COVID-19 and the future of Neoliberal Capitalism
How will COVID-19 impact the immediate future of neoliberal capitalism and the global economic landscape?
The destruction meted out by SARS-COV-2 has indiscriminately affected every individual and every organisation across the globe. The policies and decisions of the governments are presently being sorely tested. As the world grapples with this new pandemic, it is important to revisit past economic crises for applicable solutions.
The Twentieth-Century witnessed devastating events such as the two world wars and the Great Depression, which were followed by severe economic upheaval and political turbulence, and more significantly an increase in the relevance of the government’s intervention in matters of trade and commerce.
Prior to these happenings, classical liberalism was prevalent in western societies where the government played a nominal role in the country’s socio-economic structure. Traditionally, the majority of the world’s governments were reluctant to be involved in the private sector, with an exception of transportation. This ideology was influenced by the concept of “laissez-faire”, a doctrine which opposed the government’s interference in the economy except when deemed necessary, such as in the maintenance of law and order. According to this school of thought, if aggregate demand in the economy fell, the resulting weakness in production and jobs would precipitate a decline in prices and wages. A lower level of inflation and wages would induce employers to make capital investments and employ more people, stimulating employment and hence restoring economic growth.
Throughout the latter part of the 19th Century and in the early part of the 20th Century, however, small businesses, farm and labour movements began asking the government to intercede on their behalf to improve working conditions, wages and welfare. Unfortunately, at this point in history, a series of cataclysmic events took place, namely, World War 1 (1914–1918), Spanish Flu Pandemic (1918–1919), the Great Depression (1929–1941) and World War 2 (1939–1945) which crippled economies throughout the world. The global milieu was one of dire poverty, collapse of international trade and consequently, unemployment and starvation among the working-class population, with people lining up in soup kitchens and breadlines for a meagre sustenance. During this epoch, a British economist named John Maynard Keynes provided an economic theory, which was later popularised as “Keynesian Economics”, which suggested that an increase in government spending, tax cuts, and monetary expansion could be used to counteract the repercussions of large-scale recessions. Keynes’s theory of fiscal stimulus proposed that an injection of government spending would eventually stimulate the job market with an influx of skilled labour and thereby supplement business activity and even more spending, thus enabling businesses to gain more productive employees without significant cost increases. Thus, the economy would be able to slowly get out of a recession through a strong labour force.
Keynesian economics proved to be successful in bringing most countries out of socio-economic stagnation and was the predominant economic model for developed nations from 1945–1973. Despite its widespread acceptance, its popularity diminished with the oil embargo (oil crisis) of 1973 and the ensuing stagflation in the 1970s, causing most countries to turn away from Keynesian economics and adopt a new school of thought, Neoliberalism. Several eminent economists such as Friedrich Hayek and Milton Friedman drew inspiration from the 19th Century-style non-interventionist governments for a new economic model. The school centered around economic liberalization, principal deregulation of industry, privatization of state-owned enterprises, reduction of trade barriers, decreased government spending, and monetarism. Monetarists, such as the aforementioned Milton Friedman, believed that control over the money supply should be the chief means that governments use to moderate the fluctuations of a national economy, contrary to the view derived from Keynesian economics that both monetary and fiscal mediation should be used in order to tame fluctuating business cycles. This philosophy was heralded by politicians including Former British Prime Minister Margaret Thatcher and Former American President Ronald Reagan who believed that neoliberal free market structure had brought their respective countries back from the brink of an economic downturn. They endorsed the idea that neoliberal principles should be systematically implemented to solve a variety of socio-economic phenomena going forward. This premise, that neoliberalism prospered where Keynesianism struggled to combat stagflation, won widespread acceptance. Neoliberalism was accompanied by further globalisation of the world economy and unrestrained international trade. At the turn of the Millenium, neoliberalism thrived among developed and developing countries until the Global Financial Crisis of 2007–08, which was principally caused by deregulation in the financial industry and eventually led to the Great Recession. Former head of the US Federal Reserve claimed that the Great Recession was the worst economic crisis, superseding the Great Depression of 1929. Economists began to question the current orthodoxy of neoliberalism. “Keynesian Resurgence” was proposed to resolve the crisis and bring back financial balance. Numerous policy makers and economists considered a Keynesian solution, which was essentially an opponent school of thought to the preceding neoliberal capitalist structure. A set of political-economic policies revolving around reducing government budget deficits through decreased spending, increased taxation, or a combination of both, known as Austerity, was also brought forward. Several governments chose to follow austerity, which was countered by widespread disapproval and protests by the public. In 2008, many prominent economists and policy makers were in favour of Keynesian stimulus and from October of that year onward, governments began announcing major stimulus packages, in an attempt to mitigate the possibility of a global depression. By early 2009, there was widespread acceptance among the world’s economic policy makers about the need for fiscal stimulus by the governing bodies. The Great Recession persisted from December 2007 and ended in June 2009, extending over eighteen months with an alarming number of banks, including the Lehman Brothers, declaring insolvency and investors experiencing financial aftershocks.
