Doctrine Free Markets - SSRN papers

0 downloads 0 Views 348KB Size Report
world to continue under the guidance of a free global market project has put into question ... http://www.imf.org/external/np/g20/pdf/2017/070517.pdf ..... Finally, the ninth and tenth are a warm concern for the economic and ..... http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.548.7728&rep=rep1&type=pd.
The Doctrine of Free Markets: Origin, Nature and Implications Miguel Alvarez Texocotitla Department of Economics, Universidad Autónoma Metropolitana, México M. David Alvarez Hernández Universidad Autónoma Metropolitana, México Shaní Alvarez Hernández Universidad Autónoma Metropolitana, México

Abstract The present research paper contributes to the comprehension of the main aspects of the doctrine of free markets, which is nowadays represented by the political project of a free global market. The analysis of this political project is important, since it helps substantially in the understanding of the structural reforms of both the developed and underdeveloped countries, and particularly, in the knowledge of the financial deregulation. Therefore, it assists in the understanding of the origin, nature, dynamics and consequences of the radical reduction of the market’s regulatory perimeter. To materialize these contributions, the main propositions of the free market and its implications are exposed and pondered on. Both the manifestations of those against the doctrine and those who defend it are considered, and some relevant implementations to this doctrine are also analyzed. Finally, from the examination of all the arguments contained in this work, some final thoughts are derived.

Keywords: World Political Project, Free Markets, Structural Reforms, Implementation and Consequences. JEL classification: B50, F50, N40

1

Electronic copy available at: https://ssrn.com/abstract=3189876

Introduction In the circles of power of the developed countries in the decade of the 1970s, it was decided to remove all intervention in the markets, eliminate all norms, or at least drastically reduce the market’s regulatory perimeter. That is, it was decided to establish a free market system.1 Consequently, since the mid-1970s, the markets are substantially beyond the control of the States and international authorities. The result of implementing globally this decision of market liberalization is that we are not in a period of abundance projected by its proponents, but in a grim period where the market forces have led the global society into a deep crisis. The widespread deregulation has resulted in financial, economic and social crises, along with all its negative consequences. Clearly, the questioning of this state of affairs was bound to happen. An explicit social reaction has generated against the establishment of society on conditions that create, foster and protect the motives of profit maximization of the participants that control the markets. A greater number of people do not accept to be the martyrs of the ruthless, supposedly impersonal market forces. The regime of laissez-faire is provoking protests around the world that reject their mandates and their effects, and ultimately, its existence as a model of economic organization. 2 This global social protest has major political implications, since the reticence of the world to continue under the guidance of a free global market project has put into question the alleged global political hegemony of the United States. For Hobsbawm (2010), one fundamental change in the world's history since the early 1990s, is the failure of the attempt of the United States to maintain as exclusive the world’s hegemony. The neo-conservative initiative of this country is questionable; not only does it expect the United States to be the future, but it believes that it has a coherent strategy for achieving that purpose. 1

Basu (2011: 16) provides a clear and direct definition of what is a free market system: it is like an invisible hand that can discreetly coordinate the behavior of a multitude of individuals interested only in maximizing their own benefit, in order to achieve efficiency and a socially optimal result. 2 The latest mass protests have occurred in Hamburg, Germany, in the framework of the G20 Summit, where the multilateral organizations (World Trade Organization, International Monetary Fund and World Bank) propose to ensure the freedom of capital flows and to invigorate the free trade. http://edition.cnn.com/2017/07/07/europe/g20-hamburg-protests/index.html http://www.imf.org/external/np/g20/pdf/2017/070517.pdf

2

Electronic copy available at: https://ssrn.com/abstract=3189876

In this context, the present research contributes to the understanding of the central aspects of the doctrine of free markets, which is today represented by the Political Project of a Global Free Market (PPGFM). Facts and reflections are provided to help evaluate the economic, political and social implications of this doctrine, which has caused extensive damage in poor and rich countries alike. 3 In order to materialize these contributions, the main proposals and implications of the doctrine of free markets will be analyzed. In particular, the examination of the PPGFM is important because it contributes substantially to the understanding of the structural reforms in developing countries. That is, the analysis of this political project helps to understand the origin, nature, dynamics and consequences of the drastic reduction of the market’s regulatory perimeter. The point of view of those who are against, or in favor, of this doctrine will be considered. Moreover, some relevant and specific implementations of this doctrine will be discussed. Lastly, based on the analysis of all the arguments contained in the present investigation, some final thoughts will be derived.

1. The origin of the doctrine of free markets. Polanyi (2001) noted that 19th-century European civilization was underpinned in four institutions: the self-regulatory market, the system of balance of power, the international gold standard and the liberal State. All these institutions were important, but particularly the self-regulatory market, which originated a specific civilization.4 For Polanyi, a self-regulatory market economy is a controlled economic system, regulated and directed only by the market prices. This economy arises from the assumption that economic agents are utility and/or profit maximizers. Self-regulation implies that all production is destined to be sold in the market, and that all revenues are obtained from such sales. 3

We define the concept of doctrine as the set of teachings that are based on a beliefs system. It is the existing principles concerning a given subject, usually with a claim of universal validity.

We define the concept of doctrine as a set of teaching which is based on a belief system. It is the existing principles concerning a given subject, usually with a claim to universal validity. 4

The theoretical ideas from this section can be found at Polanyi (2001).

3

In this type of economy, when production develops, the supply of inputs or production factors needs to be ensured; mainly, the offer of labor, land and money. These three factors should be available for purchase in the market; that is to say, they must be available as commodities. However, this circumstance is contradictory, because they are not commodities; they are not, because none is produced for sale. Consequently, their description as commodities is entirely fictional, albeit it is with the help of this invention that markets can be organized, a place where these factors are bought and sold. All measures or policies (e.g., regulations) that would inhibit the formation of such markets could jeopardize the self-regulation of the system. In general, the formation of these markets should not be hindered, only the generating of income through sales should be allowed and there should be no interference with the adjustment of prices when changing the conditions of the factors markets. Therefore, there must be markets for all commodities, including the productive factors, and no action or policy should influence its performance. The price, supply or demand must not be fixed or regulated; only the policies and measures that ensure the selfregulation of the market by creating conditions that turn it into a unique organized power in the economic sphere will be permitted. The evolution from regulated markets to self-regulatory markets by the end of the 18th century represented a complete transformation in the structure of society. The selfregulatory market required the institutional separation of society in an economic sphere and a political sphere, though this division had never existed before. There has never been an economic system separated from society. The economic order is only a function of the social order in which it is contained.

