Costas Lapavitsas, This Crisis Has Exposed the Absurdities of Neoliberalism.

The coronavirus shock has shaken the world’s stock markets, imposing the need for massive state bailouts. But the measures to deal with the crisis risk spurring an authoritarian controlled capitalism — one that protects corporate interests while offloading the costs onto the rest of us.

Originally published as "This Crisis Has Exposed the Absurdities of Neoliberalism. That Doesn’t Mean It’ll Destroy It" on April 12, 2020, at Erensep. The EUROPEAN RESEARCH NETWORK ON SOCIAL AND ECONOMIC POLICY is a network of theorists and activists based at the School of Oriental and African Studies, University of London. Established in early 2016, ERENSEP aims to contribute to the unfolding policy debates in Europe. It brings together expertise in a wide variety of fields, including economics, sociology, and politics, while linking researchers and organisations across several countries in Europe.

The coronavirus shock has shaken the world’s stock markets, imposing the need for massive state bailouts. But the measures to deal with the crisis risk spurring an authoritarian controlled capitalism — one that protects corporate interests while offloading the costs onto the rest of us.

The COVID-19 public health emergency has rapidly turned into a crisis at the core of the world economy, which also threatens developing countries in the periphery. It has changed the balance between state and market, once again exposing the emptiness of neoliberal ideology. This economic crisis casts a harsh light on contemporary capitalism — and is likely to prove even more important than the blow to public health.

Indeed, this crisis has deeper roots, in the diseased workings of financialized and globalized capitalism over the past decade. The Great Crisis of 2007–9brought an end to the 1990s-2000s “golden era” of finance, and the years that followed were marked by poor growth at the core of the world economy. Profitability was weak, productivity growth was low, and investment showed no dynamism at all. Finance was also in trouble, exhibiting lower profitability and none of the extraordinary dynamism of the previous decade. Where the historically unprecedented crisis of 2007–9 marked the peak of financialization, the equally novel coronavirus crisis crystallizes its deterioration.

Of course, the immediate spur for the crisis owed to nation-states’ actions faced with the epidemic. Having initially ignored the medical emergency, several states then frantically locked down entire countries and geographical areas, restricting travel, closing schools and universities, and so on. This hit hard the already weakened core economies by inducing a wholesale collapse of demand, disruption of supply chains, falling production, millions of worker layoffs and loss of corporate revenue. All this spurred an unprecedented nosedive of major stock markets and panic conditions in the money markets.

It is as if the Black Death of the fourteenth century had staged a return, and twenty-first century societies responded with a similar mix of blind fear and isolation of communities. Yet the plague killed a third of Europe’s population back when its states were poor and backward feudal monarchies. In contrast, the coronavirus appears to have a low mortality rate and has struck advanced capitalist states of peerless technological accomplishments. There is already an intense debate among epidemiologists on whether wholesale lockdown was an appropriate and sustainable response, or if states should instead have focused on intensive testing of the population.

It is not for political economists to assess epidemiological policies. But there is little doubt that several states’ reactions and the ensuing collapse of economic activity are of a piece with the fundamentally flawed nature of neoliberal financialized capitalism. An economic system based on competition and naked profit-seeking — both guaranteed by a powerful state — proved incapable of dealing calmly and effectively with a public health shock of unknown severity.

Several advanced countries lacked the basic health infrastructure to treat those who became seriously ill, while also being short of equipment to test the population on a large scale and to protect those most likely to catch the disease. The lockdown and wholesale isolation of huge sections of society are, moreover, likely to have very severe implications for wage workers as well as the poorest, the weakest, and the most marginal layers. The mental and psychological repercussions will also be devastating. The social organization of contemporary capitalism was shown to be dysfunctional even from an engineering point of view.

Equally striking, however, have been even powerful states’ actions after the magnitude of the unfolding economic collapse became clear. In March, the central banks of the United States, the European Union, and Japan engaged in massive liquidity injections and brought interest rates down to zero, attempting to stabilize stock markets and assuage the shortage of liquidity. The US Federal Reserve, for instance, announced that it would buy unlimited volumes of government bonds and even freshly issued private corporate bonds. Governments in the United States, the European Union, and elsewhere, meanwhile, planned massive fiscal expansions, taking the form of loan and credit guarantees for companies, income subsidies for affected workers, tax deferrals, social security deferrals or subsidies, debt repayment holidays, and so on.

In an extraordinary move, the Trump administration announced plans to provide $1,200 per adult, or $2,400 per couple, with additional payments for children, starting with the poorest families. This disbursement was part of a package which could exceed $2 trillion — roughly 10 percent of US GDP — further providing $500 billion of loans to stricken businesses, $150 billion to hospitals and health care workers, and $370 billion of loans and grants to small and medium enterprises. In an equally extraordinary move, Britain’s Tory government declared its intention effectively to become the employer of last resort by paying up to 80 percent of workers’ salaries, if companies kept them on their payroll. These payments would be worth up to a maximum of £2,500 per month — just above the median income. Not content with this, the British government also effectively nationalized the railways for six months and there was talk of nationalizing airlines.

