IMF admits that neoliberalism does not work

The last statement of the International Monetary Fund passed through the media without much notice. The IMF’s apologies for its calculation errors nevertheless should have had the impact of a nuclear bomb. The main global financial regulator admitted that recent calculations proved their own models proved to be wrong. The multiplier of 0.5, used by the Fund, proved to be much underestimated, as according to recent studies, it should have been between 0.9 and 1.7. This is particularly important becuse  if the so-called multiplier is above 1, it means that the whole logic behind neoliberalism is based on lies and fabrications.

 

The Multipliers we are talking of, are the so called multipliers in the macro-economic theory which estimate growth as  consequence of government intervention. If a government spends money, this will stimulate growth of the economy through increased demand, for example by building infrastructure, stimulating the creation of jobs and thereby of purchasing power.

To be able to spend this money, however, the government should get the money somewhere. This is done by either taxation, either through debt issuance. This also causes money to disappear out of the economy which otherwise could have been consumed by people who would not have to pay taxes, or individuals could borrow.

The ratio of public money spent and the created growth is called the government multiplier. This multiplier has always been at the core of the huge debate between the two dominant schools of macroeconomists.

For Keynesian economists, the multiplier is bigger than 1, meaning that for every dollar that the government spends, there would be created more than a dollar of growth. This theory legitimized at the macroeconomic level, the expansion of the welfare state, which was the result of a compromise between social classes, entailing some redistribution of wealth within capitalist system

The so-called monetarists however, the macroeconomic flow behind neoliberalism, assumes that government by definition would be inefficient. Only the private market, as a result of free competition, could entail the most efficient outcomes. Any form of government intervention would therefore be harmful to the economy.

The reasoning is as follows: For every dollar that the government takes away from investors and consumers, through debt issuance or taxation, these would be used less efficiently, compared to use based on the individual preferences of consumers and investors in an environment of free market competition. The result of a euro government spending would be thus generate a net income of less than 1 euro. According to this school of economic theory the government multiplier is therefore smaller than 1.

The latter theory therefore defends public expenditure to be as small as possible, as this expenditure would be relatively inefficient. The more the government would be reduced, the more indirect growth there would be. The negative growth by decreasing government expenditure provoking falling demand, would be compensated by  the released that would end up back with the consumers and investors in particular, who would guarantee a larger more efficient growth.

This latter economic school legitimates neoliberalism, which has become  the dominant policy framework, since Thatcher and Reagan, and became the only valid truth in classical economic courses. This theory has legitimized the breakdown of the welfare state since the fall of the Soviet Union and the collapse of European social democracy. It is also the economic theory behind the recent austerity plans imposed by the European Commission, particularly in southern Europe.

Now, however, the IMF, the world's highest financial authority, comes with a “mea culpa”. According to its own recent studies, in periods of economic downturn, during crises of capitalism, the multiplier is not 0.5, but 0.9 to 1.7. This means that the IMF admits that austerity has net negative effects on the economy. Their own study thus settles the wrongness of neoliberalism, and with it the ideology and policies that they themselves have defended for decades and have driven millions of people to hunger, misery and death.

This also means that we now know that the IMF at least is aware of the fact that current economic policies will lead nowhere and the institutions of the capital have no ideas and alternatives to solve their crisis. It also means that now the way is open for real alternatives, alternatives to neoliberal capitalism.