The experience of England.

In the mid-19th century, England implemented a free market project. The purpose was to separate the economy from social and political control, which was done by the construction of a new institution, the free market, and the destruction of the most rooted markets in society that had existed there for centuries. The free market created a new type of economy 4

in which the prices of all commodities, including labor, were modified without considering the social consequences. The promotion of free trade, the reform of the poor’s laws with the aim of forcing the poor to work and the elimination of all remaining controls on wages were the three key steps in the construction of the free market in England, which is the original model for all subsequent neo-liberal policies. The free market was - and basically remains - an Anglo-Saxon peculiarity. It was built in a context that did not exist in any other European society, although its fullness only lasted for about one generation. If English society had not been deeply individualist, free market would had never existed. It was a social transformation that took place in exceptionally favorable circumstances. People had a blind faith in spontaneous progress, and with the fanaticism of the government officials, an unlimited and non-regulated change in society was pressed forward. However, the laissez-faire showed that social stability and the free market are not compatible. The damage caused by the free market to other social institutions and the wellbeing of society were severe, which originated opposing political movements. Laws enacted from the negative effects of the free market quenched its impacts by regulating it. English society would have been devastated had there not been contrary, protective measures, which undermined the action of this self-destructive mechanism. The social history of the 19th century was then the result of two processes: the extension of the organization of the market in relation to the genuine commodities was accompanied by its restriction regarding the fictitious commodities (labor, land and money.) While markets were dilated across the world and the amount of involved goods grew significantly, a network of measures and policies stopped the action of the market in relation to the fictitious commodities. In this way, the organization of the world markets of goods, capital and money gave new impetus to the mechanism of the markets under the protection of the gold standard, but at the same time, there came up an important movement to resist the pernicious effects of an economy controlled by the market.

The fantasy of the free market.

5

The idea of a self-regulatory market in the 19th century was a total chimera. Had such fantasy come to exist, it would have annihilated society and nature. Unavoidably, society took measures to protect themselves, but all these actions affected the self-regulation of the market, disorganizing the industrial activity, and thus putting society at risk in another way. It was this dilemma which imposed the development of the market system definitively and finally transformed the social organization based on it. A market economy disembedded and completely self-regulatory is a utopian project.5 Rather than the historically normal pattern of subordinating economy to society, the self-regulatory market system requires society to be subordinated to the logic of the market. However, the economy is not autonomous, it is determined by politics and social relations. On the other hand, according to Fred Block, the analysis of fictitious commodities indicate us that this neoliberal vision of automatic adjustment of the markets in the global arena is a dangerous fantasy.6 As well as national economies depend on an active role of the State, the global economy also needs strong regulatory institutions, even a last resort lender. Without such institutions, individual economies -and perhaps the global economy– will suffer overwhelming economic crises. A market system completely self-regulating has never existed. In the economic transformations of the industrialized countries, the governments had an active role not only in the protection of their industries through trade policy, but also in the promotion of new technologies. In addition, the failures of the self-regulatory markets are so considerable that government intervention is necessary, not only regarding its internal mechanisms but also its consequences. Therefore, there is no reasonable intellectual support for the proposition that markets, by themselves, generate efficient and equitable outcomes.

2. The resurrection of the idea of self-regulating markets In this section, after examining the resurgence of the idea of free markets, an analysis is made of the structural reforms. Some central aspects of the experiences with the doctrine of

5 6

Polanyi (2001) with the term "embeddedness" expresses the idea that the economy is not autonomous. Fred Block writes the introduction to Polanyi’s book (2001).

6

free markets in the United Kingdom and Mexico are also discussed. In the British experiment, the induced transformations of the State that were taken to achieve the objectives of the free market project will be underlined. In the Mexican case, it will be highlighted the political changes and economic reforms and the failure of the experiment.7

The Political Project of a Global Free Market (PPGFM).

Considering that the visible hand of government did not avoid the implementation of erroneous discretionary fiscal and monetary policies, the belief that a market economy is able to achieve on its own macroeconomic stability emerged with great force at the beginning of the 1970s (Snowdon and Vane, 2005: 219). This belief in self-regulatory markets materialized in a political project, the PPGFM, which promotes the creation of a global system of interconnected and self-regulatory markets that automatically adjust supply and demand in the markets through the price mechanism. This project aims that national economies and the global economy to be organized by means of self-regulating markets (Grey, 2000). The drivers of this project insist on global economic integration through trade and flow of capitals; they also advocate for the acceptance of the American model of freemarket capitalism. Three schools of macroeconomic thought can be identified as the contemporary intellectual pillars and promoters of the doctrine of free markets: monetarism, the new classics, and the real business cycle. In addition to their actions of theoretical support and promotion of the idea of free markets, these schools had also intended, in the decades of the 1970s and 1980s, to undermine Keynesian macroeconomic models, as theoretical tools as well as instruments of macroeconomic policy. Its explicit objective was to eliminate Keynesian theory and replace it with general equilibrium models that could be converted into empirical models for economic policy; an intention that they have not been able to concretize (Mankiw, 2006). The monetarism, represented mainly by Milton Friedman, holds as a fundamental principle the inherent stability of the capitalist system. The markets have a mechanism of self-regulation that turns unnecessary, even harmful, the intervention of the State in the 7

Some general ideas and the United Kingdom experience of this section were taken from Grey (2000).

