Has Neoliberalism Failed America? The American Inequality Series #3

The practice of neoliberal capitalism in the USA has been the focus of much debate. In this third instalment of The American Inequality Series, we will take a look at two of the key tenets of neoliberal capitalism: the beliefs in the right of the free-market to rule the economy, and in the idea that the pursuit of self-interest will lead to the best outcome for society.

Scottish icon Adam Smith, the 'Father of Modern

Economics', laid the foundations for much of

neoliberal economic theory.

Free markets rule

An idea that has dominated Western economics for quite some time now is marginal productivity theory- the idea of the competitive, regulation-light free market being the best instrument for aligning productivity, social benefits and private returns. Essentially, those who have skills that help them to be more productive will be in more demand in the competitive market- thus their ‘price’ (income, job benefits) will be higher than those incapable of being productivity. 

This meritocratic system is what most people would like- but the key question here is how to achieve this, and marginal productivity theory answers that the free market is most effective in doing so. So to examine their claim further, what are the tenets of free marketism in the USA? Is there a ‘laissez-faire’ approach, where markets are given total free reign, or a more regulated way to keep competition alive?

A popular argument against regulating fast food chains such
as McDonalds has been that the free market will itself find the
best solution over time.

Well, as is often the case, there is no definitive answer. US economic policy is not entirely coherent (no nation’s policy is); for example, observing the lack of regulation over fast food, that has contributed to the quadrupling of adolescent obesity between 1980 and 2012, one would think America is running a free market almost fully dependent on the ‘invisible hand’, that guides resources to where they are most needed by itself. Yet a glance at antitrust laws such as The Clayton Act, that bans the monopolistic practice of merging market dominators, suggests the contrary. 

Individualism

Perhaps the most retold saying of Adam Smith is his thoughts on us as consumers, 

how "it is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest".

Theory states that the businessman inevitably has the contentment of his customers in his own self interests- if he doesn’t make the customer happy, the customer will not return to him and thus the businessman will lose out. So following his self interests will benefit both himself and his customers.

The internet is held often as an example of such a successful self-regulating market where companies such as Google and Facebook have succeeded of their own merit, while others such as ask.com and Myspace have felt the consequences of failing to appease the market.

However, free markets have been seen by many to be against the interests of the ‘customers’. Allowing American companies to outsource employment is a pertinent example. Free international trade has allowed companies (particularly in the primary and secondary sectors) to hire cheaper employment in places like China, resulting in a wave of job losses in America. In the decade 2000-10, US multinationals sent 2.4m jobs overseas, simultaneously putting 2.9m Americans out of work.

Gates' Microsoft dominated the computer market during
the 1990s. 

Monopolies such as that of Microsoft over the IT market in the 1990s highlighted further free market failure- a lumbering giant was unrestrained from crushing competition such as Netscape, resulting in a lack of choice that prevented any market self-regulation from taking place. If people didn’t like Windows or Internet Explorer, there was nothing else they could choose- they had to deal with it, without the democratic power free market theory promised.

Paul Samuelson (the first American to win the Nobel Prize in economics), claimed how “utterly mistaken was the Milton Friedman notion that a market system could regulate itself”. And while free market has arguably created the environment for new businesses to prosper, it has failed to live up to its promise of market democracy- as recent monopolistic activity and the loss of domestic employment have shown, the consumers have little power over the market.

Scottish Independence: INFLATION INCOMING?

So today's the day- the final installation of our short series on Scottish Independence is here.
Oh, and it's the Scottish referendum today.

If Scotland are to become independent a great argument of the 'No' campaign is that Scottish consumers would be hit by increased prices, for everyday goods and luxury items alike.

This could have pretty bad consequences, and it is certainly possible that these increases will come in the event of independence. Recently the Chairman of the John Lewis Partnership (John Lewis and Waitrose) Charlie Mayfield claimed a Yes vote would have consequences because of the apparently higher cost of trading in some parts of Scotland, causing prices to rise in their stores.

