The third installment among a limited series of micro-essays, thinking about the background and context of six development theories commonly taught by Geography teachers. This focuses on the background and formation of neoliberalism and origin of the Multiplier effect. 

I suggest reading them in order, starting with Rostow’s Model and Modernisation Theory here.

This is not a micro-essay. This is a long read.

Society, Austria, and the Diamond-Water Paradox

When Margaret Thatcher announced "there is no such thing as society" she was met with acclaim and scorn. Taken from an interview in Woman's Own magazine, it's an inflammatory sentence fit for an epitaph. We can imagine Margaret Thatcher throwing the idea of community on the bonfire. Her critics argued she was promoting a world-view of greed and selfish individualism. 

Take any sentence out of context, and its meaning can change. It's worth reading on, to see what Margaret Thatcher said next. "There is living tapestry of men and women and people" she continued. "And the beauty of that tapestry and the quality of our lives will depend upon how much each of us is prepared to take responsibility for ourselves and each of us prepared to turn round and help by our own efforts those who are unfortunate." 

Taken alone, commentators point to Margaret Thatcher's opening sentence as an embodiment of neoliberalism. For its critics, neoliberalism is a pejorative. It's a dirty word to describe bad behaviours that lead to tragic outcomes. More on that later. Taking the quote in its entirety, Margaret Thatcher's view of society typifies an earlier school of thought than neoliberalism. 

That earlier school of thought emerged in Vienna in the late 19th Century. Most historians point to Carl Menger, and his 1871 Principles of Economics, as the origin of this earlier school. It owes its name to the shared homeland of its founders, but the Austrian School of Economics has outgrown its buildings and borders and is now an international school of thought. 

From the very start, the Austrian School of Economics challenged mainstream economic thinking. In Principles of Economics, Carl Menger proposed that the value of an object was subjective. If we imagine someone in desperate need of a car for commuting, someone who's very ability to put food on the table depends on it. If we picture someone else looking for an eighteenth birthday present for their child, it's easy to imagine that they would be willing to pay a different amount for the same vehicle. The value of the car, according to Carl Menger, depends on what it is worth to the user. 

This theory of value contrasted with earlier economic theories of value. Adam Smith had argued that the car would be worth what it takes to build, this is the labour theory of value. In Marxian economics, the vehicle is worth what it can do, allowing people to drive from place to place; the exchange theory of value expresses its utility. Carl Menger took his thinking on subjective value further, and in Principles of Economics, he addressed the water-diamond paradox. 

The water-diamond paradox was put by Adam Smith over a hundred years earlier. How can it be that diamonds are so expensive, and water so cheap, when we can live without diamonds, but we can't survive without water? Adam Smith had tried to answer it with the labour theory of value. The cost of extracting diamonds was so much more expensive than the cost of abstracting water that the high cost of production raised the price of diamonds. The question lingered, why were people willing to pay so much for diamonds when they had no use? 

Carl Menger's theory of subjective value offers a satisfying answer. Diamonds have marginal utility; their utility comes from what they signal to other people about the purchasing-power of their owner. Few are impressed by someone with enough water to drink, but having diamonds to wear duly impresses many. Diamonds may have no material utility, but they have social utility. If we examine the diamond-water paradox through the lens of the subjective theory of value, we can see that people place a higher value on diamonds than water; the high cost reflects the subjective value of marginal utility.

Though some ideas of the Austrian School of Economics have entered the mainstream economic thought, like the theory of subjective value, most of their ideas have not. The Austrian School of Economics remains heterodoxical; sitting outside the orthodoxy of accepted knowledge, theories, and models taught across the world. The Austrian School of Economics remains in this heterodoxical position because of its foundational idea. For scholars of the Austrian School of Economics, social phenomena are explained entirely by individual motivations and actions. This thinking is termed methodological individualism. We might think of this as centred on the individual, rather than centred on social class, racial heritage, generation, gender, or any other means of grouping. In economics, thinking that everyone acts as an individual, rather than as a member of a social class or gender, is heterodoxical.