7

economy. As a result, for this approach there is no need for an active stabilization policy (except in extreme circumstances). In light of a disturbance, the economy will quickly revert to the vicinity of the natural levels of product and employment (Snowdon and Vane, 2005: 24). Only under very special conditions orthodox monetarism accepts the government’s intervention on the markets. Strictly, only government intervention through monetary policy –under conditions similar to the Great Depression or to control inflation— is justified. Friedman and Schwartz (1963) argued that economic instability should not be attributed to private actors, but rather, to inept monetary policies. This conclusion shows the revival of the apology to the markets and the beginning of the stigmatization of the State by this approach. Monetarist theories have evolved into what is now known as the new classical school, with Robert E. Lucas Jr. being the most outstanding exponent. Members of this school argue, with more vehemence than monetarists, the inherent stability of markets, which could be disturbed by an erratic monetary policy. Although under that circumstance, markets would quickly return to their natural level of product and employment. In this context, this school has proposed a theory of the business cycle based on the assumptions of imperfect information, rational expectations and market equilibrium (Lucas, 1973 and 1976; Lucas and Sargent, 1979). They do not accept interference in markets in any case, even if the monetary policy is under the circumstances laid down by its ideological predecessors. So strong is their belief in the free markets and the stability of the markets that they do not see any justification for policies of stabilization, only for policies that could promote the growth of the economies in the long run. There exists a third school of thought which supports the doctrine of free markets and takes it to more extreme levels: the modern real business cycle theories (Kydland and Prescott, 1982 and Long and Plosser, 1983). Like the theories of Friedman and Lucas, these theories were built on the assumption that prices adjust instantly to achieve market balance, a radical difference from Keynesianism which assumes price rigidity. But unlike their predecessors, the real business cycle theories ignore any involvement of monetary policy in economic fluctuations. For them, economic fluctuations 8

are predominantly caused by real perturbations (from the supply side) instead of unanticipated monetary disturbances (from the demand side). The emphasis on this type of disruptions involves significant random fluctuations in the rate of technological progress resulting in changes in relative prices, to which rational economic agents respond optimally by altering their labor offer and their consumption.8 On the other hand, in the United States, neo-conservatives have identified the concept of free markets with the aim of their country to be the ideal of modern nations; they have succeeded in appropriating the credo that the United States is a unique country, the example of a universal civilization that all societies are destined to emulate. Thus, the project of building a global free market has become the American mission: to supplant the historical diversity of cultures by a single global American civilization.9 Currently, the global reach of American corporate power, and the ideal of a universal civilization, have become indistinguishable in the American public discourse. America’s business and political class are acting on the premise that they can project American values around the world without restrictions and without incurring any costs. They have the illusion of having a transcendental mission assigned. Throughout history, empires and the colonialists have always considered themselves as providers of a remarkable moral, of exquisite spiritual values and major political principles. Considering the power of the international financial community, why not think that they hold the same claim. In other words, to achieve that goal they revived the doctrine of Laissez faire in its modern version, the PPGFM. Therefore, for the American political and business power, the economic systems and the different cultures of the world will become redundant and will merge into a single universal free market. In particular, they suppose that the economic life of any country can be remodeled in the image and likeness of the American free market. The recent implementation of this project of free markets in many countries confirms that purpose.

Structural reforms

8

See Snowdon (2005: 26). Vargas Llosa (2012) also raises that we may be in the eve of a new world civilization, the civilization of the spectacle. 9

9

In recent decades, the policies of Washington have sought to build a global system open to economic infiltration and political control by the United States without tolerating rivals or threats (Chomsky, 2003). Structural reforms imposed on emerging-market countries are an important part of this American general agenda. Specifically, the structural policies are the instrumentation or implementation of the principles of the PPGFM. Below are presented two alternative proposals for structural reforms, which help to understand the process of implementation of the ideas of the doctrine of free markets. The first proposal of structural reforms may qualify as acceptable for all countries in terms of economic efficiency, equity and social progress. The second proposal, which is based in the PPGFM, is referred to as the structural policy of the Washington consensus, in which financial liberalization plays a central role. According to the first proposal, structural reforms can be defined as the substantive change of institutions, laws, regulations, rules, customs, which are those that define in a broad sense the economic structure; transformations that determine the actions of economic agents, their expectations and motivations to establish rights, incentives and obligations that frame and orient them toward social results considered desirable (Fernandez et al., 2002: 100-101). According to this definition, structural reforms not only pursue economic efficiency, but also aim to achieve certain results of equity and social progress, key aspects that contrast with the proposal of the Washington consensus. A cursory examination of the immediate and long-term objectives of a structural economic policy of this nature will allow to observe that some of them do not coincide with the objectives of first- and second-generation structural reforms proposed by the Washington consensus. Within the short-term objectives of this kind of structural policy, the following stand out (Fernandez et al., 2002: 114-115):

a) Boost the growth of output and employment. b) Reduce the costs of adjustments to macroeconomic imbalances. c) Contribute more directly to the reduction of unemployment. d) Facilitate the proper functioning of the goods and services markets. 10

e) Improve the efficiency in the allocation of productive resources. f) Increase the efficiency and dynamism of the economy. g) Eliminate trade barriers and increase the international competitiveness of the companies. h) Contribute to generate favorable conditions both for businesses and for consumers. i) Search for equity and social progress. j) Optimize the distribution of income, both in personal and territorial levels, and improve the environment and quality of life of the citizens.