Just days earlier, even left-wing academics would have considered these measures to be radical. The shibboleths of the neoliberal ideology of the last four decades were rapidly swept aside, and the state emerged as the regulator of the economy commanding enormous power. It was not difficult for many on the Left to welcome such state action, thinking that it indicated the “return of Keynesianism” and the death knell of neoliberalism. But it would be rash to come to such conclusions.

For one thing, the nation-state has always been at the heart of neoliberal capitalism, guaranteeing the class rule of the dominant corporate and financial bloc through selective interventions at critical moments. Moreover, these interventions were accompanied by strongly authoritarian measures, shutting people inside their homes en masse and locking down enormous metropoles. The state has also demonstrated its vast power to police society by collecting information through big data. For instance, Israel’s right-wing government approved the tracking of cell phones by the security police with the aim of messaging people who had unwittingly come into contact with confirmed coronavirus patients. Not only do we know where you are, but we know better than you whom you have met.

This authoritarianism is fully in line with the dominant neoliberal ideology of the last four decades. State fiat is combined with the fragmentation of society as people are shut in their own homes and huge stress is placed on the “individual responsibility” to maintain social distancing. At the same time, large numbers of people are still required to go to work using public transport, while working rights are demolished, not least as layoffs rocket without concern for due process and as remote working destroys all limits to the working week.

It thus remains unclear what direction global capitalism will take as it reels under the shock of coronavirus — even as we still endure the long aftermath of the Great Crisis of 2007–9. The colossal power of the state and its ability to intervene in both economy and society could result, for instance, in a more authoritarian form of controlled capitalism in which the interests of the corporate and financial elite would be paramount. This demands that socialists assess carefully and critically the actions that states are taking to deal with the coronavirus crisis.

The Crisis So Far

The first step is to have a simple analytical summary of the course of the crisis so far. Crises are always highly concrete historical events reflecting the institutional development of capitalism. The major steps in the coronavirus crisis can be gleaned from a raft of (sometimes rapidly outdated) publications by multilateral organizations, the press, and elsewhere. Thus:

  1. COVID-19 emerged in China in late 2019, but the response of the Chinese state was initially slow, which could perhaps be ascribed to lack of knowledge about the severity of the virus. However, other states were slow to respond even after the full eruption of the epidemic in China. Until early March 2020, for instance, the number of daily confirmed cases in the United Kingdom was in the low double digits. Yet even with the Chinese experience to draw on, the UK government did next to nothing.

  2. Eventually the Chinese state locked down huge areas of the country, and other states followed with their own lockdowns, restricting the movement of hundreds of millions of people. Demand for tourism, air travel, hospitality, restaurants, and pubs, collapsed totally. Demand for food, clothing, household goods, and so on, was also significantly affected, although the overall impact is still unclear. The uncertainty created by the retreat of consumption inevitably hit investment plans but, again, it is impossible to assess the overall impact at this early stage.

  3. The lockdown and the restricted movement of workers severely disrupted supply chains, initially in China, which provides a large volume of production inputs across the world, and then in other parts of Asia, Europe, and the United States. Together with the blow to demand, this led to the curtailing of production.

  4. Falling production, shrinking demand, and growing uncertainty destroyed company revenues. A wave of bankruptcies loomed. The jobs of millions of workers came under threat, especially in the service sector, and millions were laid off in March. Loss of employment worsened consumption and further undermined production. As revenues declined, enterprises became less able to pay their debts, trade credit vanished, and by mid-March liquidity (that is, hard cash) was at a premium. The crisis acquired a severe credit dimension, further compounding the effect on production and output.

  5. A taste of the potential economic devastation can be gained from China. According to official statistics, value added in production in January and February dropped by 13.5 percent compared to the same period in 2019 (manufacturing declining by 15.7 percent). Moreover, investment, exports, and imports fell by, respectively, 24.5, 15.9, and 2.4 percent. The Chinese contraction alone would have had a severe impact on the world economy. With many other core countries in effective lockdown, the fallout will be huge, particularly in sectors like airlines and tourism.

  6. The repercussions on working people will be shattering. Especially vulnerable are the sections weakened by years of neoliberal policies, for instance, those on flexible contracts, informal workers, and the self-employed. Also vulnerable are highly indebted workers (or those with no savings) who have limited access to benefits and public services. Women will probably be affected worse because they are overrepresented in those groups but also because of the increased care work that comes with health distress, children not going to school, and so on.

  7. Global conditions worsened further as the crisis triggered a gigantic stock-market collapse. For years the main stock markets across the world had been greatly inflated, and the risk of a severe crisis became apparent already in 2018. The coronavirus shock led to a spectacular fall of more than one-third from February to March. The result was a dramatic tightening of liquidity that spurred a money-market crisis in the United States, the center of world finance, by mid-March. The shock had morphed into a full-blown capitalist crisis.

  8. As fear gripped world markets, the flow of capital across borders, especially from the core to the periphery of the world economy, was also affected. Existing evidence does not allow for firm conclusions, but there is a distinct possibility of a “sudden stop” that would make developing countries unable to pay for imports and service debts, thus raising the prospect of currency crises. Amidst the turmoil, an unfolding price war among oil producers brought the price of Brent crude down by roughly 50 percent from late February to late March. This gigantic fall directly threatened the viability of a raft of producers across the world, including in the US fracking industry.