Supermarkets Sainsbury's and Asda have also claimed they would raise their prices, citing potential increase in costs that would occur, as technically they would have to adjust to trading in a foreign country, without being at the cost of the rest of the UK. Morrisons have also stated similar claims; though apparently they have kept open the possibility of even lowering prices if possible.
Many supermarkets claim to already have lower profit margins in Scotland due to its more spread out, rural nature- transport costs are presumably higher due to how far Scottish cities such as Aberdeen are from distribution centres.

Tesco have remained impartial on any potential consequences of the referendum on prices; though perhaps this is partly due to their unwillingness to risk backlash after their recent profit troubles rather than a commitment to not increase prices.

This seems to be a clear warning from some major businesses to the Scottish 'Yes' party, but will they really follow through?

It is certainly a possibility that this is part of the large scare policy being used by the 'Better Together' campaign- rumours are abound that these statements have been made upon special request by PM David Cameron, whose job would be in huge jeopardy in the event of a Scottish Independence.

Nevertheless, could the aforementioned businesses really raise their prices after Independence?

Inflation from the major supermarkets could serve to the benefit
of the likes of Aldi and Lidl.

Take the supermarkets- already we have seen in recent years the rise of the value-driven Aldi and Lidl , and supermarket price inflation could really make a field day for the bosses of these countries.
Aldi has steadfastly refuted any claims that they would raise prices after Independence: they cited their existence in 18 markets and how they are already adaptive enough to adjust to an Independent Scotland with no price increases.
So what will happen if Sainsburys and Co. increase their prices? Well it seems natural that even better value would drive customers to the budget supermarkets Aldi and Lidl, certainly bad news for the big supermarkets.

So what we are hearing from the supermarkets could certainly be simple another scare tactic from the 'No' campaign. If they are to follow through on their claim to inflate prices, it could really cost them even more customers to the already threatening value-driven competitors such as Aldi and Lidl.

Sources for this article can be found linked within.

German Cars: What Makes Them Special?

If you were to ask someone on the street what car they would like to own, without doubt among the most popular brand selections would be BMW, Mercedes or Audi.

These three German manufacturers have taken the global car market by storm in recent decades, and are now the epitome of the well-built, high quality yet mass-marketable luxury car.

VIDEO: http://bit.ly/XHupq2

Of course all their cars are not necessarily of the best quality on the market- the likes of Aston Martin and Ferrari to name just two produce cars closest to perfection- however the crucial aspect to why BMW, Mercedes and Audi are more successful and relevant to this discussion is because they are open to the mass-market. The average middle-class family cannot afford a four-door £150,000 Aston Martin Rapide; though a £23,000 BMW 3-Series is within the reach of many, an achievement highlighted best by how it has consistently maintained a spot in the ten top-selling cars in Britain since 2004. 

The success of the German car industry can especially be noted when compared to that of Britain's. In 2011, Germany produced 5.9 million cars, the highest number in Europe- Britain a paltry 1.3 million- many of these not for British brands but for foreign ones such as Nissan and Honda. 
And the domination of the Germans extends much further- two typical 'British' car makers, Bentley and Mini, are in fact far from British; Bentley is owned by Volkswagen, Mini by BMW. 
There are in fact no longer ANY mass-market 'purely British' brands- Jaguar, Vauxhall, Land Rover, even Aston Martin, are all foreign-owned. 

Germany's success in the car industry must also be put into perspective- consider that less than a century ago the nation was facing huge economic turmoil, the sort that provides textbook examples of hyper-inflation: the wheelbarrows of cash, the 200 million mark loaves of bread, the extremely volatile prices, the lot. 
Post-war reparations had put Germany in a terrible state in the early 20th century- but looking at Germany now, with such economic might that makes it the most influential state in the EU, it is clear that the German system has produced fantastic results.

There are numerous reasons for the Germans' successful car market, but one key reason is the industrial mindset, the 'manufacturing culture' that is fostered by the Bavarians. 

