The paradigm shift toward and away from Monetarism…

Between 1979-2009 there was an institutionalised paradigm shift in socio-economics. We could call this the rise of ‘neo-liberalism’, but this does not capture the nuanced differences between political economies. We could call it the era of globalisation. But, again this assumes all countries converged on one model of market capitalism. I think it is better to conceptualise this era as, quite simply; ‘Monetarism’, in the same way that economic historians describe the post WW Two era as Keynesianism. The question is whether we are gradually witnessing a move away from the monetarist paradigm, and if so, what is replacing it?

Monetarism captures the global deregulation of credit provision that occurred over the past thirty years. The subsequent institutionalisation of financial markets, the global flow of international capital and other ‘globalising forces’ that created a new web of global markets. There were a variety of responses to the new monetarist paradigm, but it is a case of a variety of capitalism’s within convergence. A variety of capitalism’s converging and responding within the monetarist paradigm. Some countries liberalised their financial markets, labour markets and social services more than others (UK, USA, Ireland). Some countries maintained high levels of social support, public provision and regulated financial and labour markets (Sweden, Denmark, Netherlands). All countries, though, choose and designed their policies in response to changing global monetarist paradigm (and mediated by previous domestic institutions).

The emergence of the monetarist paradigm in the USA, EU and other international market bodies (IMF) was politically driven. It was not a natural evolution but politically designed. There was a rational choice (and for many valid reasons) to shift away from Keynesianism. It was failing to tackle public debt and failing to create jobs. Keynesianism was simply not functioning anymore. Macro economic management was not working. It is generally agreed that the Keynesian economic paradigm ended after the second oil crisis in 1979. The rise of political neo-liberalist ideology through republican and conservative election victories (Reagan and Thatcher) firmly institutionalised a gradual shift away fromKeynesianism toward Monetarism. The era of governments making fiscal decisions about the private economy waned. Monetary policy was placed into ‘independent’ central banks. Public debt was the primary obstacle to be avoided. Balance the books akin to a competitive business. Full employment a task of the private market. Macroeconomic management replaced by micro private choice.

Now that we have the luxury of hindsight I think it is vitally important that we examine the complexity of this monetarist era and compare it to the Keynesian era.  The two key variables worth examining are debt and jobs. Credit provision and employment. Financial markets and labour markets. Firstly, under Keynesianism public debt was accumulated centrally through state-public deficits. Under Monetarism debt was accumulated by private citizens. The vast availability of credit that was made available through a technological revolution in accounting techniques, computerised money etc pumped money into our socio-economic systems. This cheap availability of credit fuelled a massive surplus in disposable income. This fundamentally altered consumer demand for private services. Secondly, under Keynesianism employment/unemployment concerns were transferred on to private citizens. Public jobs were replaced by private jobs. Increased consumer spending (made possible by liberal financial markets) fuelled a demand for private services. Liberal employment markets created jobs in this service sector. Under Keynesianism, job creation occurred within the public, or semi-public sector. It was not dependent upon consumer demand. It was less flexible.

Thus, the rise of monetarism did not end the growing problem of debt, it simply transferred it on to private citizens and firms. We will not know the full cost of this shift in the ‘ownership’ of debt for some years. Individual and firm defaults on debt will not demand the IMF to spread its wings. But, private debt will slow consumer spending and hence government revenues (the monetarist shift in taxation via indirect consumer taxes). The vast accumulation of private debt that occurred over the past 20 years is unprecedented.  Countries with more liberal employment markets are also witnessing much higher levels of unemployment. The USA, UK and Ireland created more jobs during the hey day of monetarism, and their flexible labour markets the envy of state focused economies such as France. But, now that one monetarism is in crisis these same countries are witnessing much higher levels of unemployment. The USA has lost 6  million jobs in the past 16 months. In the next 2-3 years we will be able to document a time-series change and effect of monetarist policies.

If the 1970’s oil crisis ended Keynesian-state focused macro management (mediated by centralised neo-corporatist arrangements), will the 2010 financial crisis end Monetarist-private market focused micro choice (mediated by competitive corporatist arrangements)?. It is too early to tell. But, two key variables are worth watching: debt and jobs.

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