimes) private wealth, but more immediately relevant to the present study, in a global world national states cannot truly represent general public interests.

Certainly states represent a collective interest, as do local governments. In that capacity they can do highly important work, representing the public concerns of their citizens. However, the claim that the nation state represents a universality, a limitless general interest rather than just the collective interests of a defined territorial group becomes highly questionable the more that national boundaries cannot contain the consequences of actions carried out within those boundaries. This has always been true; in particular the European colonial powers secured economic advantages for their ruling groups and mass populations through military conquest and the robbery of resources. Today we are more sensitive about issues of this kind, but governments as much as firms and markets are major players at dumping negative externalities on other parts of the world, particularly of course environmental damage. Our high standard of living is partly boosted by the availability of very cheap imports from countries where workers have virtually no rights at all. Only transnational governance can tackle issues of this kind. This is not an impossible dream; institutions capable of performing this kind of role exist: the EU, the OECD, the IMF, the World Bank, the World Trade Organisation, the International Labour Organisation. Mechanisms for extending their governance activities further are conceivable, and there is evidence that the staffs within these organisations have a grasp of many of the issues involved. They are also becoming awareness of the disillusion with globalisation that is fuelling destabilising xenophobic movements. As transnational bodies, these organisations are themselves likely to become the targets of these sentiments.

But transnational regimes could develop a power to counter the power of business only if they were supported by democratic energy. This is extremely difficult to achieve under any circumstances, most popular mobilisation being heavily based on the nation state. Current xenophobic trends are intensifying this, as they prevent the development of popular political energy above that level. Transnational popular mobilisations do exist. Organisations like Amnesty International, Médécins sans Frontières, Oxfam, Greenpeace, Transparency International manage to organise actions across national boundaries in ways that nationally rooted political parties find difficult. So does a growing range of more militant but also more transitory protest groups like those around most inter-governmental meetings like the G20. These all help to develop that elusive entity, an international framework of citizens’ actions. They contribute to the liberalism and pluralism of the international realm, in that they set a flexible, open discussion-based set of actions alongside and against the rigid secrecy of the discussions that go on among governments and between them and large corporations. But they are hardly democratic; the number and range of people engaged is tiny and they lack a formal democratic mandate.

Unfamiliar political confrontations are developing as neoliberalism runs into crises and blockages. Campaigns of popular mobilisation against capitalism’s excesses find their best but unlikely dialogue partners among the increasingly concerned technocrats in the international organisations. These people confront an increasingly anti-liberal form of democracy and anti-humanitarian populism. Neoliberalism, already in confusion between the lack of realism of its pure market form and the incoherence of its corporate form, stands between the two. It can be reformed only if and when the world’s major capitalist interests come to see that flirtation with xenophobic forces threatens their own longer-term interests; and that their own short-term actions compromise their own long-term needs; and if and when democratic politics can reach effectively beyond the level of the nation state.