When Margaret Thatcher announced "there is no such thing as society" but that there was a "living tapestry of men and women and people" she is describing a world-view of methodological individualism. Society, for Margaret Thatcher in the late 1980s, was not a singularly cohesive group or centred on grouping at all, but a collective of individuals. We now have two questions. Firstly, how did the foundational thinking of the Austrian School of Economics end up being broadcast by Margaret Thatcher during an interview in 1987? Secondly, why was methodological individualism being labelled as neoliberalism by its critics? 

We can start to explain this through the life of Ludwig von Mises. Enrolling in the University of Vienna in 1900, the writings of Carl Menger entranced young Ludwig von Mises. Staying on after graduating to lecture, Ludwig von Mises introduced a young Frederick Hayek to the writings of Carl Menger. Frederick Hayek would go on to be instrumental in creating we will come to understand as neoliberalism. Both Ludwig von Mises and Frederick Hayek were considered leaders of the Austrian School of Economics. They both made significant theoretical contributions to methodological individualism, and they both fled Austria during the rise of the Nazi Party in Germany.

Ludwig von Mises headed first to Switzerland, and then on to America. Frederick Hayek headed for London and naturalised as a British subject in 1938. It was in London that Hayek came across a theory popular at the time. Many British intellectuals thought the rise of fascism was a capitalist response to the growing popularity of socialism. Hayek, trained in the methodological individualism of the Austrian School of Economics, staunchly disagreed.

The Road to Serfdom

In 1944, during a time of paper rationing, Hayek published the Road to Serfdom. Hayek described what he saw as the pathway to totalitarianism, an undesirable future where all people were no more than serfs living under the power of a dictator. 

Nazism, he wrote, while not the same was not all that different from Communism. Both these systems, Hayek argued, centralised authority and used every system of coercion at their disposal to achieve compliance, reducing people to mere agents of the state. 

Hayek argued that without constant vigilance, countries would unknowingly take step after step along the road to serfdom. It would begin, Hayek warned, with a greater desire for central planning. These 'planners' would make promises of utopian outcomes, greater prosperity and social justice. Though inevitably, Hayek continued, the planners would find that they can't agree on one vision of utopia and that no one utopia is found agreeable to all people. Most national planners are well-meaning and would baulk at the use of force, Hayek assured his readers; instead, they would lead efforts to coerce and sell the plan, establishing an extensive system of propaganda. 

What Hayek warned would come next echoed his experiences before fleeing to London. Confidence in the planners would fade. He wrote that the more the planners tried to improvise, the more it would disturb everyday life. People would come to call out-rightly-that the planners just can't get things done. In desperation, trying to cling to power and see their plan for prosperity and social justice through, the planners would turn to a strong man. The planners would grant this fiery orator the authority to hammer out the plan and to force obedience. The early steps of all dictators are to inflame the majority against a scapegoat minority. No one would oppose the dictator following the ruthless deployment of his secret police. The ability to force obedience would become the first virtue of this 'planned state'.

The Road to Serfdom is undoubtedly a product of its time. Frederick Hayek had lived through the rise of fascism in Germany and Italy. Hayek had been alive as Joseph Stalin assumed control of the Soviet Union and 700,000 'enemies of the working class' were executed in the Great Purge. Frederick Hayek was also looking back, to the ‘Bonapartism’ that had seen the French Revolution culminate in a military dictatorship. In writing the Road to Serfdom, Hayek made the case that while governments might plan centrally with the best of intentions, it was coercive and ultimately undemocratic to do so. To Hayek, central planning ensured "that the will of a small minority be imposed upon the people" and as a result "the individual would more than ever become a mere means, to be used by the authority." 