The SARS-CoV-2, which originated in Wuhan, China in late 2019, has triggered today’s economic collapse. The accelerated spread of the virus has brought the global economy to a standstill and resulted in the 2020 stock market crash. Economists unanimously predict the uphill battle to economic stability due to the abrupt halt in financial and commercial activities in both advanced and developing countries. This signifies deep recessions on a global scale with a substantial slowdown of growth across developing and emerging economies. Various economic growth projections in 2020 anticipate an overall contraction around the world, with an exception of a few regional differences. While advanced economies are expected to receive the hardest blow by the COVID-19 crisis, emerging and developing Europe and countries in Latin America and the Caribbean have seen the largest downward emendation of GDP growth projections yet. Most countries have initiated economic stimulus packages necessary to mitigate the pandemic’s economic damage. Aside from the financial aspect, the acute shortage of manpower will be observed as a result of the large-scale displacement of migrant labourers in developing nations, like India, which will likely adversely impact the domestic industrial growth and development for years to come and leave grave social consequences. The true extent of economic ruin is uncertain, with the novel coronavirus spreading at an unprecedented rate and impositions of lockdowns and travel bans becoming stricter. In the current economic climate, an increasing number of governments have taken on a more protective role in order to support their vulnerable communities, thus reverting back to the time-tested philosophy of Keynesianism which was born out of crisis. The near political and economic future sharply curves away from neoliberal capitalism, with hopes of reviving and stabilizing the global economy. With the economic landscape closely resembling those observed in prior financial disasters like the Great Depression and the Great Recession, a neoliberal-capitalist structure could see an opportunity to make an appearance only after the world recovers from the Great Lockdown. In a post-COVID-19 scenario, greater government control and regulation can be expected.
This increased government involvement can take on a more sinister approach through the practise of disaster capitalism, where a governing body or regime benefits from a major disaster to adopt liberal economic policies that the population would be reluctant to accept under normal circumstances. Instances of political agents capitalising on the economic and social carnage brought about by the world wars and pandemics are disturbingly common. In Naomi Klein’s 2007 renowned book The Shock Doctrine: The Rise of Disaster Capitalism, we are brought back the Milton Friedman’s principles of neoliberal free market policies due to a rise in prominence in some developed countries because of a deliberate strategy of “shock therapy” (referring to the economic phenomenon of a sudden release of price and currency controls (economic liberalization, withdrawal of state subsidies, and immediate trade liberalization within a country, usually also including large-scale privatization of previously public-owned assets, first proposed by Jeffrey Sachs). This revolves on the exploitation of national crises (disasters or upheavals) to establish controversial and questionable policies, while citizens are too distracted (emotionally and physically) to engage and develop an adequate response, and resist effectively. Margaret Thatcher applied mild shock “therapy” facilitated by the Falklands War, which subsequently resulted in her own doctrine of “Thatcherism”.
A step further than disaster capitalism is disaster authoritarianism, which involves maximum government control in economic policy and commercial decisions in the wake of a collapsing economy due to an unprecedented calamity. This is most commonly seen in island nations which are often at the mercy of geographical elements of climate and weather, like the Philippines, Haiti and Fiji. These extended authoritarian regimes have been dubbed as “storm autocracies” as frequent storms offer more opportunities to the governments in allocating relief assistance than they generally do in exchange for restricting their citizens’ rights. Surprisingly, not only do the rulers, but even the citizens tend to subscribe to authoritarianism amid or after a disaster and was observed in Italy after a severe earthquake hit Abruzzo, an Italian region in 2009.
To conclude, the pandemic has caused great havoc and distress to all peoples of all nations but ironically has provided an opportunity for humanity to prove itself, yet again, and stand up in the face of adversity. Which isn’t an outlandish statement as we have already encountered this and worse before. As Nobel-Prize winning economist Milton Friedman once said, “Only a crisis produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around”.
- The Constitution of Liberty by Friedrich Hayek (1960)
- The End of Laissez-Faire: The Economic Consequences of the Peace by John Maynard Keynes (1926)
- Economic Possibilities for our Grandchildren by John Maynard Keynes (1930)
- The General Theory of Employment, Interest and Money by John Maynard Keynes (1936)
- Capitalism and Freedom by Milton Friedman (1962)
- Monetary vs Fiscal Policy by Milton Friedman and Walter Heller (1969)
- The Shock Doctrine: The Rise of Disaster Capitalism by Naomi Klein (2007)
- The Downing Street Years by Margaret Thatcher (1993)