(...) Contradictions inherent in Golden Age capitalism led in time to the end of prosperity.2 Economic instability began in the late 1960s and erupted full force in the 1970s with two OPEC oil price shocks, the collapse of the Bretton Woods fixed exchange rate system, and the buildup of excessive debt in the Third World. These problems created a powerful movement, led by business and, especially, financial interests, to roll back the economic regulatory power of national governments, replacing conscious societal control with the "invisible hand" of unregulated markets, and eliminate restrictions on the flow of goods and money across borders, creating an integrated global economy.
Supporters of neoliberal globalization used neoclassical economic theory to sell their program. The standard neoclassical view holds that, absent excessive government interference, both national economies and the integrated global economy will operate efficiently, more or less like the models of a perfectly competitive market system found in college textbooks. Competitive market pressures lead to the full utilization of labor and productive capital, and cause aggregate demand (or spending) to balance full-capacity income, a proposition known as Say’s Law. There is thus no need for governments to engage in activist Keynesian aggregate demand management. Globally integrated financial markets will raise efficiency and productivity, it was argued, because they will allocate world savings to the most productive investment projects no matter where in the world they are located.
(...) Heterodox critics of neoliberalism, on the other hand, argued that the abandonment of growth targeting by activist demand management would slow real GDP growth and generate higher unemployment. High unemployment and the drive for labor market ‘flexibility’ in turn would slow real wage growth and raise inequality. Financial liberalization would lead to high real interest rates and increased instability in global financial markets. Poorer countries that substituted neoliberalism for interventionist economic development policies, it was argued, were less likely to experience rapid long-term growth. These problems were not seen as the inevitable result of increased global integration per se, but were caused by the specific institutions and practices that constitute neoliberalism.
(...) This essay focuses on one of the most important economic problems created by the spread of neoliberal globalization -- the generation and continued reproduction of substantial excess capacity in most important globally contested industries.
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