The Road to Serfdom made several uncomfortable comparisons. Hayek wrote that both 1940s Britain and 1930s Germany shared admiration for governance and appreciation for power. Hayek compared the outcome of a victory by Marxist-Leninist insurgents and by right-wing nationalists, concluding that the 'planned state' would be almost indistinguishable. What Hayek saw as the ultimate failure of governance, was its "inability to leave anything to the simple power of organic growth." In summary, the Road to Serfdom warns that any attempt to plan the economy will end with tyranny.

The Road to the IEA, Chicago, and the White House

Sir Antony George Anson Fisher was alarmed by the election of a Labour government in the U.K. after World War II. Antony Fisher had read the Road to Serfdom in 1945 and worried about what the nationalisation of industry and introduction of centralised planning might eventually lead to. Frederick Hayek was lecturing at the London School of Economics when Antony Fisher sought him out. Fisher explained his plans to Hayek to go into politics to challenge what he saw as Britain taking its first steps on the road to serfdom. Fisher claimed that after some small talk, which neither of them excelled at, the conversation went something like this:

Fisher: I share all your worries and concerns as expressed in the Road to Serfdom, and I'm going to go into politics and put it all right. 

Hayek: No, you're not! Society's course will be changed only by a change in ideas. First, you must reach the intellectuals, the teachers and writers, with reasoned argument. It will be their influence on society which will prevail, and the politicians will follow. 

This is a watershed moment for what goes on to become neoliberalism. Antony Fisher, feeling imbued by meeting Hayek, stayed out of politics and in 1955 founded the Institute for Economic Affairs. Antony Fisher didn’t just found the Institute for Economic Affairs, he founded the Manhatten Institute, the International Policy Network, International Institute for Economic Research, the Pacific Research Institute, the National Center for Policy Analysis. Through the Atlas Network Fisher funded and founded over 150 free-market orientated think-tanks to influence public and political opinion.

It's worth considering a quote by John Maynard Keynes at this point:

In the same year that Antony Fisher met with Frederick Hayek, John Maynard Keynes was in Bretton Woods, working to establish the World Bank and the IMF to rebuild a war-ravaged Europe. As Fisher was getting ready to found his first think-tank, Hayek was setting sail across the Atlantic, saying goodbye to the London School of Economics, headed for Chicago.

In the 1970s, the IEA was making a regular lunch guest of Margaret Thatcher. Thatcher herself spoke of first reading Hayek's work as an undergraduate. There is another story, perhaps too perfect to be accurate, that Margaret Thatcher interrupted a speech from a more centrist member of the Conservative party by slamming a copy of Hayek's book on the table and declaring "this is what we believe."

So, how did the foundational thinking of the Austrian School of Economics end up being broadcast by Margaret Thatcher during an interview in 1987? We can plot its course as a remarkably straight line.

Arriving in Chicago in 1950, Hayek worked alongside Milton Friedman. The move placed Hayek at the centre of a Venn-diagram between the Austrian and Chicago Schools of Economics. The two men found much common ground as anti-socialists and market advocates. We know, from private correspondence, that Hayek grew distrustful of Milton Friedman's Monetarist approach to economics. Hayek saw a place for trust-breaking to prevent monopolies from forming, commenting that placing too much authority in the hands of a corporative monopoly was tantamount to placing too much authority in the hands of the government.

Following closely after Margaret Thatcher's election as Prime Minister in 1979, Ronald Reagan was elected President of the U.S.A. in 1980. We can trace an almost identical line in the U.S.A, taking us all the way from Carl Menger's Principles of Economics to the neoliberalism enacted by Ronald Reagan.

The End of History?

The neoliberalism that Hayek and Freidman fashioned can be challenging to define. "Mention it in conversation and you'll be rewarded with a shrug" George Monbiot once wrote about it. In the same Guardian article, George Monbiot charged neoliberalism with the collapse of public health and public education, a resurgence of child poverty, an epidemic of loneliness, the climate crisis, and the rise of Donald Trump. "Imagine if the people of the Soviet Union had never heard of communism," Monbiot wrote, calling out neoliberalism as an ideology that has dominated western democracy and the global economy since the 1980s but which operates namelessly in the shadows.

