Trickle-down economics: The 'free market' fable

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'Neoliberal or “free market” philosophy has long been dressed in the attractive but fraudulent garment of freedom and natural order. The impact of this fraud has been a massive rise in economic inequality ...' ~ Michael Clanchy

FORMER U.S. PRESIDENT Ronald Reagan put the case for neoliberal economics in its most pithy, yet facile, form:

“Government is the problem.” 

Get Government “out of the road” and let the invisible hand of the market generate and then “trickle-down” wealth upon the land.

Over the last decade and more, a coterie of credible, international economists including Joseph Stiglitz, Jeffrey Sachs, Robert Reich and Dean Baker have exposed this neoliberal fiction in their work. 

But economic myths, especially those collaboratively conceived and systematically promoted, die hard.

Markets and the state

No one disputes that the market – that is, the private economic activity outside of government – plays a pivotal role in wealth creation. But as Stiglitz (Rewriting the Rules of the American Economy; An Agenda for Growth and Shared Prosperitypoints out, effective markets never exist in a vacuum; they all operate within a broader political and social context. Governments and associated power elites determine this context by fixing the rules and dynamics for any particular market.

According to Stiglitz, examples of this fixing of the rules include:

'Labour laws, corporate governance, financial regulation, trade agreements, codified discrimination, monetary policy and taxation.'

Stiglitz and Reich (Saving Capitalism: For the Many, Not the Few) stress that effective markets and the state are always interdependent and that the notion of a standalone “free market”, or a natural economic order, is a fantasy. 

Indeed, the various causes, concerns and priorities of neoliberals or “free marketers” display little logical consistency, except for their blatant economic self-interest and play for advantage.

As Dean Baker (The End of Loser Liberalism, 2011) concludes

'In reality, the vast majority of the right does not give a damn about free markets; it just wants to redistribute income upwards.'  

The strategies and causes of the “free marketers”

So what are these strategies and causes that the neoliberals have successfully pursued to entrench economic advantage for corporations and high net worth individuals (HNWIs)? In what ways have they fixed the socio-political laws, policies and practices to gear the markets to their own interest, at the expense of the rest of the community?

Under his provocative chapter heading, 'Scrounging off the State', Owen Jones (The Establishment and How They Get Away with It) gives concrete examples of how corporations and the well-connected extract the fruits of the common wealth and leave as much of the costs as possible for the ordinary citizen.

1. Taxation

“Avoiding tax has become the new way of making profit” ~ Margaret Hodge, British MP 

Legal tax avoidance was recently reported (by a whistle-blower who has been a long-term executive of major accountancy firms) to be running at about $50 billion per year in Australia alone. This figure does not include illegal tax evasion to havens of various sorts. Despite this situation, the corporate sector and many wealthy shareholders ceaselessly lobby for lower business marginal tax rates and more and more tax concessions, exemptions, allowable deductions and rebates.

This corporate tax refusal inevitably transfers more of the burden of state revenue targets onto the ordinary taxpayer.

2. Public expenditure

Just as corporates push to pay less tax, they have become more vocal in stipulating where government should spend its precious revenue. Typically, they support state expenditure in activities that directly support their businesses (such as roads, rail, ports, telecommunications, research and development grants, vocational training, subsidies for equipment updates and technological renewal). 

At the same time, corporates typically call for reductions in public expenditure and private user-pays alternatives for health, education and welfare programs, so critical to the well-being of individual citizens.

3. Commercial law

As the owners of corporations, shareholders are preferentially protected by the state with the law of limited legal liability in respect of their damages affecting third parties in the community.

In trade, corporations have been granted state-sanctioned intellectual property rights, such as patent and copyright protections, which act as monopoly pricing powers, advantaging business over consumers. These monopoly restrictions often apply to essential goods and services, such as life-saving medicines.

4. Environmental law and regulation

There has been a long history of corporate activism in Australia and the U.S. in the fields of environmental law, policy and regulation. “Externalisation of costs” is a technical term used to describe corporate strategy to obtain cheap access to the natural resources of the state (read the community) and to avoid responsibilities for environmental remediation. 

Managing the impacts of carbon-induced climate change around the world is estimated to cost taxpayers trillions over the longer term.

5. Labour law and industrial relations practice

Corporations continue to adopt aggressive measures to drive down the rights, wages and conditions of workers under existing labour laws. Their interventions also include casualisation of the workforce, employee contracting, the offshoring of jobs, the importation of cheap, compliant, casual migrant labour, attacks on unions as the advocates of labour and automation and robotisation.

6. Crony capitalist deals with “sympathetic” governments

Neoliberals have converted their influential relationships with sympathetic Anglosphere governments into a recurring pattern of lucrative crony capitalist deals over recent decades.

Governments have privatised a dizzying array of essential community infrastructure – utilities such as energy, communications, roads, ports, banks and so on – at bargain basement prices, typically delivering super-sized profits for corporations and their shareholders. The impacts on citizens, however, have been higher consumer prices and reduction of vital revenue flows for needed community services.

The most egregious example of cronyism between captured governments and corporations was the 2008-9 tax-payer funded bailout of failing U.S. banks during the global financial crisis (GFC). Neoliberal financiers persuaded the U.S. government to nationalise/socialise the risk and debts of the industry while allowing banks to keep the profits. 

Was this bailout initiative “free market” action or thoroughly corrupted capitalism? Indeed.

The impact of neoliberalism

Neoliberal or “free market” philosophy has long been dressed in the attractive but fraudulent garment of freedom and natural order.

The impact of this fraud has been a massive rise in economic inequality within advanced western nations over the last 40 years. 

This economic inequality has been exhaustively documented by Thomas Piketty (Capital in the 21st Century) and a host of other respected government and non-government research studies.

Wealth has been further concentrated at the top end, the middle classes have experienced a process of being hollowed out and the prevalence of working poor has dramatically increased.

The erstwhile neoliberal promise of “trickle-down wealth” has become a joke in very poor taste.


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