The largest remaining section of the Berlin Wall was converted into Postdamer Platz's East Side Gallery. Photo / Supplied, File
The largest remaining section of the Berlin Wall was converted into Postdamer Platz's East Side Gallery. Photo / Supplied, File
Opinion
OPINION
When the Berlin Wall came down in 1989 neoliberals seized the moment and euphorically declared free-market capitalism's historic triumph over socialism. It was nothing of the sort.
The demise of the Soviet experiment marked the ascendency of the modern mixed economies of the Western social democracies over totalitarian socialism.
Economic systems are distributed along a continuum from socialism at one extreme to free-market capitalism or neoliberalism at the other. Between these two extremes is the modern mixed economy.
Socialism and neoliberalism, grounded in ideology, hugely favour the fortunes of a tiny minority or closed circle (the 1 per cent); power and privilege under the former and immense wealth accruing to the latter.
By contrast, the modern mixed economy pragmatically combines state and market in varying, adjustable proportions to achieve the greatest good for the greatest number over the longest run.
Socialism prescribes state ownership and control of all the means of production, distribution and exchange; all economic activity is state-directed; no private sector or market activity is permitted. Socialist economies are also called planned or command economies.
The former Soviet Union is the best example of a socialist state. That experiment failed not because of an all-powerful, pervasive state but because of an extreme ideology that excluded the market altogether.
In fact, an all-powerful, pervasive, activist state setting broad macroeconomic (economy-wide) guidelines to achieve stated goals is the distinctive feature of the contemporary developmental state. Singapore's spectacular economic and societal transformation illustrates the criticality of a strong, activist state in the development process.
In neoliberal mythology, New Zealand was a socialist state before 1984. That is absurd. Prior to 1984, we had a mixed economy with a moderate, occasionally high but never dominant level of state control and direction such as Singapore, for example, with its glittering, state-led, designer prosperity.
Socialism's polar opposite is neoliberalism. While the complexion, duration and political settings have varied the neoliberal prescription contains seven core components.
First is the elimination of inflation, regardless of cost, as the sole objective of monetary policy.
The second is wholesale, indiscriminate, economy-wide deregulation and privatisation.
The third is the removal of all subsidies and incentives (the infamous level playing field). The fourth is free trade or unregulated international commerce (multinational corporate libertarianism).
The fifth is unrestricted investment openness.
Sixth is labour suppression (flexible labour markets).
But the most critical is small government; the state's role, apart from national defence, police and the justice system, should be severely restricted. Small government, incidentally, explains neoliberalism's proscription of affirmative public action or state intervention to rectify market failure or overcome barriers to economic advancement.
This blunt, medieval policy instrument was implemented with International Monetary Fund (IMF)/ World Bank guidance by military governments in the South American Southern Cone nations (Chile, Uruguay and Argentina) in the 1970s.
John Gascoigne. Photo / Supplied
The results everywhere were the same. Inflation fell alright, but so did national output. Economic growth practically ceased. Unemployment and national debt soared. Property and stock market speculation raged. Savings and investment simply evaporated. And wealth and income inequality increased horrendously.
But the IMF/World Bank and the OECD lauded Southern Cone neoliberalism as an unqualified success.
By 1983, however, the ravages of the neoliberal prescription based on low inflation, balanced budgets, small government and blind faith in unregulated, untrammelled market forces as inherently conducive to prosperity had been extensively documented in the economic literature.
But in 1984, New Zealanders, although they were warned, chose to ignore the cardinal lesson of recent economic history and drew the short straw. We live with the result.
• John Gascoigne is a Cambridge-based economic commentator.