To shine a light on the advent of neoliberalism, it can be helpful to take a historical lens developed by the German philosopher Georg Hegel and advanced by the German political theorist and economist, Karl Marx. Through this lens, history is organised as a series of socio-economic epochs. 

It was commonly accepted in the 1930s that classical liberal laissez-faire economics was to the blame for the Great Depression. This led to a popular desire to control markets in the post-war years bringing an end to classical liberalism. We label this post-war period the Keynesian Consensus, crediting the influence of Britain’s pre-eminent economist, John Maynard Keynes.

When the U.K.'s labour party won the 1945 election, the prime minister Clement Atlee laid out his plans to achieve full employment, develop a mixed economy, conciliate the trade unions, retreat the Empire, and develop a welfare state of nationalised healthcare. These ambitions are now seen as part of the Keynesian Consensus; a unification of government action, political ideology and economic planning. For Atlee and other world leaders during the post-war years of Keynesian Consensus, safeguarding the economic and social wellbeing of all citizens was at the heart of good governance.

Advocates of liberal economic thinking were keen to revive it's standing. World events strengthened their efforts in the 1970s. The Nixon shock that contributed to the collapse of Allende's Presidency in Chile, followed by the 1973 Oil Crisis, had weakened confidence in Keynesian Economics. Milton Friedman was preaching Monetarism in full force as an alternative to discredit Keynesianism.

Neoliberalism was taking shape. Influenced by Frederick Hayek, promoting individual rights became a social value of neoliberalism. Advocates maintained that this social value was best achieved by reducing the involvement of the state in people lives through privatising public services. Influenced by Milton Friedman, Monetarism became the prevailing approach to economic regulation; opposing central planning and government involvement in a free-market.

Without central planning from a government authority to guide the economy, an alternative means of decision making is needed to answer the fundamental question of economics; how much, of what should be produced? In neoliberalism, the answer to this is consumer signalling. When we talk about using the market to decide, we’re talking about the system of consumer signalling.

Let's say a supermarket stocks three types of breakfast cereal. The shoppers at the supermarket tend to prefer cereal A over cereal B and C. Their consumer habits signal to the supermarket that more of cereal A needs to be stocked than cereal B or C. The supermarket orders more of cereal A, which signals to the manufacturers that they need to produce more. The manufacturers of cereal B and C also get a signal, that they need to improve the quality of their product or they'll run the risk of no longer being in the cereal business. In consumer signalling theory, this creates healthy competition between business rivals which results in higher quality, more choice, and lower prices for consumers.

For Hayek and the Austrian School of Economics, consumer-signalling went further. Consumer-signalling was an expression of direct democracy. It offered an immediate and impactful voice to the individual in a way that representation in liberal and social democracies couldn’t. The subjective theory of value meant that anything and everything could be given a price. If everything could be given a price, then everything could be made responsive to consumer-signals. In the Austrian School of Economics, markets are democracy.

There are a myriad of criticisms of consumer-signalling. These range from those morally opposed to the reduction of the human spirit to ‘consumers’ to the fact that humans are not homo-economicus and have repeatedly shown that don’t always act in their own best interests. In economics, homo-economicus is the well-informed, rational, forward-thinking economically-literate individual who acts in their own self-interest. Think about the McDonalds pound-saver menu for a second. Now ask yourself if it’s true that people do things they know to be bad for their long-term health because they think they’re getting a good deal. Homo-sapiens are not homo-economicus. We’ll revisit the idea of rational long-term planning in the fifth instalment when we look at Amartya Sen’s theory on human development and the effect of poverty on decision making.

The use of consumer signalling is considered acceptable in areas of life where people acknowledge their role as being consumers. The idea that spending habits influence what’s stocked on supermarket shelves isn’t seen as an area of controversy. Much the opposite, where the government to decide what was to be stocked and how much people could buy, this would be seen as an attack on people’s personal freedoms.