The immediate objectives of this type of structural reform seek a balance between economic efficiency and social progress; they indicate the importance of more flexible markets, without prejudice to the equity and welfare. In relation to their ultimate objectives, these coincide partially with the objectives of an economic policy of stabilization, since this structural policy also aims to reduce inflation, unemployment, and aims to control the imbalances in the balance of payments, in addition to boosting the growth of real production of the economy. This policy also raises more qualitative ultimate objectives, such as improving the distribution of national income and wealth, improve the allocation of resources, increase the efficiency in the use of these on an ongoing basis, improve the quality of life of individuals, and even to promote solidarity, social and economic justice. On the other hand, Williamson (2003: 10) has drafted a document which listed ten reforms of economic policy that almost everyone in Washington considered necessary to undertake in Latin America at the end of the decade of the 1980s. These reforms of the original Washington consensus, also known as first-generation structural reforms, were the following: financial liberalization, openness to foreign direct investment, privatization, deregulation and security for the rights of property, competitive and unified exchange rates, trade liberalization, tax discipline, reorientation of public spending and tax reform (Navia and Velasco, 2001). According to this classification, the first six reforms are closely related to the financial markets. The sixth and seventh are linked with the commercial opening of the countries with emerging markets, and the last three with macroeconomic stability. In them, what stands out immediately is the absence of any policy related to social welfare, since 11

they are all oriented towards the liberalization of markets and the fulfilment of the financial commitments of the countries with emerging markets. This orientation towards the liberalization of markets is in harmony with the objectives of the PPGFM. Subsequently, the original proposal evolved into an initiative of structural reforms of second generation. The new extended Washington consensus proposal contains the following measures: a legal and political reform, the creation and strengthening of regulatory institutions, the fight against corruption; the flexibility of the labor market, the entry to the World Trade Organization (WTO), the establishment of codes and financial rules, the prudent and rational opening of the capital account; the non-implementation of intermediate exchange rate regimes, and the creation of social safety networks and poverty reduction policies. The first five reforms are aimed to consolidate previous structural policies. The sixth, seventh and eighth are not strictly reforms, but only changes that are also necessary for the original consensus policies to functioning properly. In particular, they aim to moderate the macroeconomic and banking instability produced by the first wave of financial reforms. Finally, the ninth and tenth are a warm concern for the economic and social effects of structural reforms on the population of countries with emerging market economies. Summarizing, it can be observed that only in the proposal for structural reforms of second generation, the problems of poverty and social security are contemplated marginally; but fundamental issues such as the distribution of income and wealth, the environment, and social and economic justice are not considered. This can be understood as the political project of creating a global free market not having the intent to consider those topics.

The free-market experiments of United Kingdom and Mexico.

The International Monetary Fund, the World Bank and the World Trade Organization have sought to impose free markets to all countries. They have implemented specific political

12

programs whose goal is to incorporate the various economies of the world in a single market without restrictions.10 In the United Kingdom, structural reform policies resulted in significant economic, political, social and institutional changes. The drivers of these reforms considered that it was imperative to take political power to achieve their goals. The exercise of the State’s power to impose economic reforms weakened the political institutions in vital aspects, to such an extent that it put at risk the very existence of the political party that implemented them, the Conservative Party. This was not a British singularity, but the local expression of a general paradox. The centralization of the British State was an integral part of the construction of the free market. Only a powerful centralized State could face the strong institutions of intermediation, as unions that mediate between the workers and the market forces. The creation of a free market requires that these social institutions be weakened or destroyed; they must be neutralized as producers of particular interests that hinder the free market. According to this fundamentalist view, the primary function of the State is to provide a framework of rules and regulations within which the markets - particularly the labor market – function in a self-regulatory way. Consequently, labor legislation had to be amended. The contemporary model that inspired these changes was the U.S. labor market, with high levels of mobility, a downward wage flexibility and low costs for the companies. Thus, British structural policies stripped the State of most of its influence in the economy; a fundamental transformation of the functions of the State took place; almost all of the State properties passed to the private sector, the unions power fell, a more individualistic labor market was created, price stability was weighted on, and the government’s responsibility for full employment was abandoned. Similar to the United Kingdom, the initial momentum of the experiment in Mexico was pragmatic. It did not emanate from its political class, but it was conceived by its government officials. In light of the economic downturn, the implementation of a fundamentalist market project was not the only possible response, nor it was the most

10

In the United States, the doctrine of free markets was also widely applied. The specific policies of this doctrine have significantly determined their recent financial and economic crises.

13

appropriate. As it happened in other countries, the idea of free markets, with their radical solutions to economic problems, proved compelling for the economic and political elites. The real economic and political power came out of the sphere of the State, where a process of privatization of power took place. The ability of the State to choose between different macroeconomic policies was removed. Previous public policy objectives were not only abandoned, but were eliminated as possible options. The goal was to separate the neoliberal policy of democratic control. 11 Within the reforms that were implemented in the 1980s, the reforms of the State had an outstanding place, since these generated other developments in the economy and in society. For the Mexican government, the reform of the State was a basic element of its strategy for modernization and structural transformation (Rebolledo, 1993: 116):

"(...) "Economic progress is first and foremost, a consequence of the larger political project of the reform of the State which (...) implies a new distribution of responsibilities and priorities for the State, and for society".

In opposition to the government’s explanation about the purpose of the reforms, it could be argued that the implementation of the first structural reforms was due to the need to restructure the country's external debt; which in turn, was essential for the viability of structural reforms proposed by the Mexican government. In other words, without restructuring the external debt, the modernization of the economy would not be possible. Therefore, the structural reforms had as main objective to tackle the problem of public and private debt. The caring of social needs and facing a more competitive world, which were supposedly the objectives of the reforms, were basically a rhetorical artifice. The objective was to modernize and liberalize the economy to pay the external debt. The following statements by some public officials are very eloquent, and support the issues raised:

11

Despite the historical evidence, the former Mexican President Carlos Salinas de Gortari emphatically stated that in the period of 1982 to 1988, what was instrumented in Mexico were conventional structural adjustment policies and that under his government (1988-1994), what prevailed was a program of social liberalism that has no relationship with neo-liberalism (Salinas de Gortari, 2008).

14

"(...) The reordering of public finances together with the structural reform of the economy, constitute a necessary condition for achieving a successful negotiation of external debt (...) The bigger the efforts made on the structural reform, the better will be the terms and conditions of the restructurings" (Gurría, 1993: 216-217).

