Home > Uncategorized > What’s inside the neoliberal mind? Part 2 – Marketfundamentalist Marxism, kind of

What’s inside the neoliberal mind? Part 2 – Marketfundamentalist Marxism, kind of

The latest ECB Economic Bulletin states: “In Portugal, the 2009-13 reforms have already raised the levels of productivity and potential GDP. According to OECD estimates the reforms will have resulted in a 3.5% increase in these variables by 2020″.  This quote, from an article titled “Progress with structural reforms across the euro area and their possible impacts”, reminds one of the 1947 Isaac Asimov story about the endochronic nature of thiotimoline, the compound which “will dissolve before the water is added“. I mean – is it 2020 already?

The article is profoundly researched when it comes to neoclassical models – but lacks a proper diagnosis of the present situation and totally ignores even ECB papers which, when looking at the present day situation in the Eurozone in a serious way, produce results which makes the neoclassical view of events crumble.  This recent high quality paper shows that government payment delays and arrears lead to increased levels of bankruptcy – another cost of bankruptcy and, as it shows that money matters, another blow to the idea of Ricardian equivalence. Still, government expenditure is strangely absent from the article. Or this recent ‘flow of funds’ analysis, which tries to establish a kind of national cash flow/debt analysis. Still, debts, the financial system  and debt deflation are strangely absent from the article Or this recent one, which shows that the confidence fairy does not exist.  Still, reforms are defined as confidence boosting by default. Or this recent one, about the (diminishing) differences between USA and Euro Area geographical labour mobility. Still, reforms of labour markets are seen as a panacea. The article is clearly profoundly underresearched when it comes to non-neoclassical ways of investigating the economy.

Oddly, it is even possible to read it as a tract from an unreformed Marxist economist earning his money by ghostwriting for a capitalist bank: class struggle, surplus value, a rigid division of classes into labourers on one side and capital owners on the other side, the declining rate of profit (and what to do about it) and a kind of labour theory of value – it’s all there. A little more on this below. First however the glaring lack of any kind of serious diagnosis of the present Eurozone problems – we might have a problem with aggregate demand (graph 1). Or high government and household debt. Or government austerity.


A low rate of investments does not necessarily mean that we have to boost investment. Maybe we have just moved to another epoch, characterized by a smaller flow of investment spending. But that does leave a hole in spending. Germany and the Netherlands succeeded in filling this spending hole (which started to increase since about 1970!) with exports, all countries increased government consumption and some countries filled it with increased consumer spending. Just stating, as the article does, that lower wages will increase confidence and will lead to a rebound of investment without giving any kind of serious thought to these kind o f problems does not do the trick – a valid cure can only be based on a valid diagnosis. But investigations like this one are absent. It really provides a micro cure for a macro disease.

Considering the almost Marxist stance of the article: phrases like the make one think of class struggle (in the Marxian labour-capitalist sense) and surplus value (mind that a wat mark-up is considered to be bad while a higher profit margin is, by definition, good):

Labour market reforms, to the extent that they reduce the wage mark-up or the reservation wage, should have a wage-moderating effect, which is reflected in improved competitiveness and/or higher profit margins for firms … because the initial wage-moderating effect of labour market reforms is reflected in a higher profit margin, firms have additional funds to invest and a higher return to capital…

This clearly is a classical Marxist labour-capital class struggle setting (again: Marxist classes are not something like ‘the middle class’ or even the ‘0,1%’ but ‘labour’ and ‘capital’). It won’t come as a surprise that lower wages and employment will, according to the article, lead to higher confidence and investments (in the long run). In that sense, it can, on a meta-level, also be understood as part of the ‘superstructure’ of society. And though macro Unit Labour Costs are not central to the article, they are mentioned – and indeed used as a kind of labour theory of value…

The real problem is however that the article totally ignores cyclical unemployment, government expenditure, financial and housing bubbles, the decline in investment and comparable events. While, as everybody is assumed to behave in the way neoclassical economists want us to behave, reforms will not just lead to higher unemployment and lower wages but will also boost confidence and investments which, as stated, is not what happens. As such aspects are ignored they also can’t be part of the diagnosis – or even the cure. The solutions are consistent on their own terms. Consistent… but wrong.

Caveat: Portugal, Greece and Spain did not show sign of stagnation before 2008, which means that, yes, there were serious problems but lack of dynamism wasn’t one of them. Italy, however, did show these signs (multiple no growth decades (the economic consequences of mr. Berlusconi?), an extra-ordinary high difference between broad and normal unemployment). Which means that there may (!) be good reasons to accept that the Italian economy does need reinvigoration – and end to the mafia and ‘Berlusconi’ (both pretty succesful market oriented entities, by the way). The point: such an analysis is totally absent from the article – a proper diagnosis is lacking.

  1. blocke
    March 30, 2015 at 8:17 am

    If you raise the point of Marxism, why don’t you put the Marxist discussion of class in a broader framework, as I did forty years ago in “What Marxism Means to an American Historian,” Pacific Historical Review, May,1975,xliv:2, 147-170. historical materialism is only one branch of Marxism and not the more important.

    • merijnknibbe
      March 30, 2015 at 9:36 am

      The irony of the situation is this:

      The classical roots of neoclassical economics (roots which it shares with Marxism) leads it to define ‘labour’ and ‘capital’ as two opposing forces, just like Marxism – there is a reason why neoclassical economists fight unions and want to decentralize wage negotiations as much as possible. With the rise of policy recommendations based upon DSGE macro models (which try to define the dichotomy away by assuming one representative consumer who is labourer as well as capitalist but with policy implications which, as some people are just labourer while others own (rights to) shares, play out as a kind of conspiracy to pit labour against capital) this tendency has become quite a bit stronger – it sure is a part conscious, part uncoscious effort to end the post war European ‘social contract’. Which increasingly provokes exactly the kind of class struggle neoclassical economices tries to define away (and which I thought belonged to the past).

  2. March 30, 2015 at 9:20 am


  3. March 30, 2015 at 8:16 pm

    Black holes and white noise
    Comment on ‘What’s inside the neoliberal mind? Part 2 – Marketfundamentalist Marxism, kind of’

    Inside the neoliberal mind is the same strange thing as in the marxist mind: a scientific black hole. Constructive Heterodoxy has rigorously demonstrated that both approaches lack the correct profit theory (2015b) and as a matter of logical consequence the correct employment theory (2015a). Employment for the investment economy is given by:

    The employment equation says that there is a central defect in the market system, viz. there is POSITIVE feedback between wage rate and employment. This explains the greater part of rampant unemployment.

    Not much more than rhetorical white noise evaporates from neoliberal or marxist black holes.

    Egmont Kakarot-Handtke

    Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Employment.
    SSRN Working Paper Series, 2576867: 1–11. URL http://papers.ssrn.com/sol3/
    Kakarot-Handtke, E. (2015b). Essentials of Constructive Heterodoxy: Profit. SSRN
    Working Paper Series, 2575110: 1–18. URL http://papers.ssrn.com/sol3/papers.

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