Where the use of consumer signalling becomes more controversial is when it’s applied to areas where people don’t think of themselves as consumers. Where schools have been asked to see themselves as competing against one another is referred to as the marketisation of education. The marketisation of education is correctly associated with a neoliberal position. Consumer signalling, the theory goes, improves efficiency, choice, and lowers the cost for the consumer. The aspects of neoliberalism that have attracted some of the heaviest criticism, have been the outcomes of applying consumer signalling to areas which haven’t historically been seen as markets. Again, this will be an important area to revisit when we come to think about Amartya Sen’s work.

In 1976, the Labour Prime Minister, James Callaghan, felt forced to ask the IMF for a £2.3 billion loan to maintain the welfare state. In return, the IMF demanded massive spending cuts. Justifying his decision at the Labour Party conference later that year James Callaghan explained that government spending was like "injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step." The welfare state of the Keynesian Consensus seemed to be on its knees.

Or was it? Had overspending on the Welfare State crippled the economy, or was it the Nixon Shock and the dual Oil Crises' of 1973 and 1979? Countries service a much higher level of debt now, under neoliberal approaches, than was considered a crisis under James Callaghan.

The winter of 1978/79 was dubbed the ‘winter of discontent’ as widespread strikes gripped the U.K. during the coldest winter for 16 years. For Hayek, these were clear signals that Britain was on the road to serfdom. The central planners had made utopian promises, confidence was waning, there had been mass disruption to everyday life. In the Road to Serfdom, the next steps would be the election of a strong man, someone with the conviction to ensure that the plan was seen through. Instead of Hayek's strong man, the U.K. elected an Iron Lady.

Margaret Thatcher took the reins of government; there would be no more central planning, even in 1997 when the U.K.’s Labour Party returned to government. The epoch of Neoliberalism had begun.

Chile’s Economy After Allende

When the Chilean crisis ended and the dust settled in 1973, a C.I.A. backed military had overthrown the democratically-elected socialist government and taken control. The former prime minister Salvador Allende had met his end at the hands of a bullet. Allende's former economic advisor, Andre Gunder Frank, the architect of dependency theory, had become a political exile and fled to Berlin.

The military junta, under the direction of General Augusto Pinochet, presented its mission as a "national reconstruction." The brutality of the dictatorship is beyond question. From 1973 to the return of democracy in 1990, an estimated 3000 people were dead or 'disappeared', tens of thousands tortured, and an estimated 200,000 driven into exile.

As General Pinochet assumed control, the economic crisis in Chile raged on. With the economy faltering, and the military dictatorship unable to offer a remedy, General Pinochet turned to a group who'd spent years on the fringes of Chilean political and economic thought, but who had their 178-page long plan ready to go; the Chicago Boys.

Way back in 1956, around 25 Chilean students had been invited to Chicago. They soon became enthusiastic converts to Friedman's Monetarist economic philosophies. These 'Chicago Boys', as they came to be known, filled the vacuum of financial policy left by the coup. The Chicago Boys were given free-reign under Augusto Pinochet's dictatorship, and they set about enacting neoliberal doctrines. The central planning of Allende's rule was scrapped, along with price controls and government subsidies. The Chicago Boys set Chile on a path to become the most liberalised economy in the world.

There is no debate that Chile's GDP per Capita has increased at a faster rate than the Latin American average since 1975. Chile is ranked as a high-income country by the World Bank and stands among the wealthiest Latin American countries. Milton Friedman referred to this as the 'Miracle of Chile'. There is debate about the extent to which the Chicago Boys adoption of Neoliberal practices triggered this rise. Milton Friedman and Anna Schwartz point to the Chicago Boys neoliberal policies triggering a multiplier effect.