"(...) "The renegotiation [of the external public debt] in 1989/1990 validated a splendid effort that Mexico undertook since 1982-83 and laid the groundwork for the macro and microeconomic revolution led by the administration of President Salinas (Gurría, 1993: 206). On the other hand, the promoters of the first-generation structural reforms required a strong political system to implement reforms quickly and effectively. They needed an effective control of the fundamental political processes to prevent society from organizing and presenting a solid resistance to structural changes involving negative social and economic impacts. In most cases, the promoters of reforms counted on that kind of strong political system. A government official convincingly illustrates the ease with which the governments of emerging-market economies implemented the reforms (Ortíz Martínez, 2003: 17).

"(...) most of the first-generation reforms required in many cases, only the will of the authority for their execution. A decree was enough to dismantle the measures of exchange control, and control of the deficit rested on the firmness of the control of public expenditure. In addition, governments counted on a political environment in many cases that allowed them to move quickly to introduce changes with profound consequences in the economic system (...) ".

In general, the Mexican government implemented structural reforms without major problems; only in some occasions did it face some marginal obstacles. This was the case with the re-privatization of the banking system during the Salinas’ regime. The arguments advanced by his government to re-privatize banks were not fully accepted by all the political groups. For this reason, Salinas had to negotiate and arrange politically (Ortíz Martínez, 1994: 86-88). 15

At the same time, if the promoters of the economic restructuring of the countries with emerging economies demanded specific policy changes in these countries, these political changes were made. For example, the drivers of the economic reforms in Mexico required a democratic political system to justify them. To achieve this goal, they needed an electoral reform, which was designed and implemented. However, this reform orchestrated by the government of Salinas was very limited; control of electoral processes followed under the control of the executive power and his political party, the Institutional Revolutionary Party (PRI). Generally, structural reforms have negatively operated on democratic processes. Chomsky (2003: 200) accurately indicates that the financial liberalization that opened the neo-liberal era in the 1970s reduced the possibilities of democratic election, translating decisions into the hands of a "virtual Senate" of investors and lenders, who make referendums continuously on economic and financial policies applied in all nations. Central

banks

are a

clear

example of anti-democracy;

lacking social

representativeness, these banks express faithfully the perspectives and the interests of the financial community. The same is true for other neoliberal policies: privatization, for example, reduces the field of possible democratic options, of serious form in the case of the privatization of services, which has given rise to a great popular opposition. Even in strict economic terms, privatization programs were imposed with very little empirical evidence, if there ever was, or solid theoretical bases (Chomsky, 2003: 201). In this context, it is important to note the details of Joseph Stiglitz around the concept of democracy. For Stiglitz (2003: 14).

"(...) democracy in the true sense of the word is more than mere electoral democracy. True democracy is participation in decision-making of the country, and among the most important decisions are those that have greater impact on people's lives: economic decisions (...) ".

In Mexico, the doctrine of free markets has inflicted enormous social and political damages, with few benefits for the economy as a whole, if any. With this project, the economic and social inequalities increased. Also, the corruption of the institutions that the 16

State that has enabled, have raised formidable obstacles in the functioning of the economy and democracy. The effects of this doctrine have been perverse, even from an American point of view. It is assumed that the main interest of the United States in Mexico is to maintain its political stability, however, free market policies have turned Mexico into an unstable country that faces an uncertain political future. The fate of this country under the rule of market fundamentalism is uncertain. A return to the economic nationalism of the past does not seem viable. In Mexico, perhaps more clearly than in any other part, free market policies have failed in a noticeably way, and they have left few positive choices to Mexican society. The multiple similarities between the effects of free market policies in countries as diverse as the United Kingdom and Mexico are not accidental. In each of those countries, the doctrine of free markets has allowed the enrichment of a small minority, it has plundered the middle classes, it has increased the number of people marginalized, it has unscrupulously used the powers of the State for their personal agendas, it has corrupted and delegitimized the State institutions, it has divided societies, and it has established the terms within which political parties and other opposing organizations must operate.

3. Keynes’ criticism to the doctrine of free markets. In the present context of widespread economic instability, Keynes’ criticism of the doctrine of laissez faire is important, seeing that this doctrine is the intellectual basis of those who run the current international economic system. Considering that Keynes was a prominent neoclassical economist, his questioning could qualify as an internal criticism, generated inside of the economic thinking that has prevailed over the capitalist economies. Despite this, his questionings do not cease to be relevant and significant, since they constitute a starting point in the elaboration of a more fundamental critique of the doctrine of laissezfaire, which should necessarily include more radical approaches outside the mainstream economic thought.12

12

As could be the approaches of Karl Polanyi (2001), John Gray (2000), Kaushik Basu (2011), and Fred Block and Margaret Somers (2016).

17

On the other hand, and aside from any limitations, Keynes’ criticism mentions how the doctrine of laissez faire was followed and defended —consciously or unconsciously— by the main participants in the stock market, prominent academics and leading officials of the U.S. government, including the Presidents Coolidge and Hoover, before and during the crisis of 1929. This is an important circumstance, considering that it holds great similarity with the contemporary backing of this doctrine.

His analysis of the doctrine of free markets.

In his work (The end of laissez-faire, published in 1926), Keynes located the origin of the doctrine of free markets in the philosophical approaches of some prominent thinkers from the 17th to 19th centuries. In particular, ever since the end of the 18th century, this doctrine was influenced by different currents of thought, but mostly by the ones represented by John Locke and David Hume, which constituted a solid intellectual support for the rights of property and freedom of the individual. Freedom to do as they wish with themselves and their properties. A key issue discussed in his work is the notion of harmony between individual selfishness and the public good. The contradiction between the individualism of David Hume and the egalitarianism of Jeremy Bentham received from the classical economists an alleged scientific basis, assuming that by the action of natural laws, individuals who consciously pursue their own interests in conditions of freedom, always tend to promote the common interest at the same time. Altogether, the individualism of the political philosophers and the harmony between personal interest and the interest of the community, supposedly justified in scientific terms by the classical economists, underpinned the doctrine of laissez faire. In addition, the corruption and ineptitude of government officials that occurred mainly in the 19th century, induced the general acceptance of this doctrine. Keynes (1972: 275-276) synthesizes it in the following way: “(...). The philosophers and economists told us that for sundry deep reasons

unfettered

private enterprise would promote the greatest good of the whole. What could suit the 18

business man better? (...). Thus, the ground was fertile for a doctrine that, whether on divine, natural or scientific grounds, state action should be narrowly confined and economic life left, unregulated so far as may be, to the skill and good sense of individual citizens actuated by the admirable motive of trying to get on in the world."