Britain's manufacturing industry has had a rough last 30 years- in this period shrinking by two-thirds. Margaret Thatcher's time as PM during the 1980s to many killed the secondary industry in Britain. I'm sure you've seen the images of striking factory workers, unhappy at Thatcher's crushing of worker unions and the closures of numerous car factories throughout the nation. 

Meanwhile, Germany has only been growing since the Second World War- whereas British car factories became a battleground for a class war between management and labourers, German factories were tight-knit, harmonious and therefore far more efficient. 

The closer relationship between workers and management is part of Germany's attention to what is known as the 'social market economy'- a type of capitalism that does not co-ordinate market activity itself, but at the same time provides support for society- be it in the form of universal healthcare, unemployment insurance and, most relevant in this discussion, trade unions. German workers enjoy among the highest secondary sector wages in the world, and are provided good working conditions. In contrast to the system in the USA for example, where entry-level factory wages were halved from $28 to $14 an hour, the Germans' higher investment in the workers pays off, creating a more co-operative and committed environment, where workers develop loyalty to their company, an idea almost lost in the US labour economy. 
German workers are in fact the most loyal in Europe- the job market is far more stable, meaning companies can afford to invest more in long-term training, and crucially it means workers on the production line are experienced and efficient in their job.

Output is also helped by the power given to the workers on the German production line. Almost all German factories will have members of the regular workforce on the executive committee of the factory- as a result the workers are given a voice in the running of the factory, and have the power to suggest changes that may improve efficiency. 
To those who may believe this system can be abused to benefit the workers at the cost of the company, this is where the German system really makes a difference. Loyal German workers who are decently paid already are more likely to not abuse their power to push such agendas.
This system making workers a part of the running of their factories increases the workers' morale, making them feel more empowered as part of a democratic operation.

The education system is arguably the biggest factor in German industrial success. Whereas in Britain all youths are pushed through the same educational system until the age of 16, after which they are offered either further education or half-heartedly the option of vocational education- such as BTEC, or Apprenticeships.
These being relatively young programs, they are not well-established and are avoided by many students, partly as they are seen as for those intellectually inferior to the further educationers (certainly not always the case).

Meanwhile Germany offers more choice to specialise at an earlier point. After the age of 10 (or 12 in some areas) student can study at the Gymnasium to pursue higher education such as university, or can opt for the Realschule or Hauptschule, schools that will provide education in core subjects such as Maths but have a heavier focus on vocational education and practical work experience.

These extra years provides a head-start for German workers and has created skilled, respected workers, ready-made to enter the world of manufacturing at the age of 18. German factories have had no shortage of skilled workers- and as a result the production lines are efficient and smoother than most others in the world.

Germany have certainly set the benchmark for efficiency in the manufacturing industry. It must be noted that Japan are similarly capable in car production. 
Worker empowerment, the social market economy and an established, effective specialist education system have propelled Germany to the top of the global car industry- and while other countries may not be able to fully translate German practices into their own car industries, it is certain that they can learn lessons from it.

SOURCES (And recommended reads): 

How German cars beat British motors - and kept going bbc.co.uk/news/magazine-23406467 (BBC, 2013)

Mercedes Benz, BMW and Audi Seen as Top Three Car Manufacturers in Terms of Overall Brand Quality By Europeans, According to New Harris Interactive Survey prnewswire.co.uk/news-releases/mercedes-benz-bmw-and-audi-seen-as-top-three-car-manufacturers-in-terms-of-overall-brand-quality-by-europeans-according-to-new-harris-interactive-survey-155096425.html 

Why doesn't Britain make things any more? www.theguardian.com/business/2011/nov/16/why-britain-doesnt-make-things-manufacturing (The Guardian, 2011)

Manufacturing lessons from Germany

www.tradegood.com/en/insights/viewpoints/market-features/manufacturing-lessons-from-germany.html