For neoliberals advocating the multiplier effect, it's the removal of trade barriers that encourages more investment from transnational corporations. The resulting increases in employment will see more local spending and consumption, creating an upward spiral of economic growth which encourages more people to the region. The effects of the multiplier effect are cumulative and continuous, a structural change in one area will lead to a structural change in the next. The role of government in this multiplier effect to incentivise corporate activity by lowering limits to free trade. With the removal of barriers to global trade and investment being a core characteristic of neoliberalism, it's easy to see how the multiplier effect makes a natural pairing.

Indian economist Amartya Sen, the author of the theory of human development, is critical of Friedman and Schwartz’ analysis. Amartya Sen casts doubt that the purely 'Monetarist' approaches of the Chicago Boys triggered such a multiplier effect. Amartya Sen points to the period from 1973 to 1982, when Chile's economy was at its most 'Monetarist', claiming there was little net economic growth. Amartya Sen points to most of the growth happening after 1982 when the Chilean government renationalised its copper industry. Javier Santiso, a French-Spanish economist, also finds that Chile's greatest economic growth was post-1982; a period when "neoliberal attitudes in Chile had cooled" and consumer-signals no longer had exclusivity on decision making.

The Miracle on the Han River

Referring to the rapid economic growth in South Korea, the Miracle on the Han River' is an allusion to 'Miracle on the Rhine.' At the end of World War II, West Germany had a skilled workforce, a high technological level, but a depleted economy. The injection of cash under the Marshall Plan saw it make rapid progress when compared with the central planning approach in East Germany. The success of West Germany under the Marshall Plan made a significant contribution to Walt Whitman Rostow's view that aid was a pathway to development. Where the Miracle on the Rhine helped make the argument for development aid, the Miracle on the Han River would play the same role for trade.

A generation of farmers and manual labourers in South Korea, along with Hong Kong, Singapore, and Taiwan, saw their grandchildren graduate with university degrees. Much of this transformation was achieved through the investment of foreign transnational corporations alongside the development of its own. Hyundai, Samsung and Daewoo are world-renown Korean transnational corporations. In South Korea, like in Chile, we see the role of the multiplier effect in economic development. 

In 1993, a report titled The East Asian Miracle was published by the World Bank. The East Asian Miracle gave full credit for the economic development of the Asian Tigers to their adoption of neoliberal policies. The report’s accuracy has been hotly debated ever since. All four of the Asian Tigers can be said to have shared approaches that led to their economic rise. They were export-orientated, and for the most part, sold their goods to consumers in the U.S.A. The four Asian Tigers maintained low taxes and minimal welfare states. These can all be said to be neoliberal, but there is more to neoliberalism than exports, low taxes, and minimal welfare.

The Asian Tigers invested heavily in education. By 1965, the Asian Tigers had achieved universal primary education. South Korea had reached a secondary education enrollment rate of 88% by 1987. Analysts note the low levels of gender bias, the enrollment rate between men and women was almost equal. Although their openness to free-trade is considered neoliberal, none of the Asian Tiger governments looked to use market systems of consumer-signalling in the fields outside of those markets are traditionally associated with. Until the 1980s, the Asian Tiger governments had extensive industrial policies; their governments were planning centrally.

The multiplier effect undoubtedly played an influential role in the economic development of South Korea, Hong Kong, Singapore and Taiwan. We have seen that the multiplier effect has a significant role in Chile's economic growth. The question I think we need to ask is how connected the multiplier effect is to neoliberalism. 

For Hayek, consumer-signalling was democracy. In neoliberalism, Hayek's consumer-signalling was made possible through Friedman's Monetarist approach. To its advocates, neoliberalism represented the most democratic way of making a decision. The Chicago boys took Chile down the path towards neoliberalism while it was a military dictatorship. In a 2008 interview, Milton Friedman suggested that adopting neoliberalism was the reason for Chile's transition to multi-party democracy in 1990. To Milton Friedman, economic freedom inevitably leads to political freedom. 