At present, it could be added: what else could have fascinated the interests created in the financial markets more, since the 1970s, than the deregulation of the markets? Certainly, nothing else that was not a doctrine that promoted and justified fully the unbridled pursuit of maximum yields. The origin of the doctrine of free markets can be analyzed in greater detail. Keynes (1972: 282-283) warns that the principles of laissez-faire have been derived not from facts, but from a set of unrealistic assumptions provided by the conventional economists. These assume that natural selection without limitations leads to progress. That is, they assume conditions in which the efficient distribution of productive resources can occur through the free action of individuals, through the method of trial and error, in such a way that those individuals who act efficiently will drive out the inefficient by way of competition. This implies that one should be ruthless to those who invest their capital erroneously. It is a method that allows the rise of those who are most successful in the pursuit of profit, through a ruthless struggle for survival, which selects the most efficient through the sinking of the less efficient. The cost of the struggle does not count, but only the benefits of the final result, which are presumed to be permanent. In addition, these economists assume a state of affairs in which there is the opportunity to make unlimited money as a product of maximum effort. In terms of laissez faire, the benefit of the individual increases either because of skill or luck, their productive resources are in the right place and at the right time. A system that allows the laborious or privileged individual to collect all the fruits of this juncture, obviously offers an immense incentive to be in the right place and at the right time. This way, one of the most powerful human impulses, namely the love of money, is tied with the task of distributing the resources rationally (making the cost-benefit calculation) to increase wealth (Keynes, 1972: 283-284).

19

In the face of those assumptions that underpin the principles of laissez faire, Keynes takes a radical stance. He harshly challenges the previous assumptions that try to bring some seriousness to the doctrine of laissez faire, and categorically proposes its elimination. However, the radicalism of his approach should be placed in the right dimension to avoid an erroneous misperception of his political philosophy, since some have seen in it indications of socialism. Luckily, he dispels any misunderstandings about his political thinking by stating vehemently that the class struggle would situate him in the enlightened bourgeoisie. Keynes (1972: 287- 288) emphatically proposes: “Let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded. It is not true that individuals possess a prescriptive "natural liberty" in their economic activities. There is no "compact" conferring perpetual rights on those who Have or on those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the Principles of Economics that enlightened self-interest always operates in the public interest. Nor is it true that selfinterest generally is enlightened; more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these. Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately.”

The first thing that stands out in the abovementioned quotation is the metaphysical labelling that Keynes makes of the principles on which the laissez faire is based. These principles are only assumptions that do not emanate, in any sense, from a scientific analysis of the social reality. Keynes categorically denies the supposed natural laws that govern social relations and supposed social contracts that justify the distribution of wealth and reconcile interests that lead to social harmony. It sharply questions the supposed superiority of individualism over collective action, and in particular, that individual selfishness could lead to a positive social result.

20

On the other hand, there is one important fact that Keynes (1972: 286) calls attention to: individualism and laissez faire, despite their deep roots in the political philosophies and morals of the late 18th and early 19th centuries, could not have secured their dominion over the direction of the public affairs, had it not been for their conformity with respect to the needs and wishes of the entrepreneurs. This point of Keynes lucidly illustrates the communion between the doctrine of laissez faire and the business and financial interests. The above has some parallels with what happened in the world economy from the 1970s onwards, although the domain of the laissez faire over the markets was more virulent at the end of the 20th century than in 1929, given the steadfast support of entrepreneurs. In particular, the deregulation of financial markets would not have been possible without the stimulus given by the international financial community. In relation to the financial markets, Keynes (1972: 291-292) was inclined to the regulation of key financial transactions and the transparency of the same. To him, the main economic problems are derived from risk, uncertainty and ignorance, since individuals with resources can take advantage of the uncertainty and ignorance. The remedy would not be within the scope of action of individuals, since it would even benefit their interests to worsen the risk, uncertainty and ignorance. Keynes thought that the correction for these things is in the regulation of money and credit by means of a central institution and transparency of information, by the law if needed, of all the economic facts that are useful to know. Particularizing on savings and investment, Keynes (1972: 292) indicates that coordinated action is needed for the community as a whole to save, so these savings go abroad in the form of foreign investments, to be distributed through the most productive channels. Emphatically, he states that these issues need not be left entirely to the discretion of opinion and private benefits, as it is now. It is suitable to reiterate that questionings prior to the doctrine of laissez faire do not imply a criticism to the capitalist production system. In this regard, Keynes (1972: 292293) is very clear and straightforward when he warns that his criticisms and reflections on the doctrine of free markets had as purpose to improve the functioning of modern capitalism by means of the administration of collective action, or the State. There is nothing 21

in them seriously incompatible with the essential feature of capitalism, that is, with the dependence of an intense appetite for making money and for the instincts of love of money of individuals as the main stimulus of the economic machinery. Keynes (1972: 291) punctually marks the limits of the State’s actions in the economy. The most important agenda of the State does not refer to those activities that private individuals are already developing, but to those functions falling outside the sphere of the individual, those decisions that nobody takes if the State does not. The important thing to the government is not to do things already being done by the individuals, and do them a little better or a little worse, but to do those things that are currently not being done at all. For Keynes (1972: 294), in many ways, the capitalist system is extremely questionable, but not replaceable. If capitalism is directed with good sense, it can probably become more efficient in achieving economic goals than any other alternative system. In his view, the problem is to build an economic system that is as efficient as possible without going against the idea of social welfare. It is important to note that the questioning of the capitalist system could exacerbate under a global economy of laissez faire, because of the negative implications for the global society. An explicit and general social reaction could be generated against basing society on conditions that produce, foster and protect the maximization of profits; since individuals would not accept being the victims of the seemingly impersonal market forces, which they did not put into action.