German Lessons: DEVELOPING INDUSTRIAL POLICY IN THE UK www.tuc.org.uk/sites/default/files/tucfiles/germanlessonsedit.pdf

US carmakers cut pay as Australia's hourly rates soared www.theaustralian.com.au/national-affairs/us-carmakers-cut-pay-as-australias-hourly-rates-soared/story-fn59niix-1226779288772?nk=7680174eef8fa1a758fb359ff5cd292a (The Australian, 2013)

Consumer confidence drives record year www.smmt.co.uk/2004/01/consumer-confidence-drives-record-year/ (SMMT, 2004)

German workers 'most loyal in Europe' www.thelocal.de/20121014/45553 (The Local, 2012)

German School System www.howtogermany.com/pages/germanschools.html

What If Everyone Had A Job?

In recent times of economic trouble, unemployment in Britain has risen considerably in the past decade. From a relatively healthy 4.5% rate in May 2005, in April 2014 it was recorded at 6.8%- not an insignificant rise in any sense. This has led to the more and more citizens becoming reliant on state benefits- easily proven by the debate over benefits of the last few years, and shows like 'Benefits Street', which makes quite a crude reality-style show out of the lives of a group of unemployed people on benefits.

The ideal situation to most people, after having constantly been hearing news of unemployment in the last few years, is that everyone has a job- that no one is unemployed, that we have full employment.

Full employment has no agreed definition, though of course it cannot mean purely 100% employment- as there is always likely to be Frictional unemployment- that is the unemployment of people who may be searching to change, or is in the process of changing their employment. Christopher Pissarides, professor of economics at LSE states "full employment never meant zero unemployment".

The apparent benefits of full employment are clear- more people would have a wage, would be able to afford a living, homelessness would decrease, no one would have to depend on benefits- but the potential effects of full employment go deeper. Let's look at just a few.

Firstly, an advantage (though I'm sure some would disagree with me) is that full employment would empower regular workers. Employment is a scarce resource, just like oil or gold- and, just like these scarce resources the value of employment increases as unemployment decreases. As more people gain jobs, the pool of unemployed workers will grow smaller and smaller. It will be harder to find employees.
Thus the employees will be empowered more in a world of zero unemployment than in one of unemployment. We've seen recently, perhaps moreso in the USA, that mass unemployment has decreased the value of workers- that they have become almost disposable. As a business could easily find someone else desperate for their job, workers have been suppressed via long working hours, terrible pay and the like. A world of full employment would be the opposite of this.

On the other hand, the potential wage rise that could result from this could simply lend itself to a larger cycle.
As wage demands increase, so would inflation- this was notable for example in the 1970s, when acceptance of union demands for higher wages was closely linked to rising general inflation.
What this does is in effect create a nominal wage increase- people may begin to see a higher number on their paychecks, but the benefits of this would most likely be cancelled out by rises in prices of everyday items, the general cost of living. Take an example- if your wages rose by 4%, but the price of bread rose by 4%, you wouldn't directly benefit on your weekly shop- because the extra money you earned would be spent on the same things you purchased before. If you could normally only afford 1 loaf of bread, after your nominal wage increase you'd still only be able to afford 1 loaf.
This is not what we really want, a real wage increase. A real wage increase would mean increase in purchasing power- so that you could afford an extra loaf after your wage increase rather than one.

The 'cycle' mentioned earlier relates to the business' viewpoint of this. An increase in expenditure on wages that full employment may enforce would be an extra cost that potentially could lead to spending cuts, if the business is not willing to absorb the costs of extra wages (certainly not a rare occurrence). This would lead to people losing their jobs- reversing the effect of full employment. Of course this would be a long term shift, but arguably it implies full employment is no sustainable solution itself, but part of a larger repeating shift in the economy.

So, full employment has potentially far deeper effects than at first glance. Only two have been mentioned here (for the sake of relative brevity)- what do you think about full employment? An ideal target or a false friend?