The Asian Tigers adopted neoliberal positions while maintaining strict government control. The Economist's Intelligence Unit now places South Korea as the 23rd most democratic country in the world. This would support Friedman's position, that economic freedom inevitably leads to political freedom. However, three of the last seven freely-elected prime ministers of South Korea have been indicted for corruption, with one completing suicide to avoid scandal. Hong Kong maintains an unrepresentative system, and rioting has only increased in recent years. It's interesting to note that both South Korea and Taiwan's economies grew faster in the decades before they became democracies than they have done since. 

Whether you agree with Hayek that consumer-signalling is an expression of direct democracy or not, it was intended to be as much a core component of neoliberalism as Monetarism. Without the deployment of consumer-signalling, are the Asian Tigers really neoliberal?

The Washington Consensus

Since it came into operation in 1946, the President of the World Bank has been appointed by the President of the U.S.A. During the epoch of neoliberalism, the direction of the World Bank was influenced by the world-view of President Ronald Reagan, who was in turn influenced by Milton Friedman. During the epoch of neoliberalism, the approach taken by the world bank to development was unmistakably neoliberal.

It came to be termed the ‘Washington Consensus’. A list of ten remedies that would, it’s acolytes advocated, address the underdevelopment of Latin America, and set much of the rest of the world to rights as well. In its original sense, the Washington Consensus only pertains to a list of ten common actions that were promoted by Washington-based think-tanks. Taken in a broader sense, the Washington Consensus represents the work and effort of Antony Fisher’s network of free-market think tanks to reshape the Keynesian Consensus. It’s very name drew criticism, evoking, as it does, a sense of American imperialism and echoing Rostow’s Model; that high-mass consumption and Americana is the ultimate goal of the development highway.

The list embodies neoliberalism, in every way but Hayek’s. The Washington Consensus makes no mention of promoting direct democracy through consumer-signalling. In this list, we can, perhaps, find the answer to our question about the Asian Tigers. The Asian Tigers are neoliberal, in every way but Hayek’s. We can also see, with greater clarity, the criticisms made by George Monbiot. How the means-as-ends practical implementation of neoliberalism, without the philosophical heritage of the Austrian School of Economics, operating in the shadows, might lead us all down a path to the collapse of public health and public education, a resurgence of child poverty, an epidemic of loneliness, the climate crisis, and the rise of Donald Trump.

Through the World Bank and the IMF, the Washington Consensus was packaged and sold as a development agenda. Cash-strapped governments were given aid and loans in exchange for reducing the deficit, government spending, deregulating industry, and liberalising their trade rules. As Dambisa Moyo frames it, the free-markets gave African countries the freedom to succeed, but also the freedom to fail. Trade liberalisation, privatisation, and deregulation didn’t guarantee a multiplier effect.

By the end of the 1980s, the debt of emerging-markets was at least US$1trillion. The cost of servicing the debt was so colossal that it outsized the inward flow of debt. Between 1987 and 1989, there was a negative flow of aid from the poorest nations, to the wealthiest. The 1980s came to be known as the ‘lost decade’ as far as development was concerned. For many, the multiplier effect hadn’t materialised. If the Washington Consensus didn’t deliver, and Chile and the Asian Tigers could do it without democracy, why do we think of the multiplier effect as a neoliberal model?

The unexpected origins of the Multiplier Effect

Finding the origins of the multiplier effect is tricky. Follow the course upstream, and the source appears to be Gunnar Myrdal. The theory of circular cumulative causation that Gunnar Myrdal published in 1956 sounds like the multiplier effect of GCSE textbooks, and the Spiral of Urban Decline. You can see the model in Gunnar Myrdal's writing:

Suppose that in a community an accidental change occurs which is not immediately cancelled out in the stream of events: for example that a factory, where a large part of the population gets its livelihood, burns down and that it becomes clear that it would not pay to rebuild it, at least not in that locality.

The immediate effect of this primary change is that the firm owning it goes out of business and its workers become unemployed. This will decrease incomes and demand. In turn, the decreased demand will lower incomes and cause unemployment in all sorts of other businesses in the community which sold to, or served, the firm and its employees. A process of circular causation has so been started with effects which cumulate in the fashion of the "vicious circle". 