Some aspects of his political philosophy.

Keynes (1972: 298) believed in the free trade because he thought that, in general and in the long run, it was the only technically sound and intellectually coherent economic policy. But unambiguously stated that he did not believe in the political philosophy that came with the doctrine of free trade. Keynes did not accept the free market unconditionally. He did not believe in the free market in all circumstances and at any time, and in his general theory says it unreservedly (Keynes, 1964: 382-383). 22

Under the system of laissez-faire, plus the national and international gold standard, which was the orthodoxy in the second half of the 19th century, there was no instrument of economic policy that the government could use to temper the economic misery on the inside, except the markets competition. This orthodoxy rejected any measure that could be used to address chronic unemployment or the intermittent underemployment, except those that were used to improve the trade balance. In this way, international trade was a last resort resource to keep the employment in the interior, boosting exports and restricting imports, which if successful, would simply displace the problem of unemployment to the country with least resources for competition. As a result, the free exchange of goods and services was far from being a mutually advantageous exchange for the participants. Regarding the political philosophy of the doctrine of laissez faire, Keynes is relentless with his criticism. He is ruthless with the political instrument of this doctrine, the conservative party, since he emphasizes in the inability of the party to suit the capitalist system to changes in the local and international surroundings. He is severe with the leaders of that doctrine for their intellectual limitation to derive answers to the problems the capitalist system faces, and is accurate as to identify the source of that incompetence, the hereditary principle. In his own words (Keynes, 1972: 299), the conservative party should deal with developing a version of individualist capitalism adapted to the gradual change of circumstances. The difficulty lies in that the capitalist leaders are unable to distinguish the new measures to safeguard capitalism from what they call Bolshevism. If the obsolete capitalism was intellectually able to defend itself, it would not be rejected in many generations. But fortunately for many, this is unlikely. The origin of the intellectual decline of the individualist capitalism is in the hereditary principle. The hereditary principle in the transmission of wealth and control of businesses is the reason why the leadership of the capitalist cause is weak and senseless. It is overly dominated by men of the third generation. Nothing will result in the decline of a social institution with more certainty than its adherence to the hereditary principle (Keynes, 1972: 299). His proposals move to reflection. Keynes (1972) established that the capitalist leadership was weak and senseless. If that was his reaction to the transmission of the 23

control of the companies, his critique would be much more severe with respect to the current transfer of financial wealth, which does not involve the management of businesses but only investment, the inherited, in the financial markets. After the World War I, the real wealth holders had mainly rights, not over real assets, but over financial assets; currently, there exists the same circumstance, but more extended. This means that the gains of the wealth holders are mainly derived from financial transactions and not from productive activities. Keynes said in his controversy between saving and investment spending: it is not the miser who becomes rich, but he who invests his money in fruitful investments. However, today, who becomes rich is not the one making productive investments, but who invests speculatively in financial assets, and the more sophisticated, the better. Plainly, the inherited wealth that were collectively produced are being used unproductively. For Keynes (1972), the doctrine of laissez faire was no longer applicable in the 1930s. He did not believe it to be wrongful in the circumstances it originated from, but it ceased to be correct under the conditions of his time (Keynes, 1972: 300-301). Under these circumstances: what are the alternatives that Keynes considered? If the laissez-faire ceased to be relevant and its proposals for the proper functioning of the capitalist system are incorrect, then: is the regulation of the forces of the market (or the forces of supply and demand) imperative? Should wages be set by the forces of supply and demand, in accordance with the orthodox theories of the laissez-faire, or should we begin to limit the freedom of the market forces, by reference to what is "fair" and "reasonable", taking into account all the circumstances? (Keynes, 1972: 303). To these questions he offers a proposal: we need to find new policies and new instruments to adapt and control the functioning of the economic forces, so as to not interfere in an intolerable way in the current ideas about what is convenient and appropriate to the interests of social stability and social justice (Keynes, 1972: 306). Keynes informs (1972: 305) of the difficulties to bury the laissez faire. The transition from economic anarchy to a regimen that deliberately aims to control and lead the economic forces in the interests of social justice and social stability, will present enormous technical and political difficulties. However, he suggests that the true destiny of the new liberalism is to find its solution. 24

Without a doubt, these difficulties are currently enormous due to the greater power that the promoters and beneficiaries of the modern version of the doctrine of laissez faire now have; due also to the extent and depth of the international financial system. Large companies have always supported proposals that allow the maximization of profits, and for this reason, they support with all their power the deregulation of the markets doctrine because it has offered them the best conditions for achieving that objective. In the time of Keynes, the facts suggested that the bankers of the world had been bent on suicide. At any stage of the process they had wanted to adopt a sufficiently drastic remedy. Things were left to be taken too far that it was extremely difficult to find a way out (Keynes, 1972: 157-158). Something relatively different happens today. The main participants in the global financial market have no need, and therefore, make no effort in committing suicide, given that they have the political power to promote, design and implement their own rescue and recovery. But also, something relatively similar occurs. Though things are going off too far and there is uncertainty in relation to the effectiveness of the recovery and the end result, they will not accept any substantive change or reform that may affect their interests, which can be translated as a great problem to find an exit to the global crisis that is adequate for all.