If there are no other exogenous changes, the community will be less tempting for outside businesses and workers who had contemplated moving in. As the process gathers momentum, businesses established in the community and workers living there will increasingly find reasons for moving in order to seek better markets somewhere else. If they do, this will again decrease incomes and demand. It will usually change the age structure of the local population in an unfavourable direction.

Gunnar Myrdal's writing predates the epoch of neoliberalism by two and a half decades. He was an open and loud proponent of the welfare state and the Keynesian Consensus. Some economists have argued that if Myrdal’s earlier work had been translated into English sooner, we’d all be referring to the Myrdalian Consensus. So, how did the multiplier effect come to be co-opted?

I’m not entirely sure.

Gunnar Myrdal was researching regional inequalities, not advising national policy. His work was focused on establishing whether there was an equilibrium in regional inequalities. Myrdal was asking whether the presence of a multiplier effect in one place would cause a decline in another area through the movement of workers and capital. If there was an equilibrium, then no one was really ending up better off. Myrdal found that it wasn’t in equilibrium, meaning the total amount of capital was increasing or decreasing, and the multiplier effect did lead to a long term change.

The connection between Myrdal’s work and neoliberalism seems to be the opportunity for foreign investment. To look at this, we’re going to consider the work of Thomas Piketty. Thomas Piketty is a French economist who studies income and wealth inequality. In 2013, Piketty published Capital in the 21st Century, in which he argued that the rate of return on an investment is always greater than income. Let’s imagine factory employees, being paid for their labour, and earning their income. Now, let’s imagine someone who already has considerable wealth, investing in the factory, buying new machinery, or enlarging it. The investor will end up getting richer, faster, than the workers can earn an income. Piketty argued that there is no way for someone who is selling their labour to catch up with someone with money to invest. Piketty is describing an ever-increasing level of inequality, as those who are born rich increase their wealth at a faster rate than those who aren’t born rich.

Using Piketty work as a lens, the multiplier effect works in the sense it attracts investment from elsewhere, rather than from inside the country. If no one in the country is rich enough to invest, the factory can’t buy new machinery or enlarge. Through trade liberalisation, investment from overseas wealth is encouraged. People born into wealth want to see a return on their investment, and in exchange, people who aren’t born into wealth see the income and demand in the local area increase. The nation, as a whole, is seen to have an improving economy, which in turn attracts a greater level of investment. Will the workers ever catch up with the wealth of the investors? To Piketty, never. It’s likely we only have to think of the contrast between Jeff Bezos’ accumulated wealth and the income of any worker in an Amazon warehouse to find ourselves nodding in agreement.

So, why is the multiplier effect associated with neoliberalism? It seems to be the nature of the investment. Trade liberalisation encourages more foreign direct investment.

Is the multiplier effect a neoliberal model? No, it seems curious that it’s associated with it.

Is it proper neoliberalism, without Hayek? Perhaps, maybe it’s just Monetarism or free-market fundamentalism, but the chances are if you bring those up in conversation you’ll be rewarded with a shrug.

A THOUGHT ON POSITIONALITY

I think about development with the words of Andre Frank, Dambisa Moyo, Jeffrey Sachs, Swaminathan S. Anklesaria Aiyar, Milton Friedman, Thomas Piketty, John Maynard Keynes, Frantz Omar Fanon, Daron Acemoglu, James Robinson, Mahmood Mamdani, Deepak Lal, Peter Frankopan, Paul Collier, William Easterly, Jong-Dae Park, Thomas Sowell, and Albert Memmi. 

I also think with what I've made from all the people I've met, the conversations I've had, the countries I've lived in, and the languages I've learnt. We think with what we know. 

Our standpoints on development discourse are constructive. Mine is imperfect. I’m consenting to learn in public. Ancora Imparo.