4. Final thoughts For Keynes, economic theory is a method rather than a doctrine, highlighted it, but we must reiterate that as doctrine entails an ideology that aims to support and justify the specific interests of the economic and political power, and which on numerous occasions and different circumstances, its methodological role is overcome by vested interests. The arguments presented in this research allow to corroborate this idea: monetarism, new classical school and the real business cycle theory have an interactive relationship with the vested interests of the PPGFM; which promote and support the explanation of these schools on the functioning of the economy and these in turn, through a purported scientific nature of its analysis justify the decisions and actions of the vested interests in the markets. When object the so-called scientific nature of Keynesianism and their effectiveness to resolve the central macroeconomic problems, these approaches question the economic 25

stewardship of the State and the regulatory structure of global market (an intellectual and doctrinal work very appreciated mainly by the international financial community). The PPGFM is facing serious economic, political and social challenges as a result of the global economic crisis. To bring the project to a more advanced stage, the dangers to the global society are greater and unpredictable, and consequently, resistances are too. The challenges and resistance to market fundamentalism are important, but its main backer, the United States, has enough power to veto any reform of global laissez-faire. Therefore, while this country continues committed to this project it will veto any reform to the world economy.13 Keynes warned of the difficulties to bury the laissez faire. Difficulties which are currently thumping by the power that now have the promoters and beneficiaries of the modern version of the doctrine of laissez faire; as well as by the extent and depth of the international financial system. Financial liberalization has been the central element to sustain the viability of a global free market, because it has annulled or slowed resistances which had previously found the project in the 19th century. Nevertheless the strong social opposition is facing, it can be said that the project of implementing worldwide free markets seems destined to persist in the foreseeable future. The Anglo-Saxon free-market will remain the model of economic reform everywhere. Therefore, in the absence of a viable political alternative, the idea that the global economy should be organized as a unique and universal free market will continue to be the prevailing, especially if vested interest groups who promoted this project maintain under its control the financial markets and the world economy.14

Bibliography. Basu, Kaushik. 2011. Beyond the Invisible Hand: Groundwork for a New Economics. New York: Princeton University Press.

13

Further, Donald Trump administration aims to reduce many regulatory norms of the financial markets adopted after the global financial crisis (El País, 2017a). 14 Paul Samuelson noted that libertarian capitalism of the Laissez-faire that Milton Friedman and Friedrich Hayek preached, it was allowed to develop without regulation, is the primary source of our current problems. Samuelson emphasized, those personages are now dead, but their poisoned legacies persist (El País, 2017b).

26

Block, Fred and Somers, Margaret. 2016. The Power of Market Fundamentalism. Karl Polanyi’s Critique. New York: Harvard University Press. CNN. 2017. G20 protesters set street fires, loot stores. Available from: http://edition.cnn.com/2017/07/07/europe/g20-hamburg-protests/index.html. [accessed 13 August 2017]. Chomsky, Noam. 2003. Hegemony or Survival. American’s Quest for Global Dominance. New York: Metropolitan Books Henry Holt and Company. Fernández, D. A., Parejo, G. J. A. and Rodríguez, S. L. 2002. Política Económica. México: McGraw Hill. El País. 2017a. Tribuna, Adiós al capitalismo de Friedman y Hayek. [online] EL PAÍS. Available from: https://elpais.com/diario/2008/10/26/negocio/1225026869_850215.html [accessed 15 August 2017]. El País. 2017b. Trump presenta la guía para rebajar la regulación financiera. [online] EL PAÍS. Available from: https://economia.elpais.com/economia/2017/06/13/actualidad/1497307027_925655.html [accessed 15 August 2017]. Friedman, Milton and Schwartz, A.J. 1963. A Monetary History of the United States, 1867-1960. New York: Princeton University Press. Grey, John. 2000. False Dawn. The Delusions of Global Capitalism. London: Granta Publications. Gurría, José Ángel. 1993. La política de la deuda externa. México: Fondo de Cultura Económica. Hobsbawm, Eric. 2010. World Distempers-Interview. New Left Review 61. International Monetary Fund. 2017. Global prospects and policy challenges, G-20 Leader’s Submit. Available from: http://www.imf.org/external/np/g20/pdf/2017/070517.pdf. [accessed 05 September 2017]. Keynes, John Maynard. 1972. Essays in Persuasion. The Collected Writings of J.M.K. Volume IX. For the Royal Economic Society. London: Mac Millan St. Martin’s Press. Keynes, John Maynard. 1964. The General Theory of Employment, Interest, and Money. New York and London: A Harvest / HBJ Book. Harcourt Brace Jovanovich. Kydland, F. and Edward, C. 1982. Time to Build and Aggregate Fluctuations. Econometrica, 50(6): 1345-1370. 27

Long, John, B. and Plosser, Charles. 1983. Real Business Cycles. Journal of Political Economy, 91(1): 39-69. Lucas, Robert Jr. 1973. Some international evidence on output-inflation tradeoffs. American economic Review, 63(3): 326-344. Lucas, R. Jr. and Sargent, T.J. 1979. After Keynesian Macroeconomics. Reserve Bank of Minneapolis Quarterly Review, 3(2): 1-16. Mankiw, Gregory. 2006. El macroeconomista como científico y como ingeniero. Economía Teoría y Práctica, 25: 22-39. Navia, Patricio. and Velasco, Andrés. 2001. The Politics of Second Generation Reforms in Latin America. From: IIE Conference on Latin America. [online] Cambridge: Center for International Development, pp.1-57. Available from: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.548.7728&rep=rep1&type=pd f [accessed 15 August 2017]. Ortiz Martínez, Guillermo. 1994. La reforma financiera y la desincorporación bancaria. México: Fondo de Cultura Económica. Ortiz Martínez, Guillermo. 2003. Latin America: Overcoming Reform Fatigue. Finance & Development. IMF, 40(3). Polanyi, Karl. 2001. The Great Transformation. The Political and Economic Origins of our Time. Boston: Bacon Press. Rebolledo, Juan. 1993. La reforma del estado en México. México: Fondo de Cultura Económica. Salinas de Gortari, Carlos. 2008. La Década Pérdida. México: Debate. Snowdon, Brian and Vane, Howard. 2005. Modern Macroeconomics. Its Origins, Development and Current State. London: Edward Elgar. Stiglitz, Joseph. 2003. El rumbo de las reformas. Hacia una nueva agenda para américa latina. CEPAL, No. 80. Vargas Llosa, Mario. 2012. La civilización del espectáculo. México: Alfaguara. Williamson, John. 2003. From Reform Agenda to Damaged Brand Name. Finance & Development. IMF. Volume 40, Number 3.

28