Upend the trickle-down

Neoliberal policies have hollowed out democracies and spawned unchecked oligarchs. Grasping their structure points to a fix

The Canary Wharf tower grew out of the undeveloped industrial landscape of South Dock in London Docklands, seen here on 18 July 1991. Photo by Richard Baker/Getty Images

taught to undergraduate, honours and postgraduate students during 2004-2022, and is now an honorary fellow in the Finance Department at the University of Melbourne, Australia. He has published eight research monographs, four book chapters and more than 30 journal articles. Five of his most recent articles have been multidisciplinary involving cosmology, COVID-19, and global warming.

If the people around you are spiteful and callous and will not hear you, fall down before them and beg their forgiveness; for in truth you are to blame for their not wanting to hear you.– from The Brothers Karamazov (1880) by Fyodor Dostoevsky

If Western democracies were companies, they would be dismissed as lifestyle businesses whose managers (ie, political leaders) run them to promote their own interests and wealth. Leaders pursue projects that benefit the few, rather than national goals, and leave their countries with low economic growth, heavy debt and rampant white-collar crime. We entered this era of an unjust social order, political malaise and destabilisation almost half a century ago when the US president Ronald Reagan and the UK prime minister Margaret Thatcher introduced libertarian reforms that were embraced globally.

At his first cabinet meeting as president in 1981, Reagan distributed copies of Mandate for Leadership, whose 3,000 pages came out of the Heritage Foundation, a conservative research group in Washington, DC. This became the ideology of neoliberalism, which advocated a smaller state, industry deregulation, tax cuts, strengthened defence, and roll-back of social engineering. A year later, 60 per cent of the Mandate’s proposals had been adopted by the Reagan administration, and The New York Times called it ‘the manifesto of the Reagan revolution’. His initiative engaged Thatcher, and spread globally to dominate public policy in democracies around the world.

Ronald Reagan became the first sitting US President to visit the New York Stock Exchange in March 1985. Courtesy Wikipedia

My perspective is that of an engineer with a career as a corporate strategist and, more recently, finance academic. In 2000, shortly after the Y2K scare, I left the corporate world for academia and research into decision-making by international finance organisations. In a round of industrial tourism, I interviewed more than 50 finance executives in Istanbul, London, Melbourne and New York. This led to three books, including Applied Investment Theory (2016), which criticised the justice system’s failure to prosecute corruption and criminal activity in large companies and among elected officials.

A framework used in corporate finance to explain the behaviour of organisations and individuals is the structure-conduct-performance (SCP) model, and it can help us understand the effects of the changes that Reagan and Thatcher brought to Western democracies. SCP conceptualises decisions within a multidimensional framework; when applied to countries, this framework postulates that their conditions are driven by the structure of institutions, laws and conventions; which drives the conduct or decisions of government, individuals and organisations; and that in turn leads to performance or outcomes.

Reagan and Thatcher asserted that unleashing markets and shrinking the state would ensure prosperity. Their signature initiatives of industry deregulation, tax reduction, market liberalisation and labour market reform won the day.

It did not take long, however, for the trickle-down effects of tax cuts funded by government debt to prove disastrous. Most obvious was the Black Monday stock market crash of October 1987. Neoliberalism had reduced the capacity of public institutions to manage systemic risks, and – as the authority and ability of government to regulate industry shrank – moral hazard spiked.

Infrastructure is a simple way to illustrate the realignment between state, markets and democratic institutions over the past half-century. Following the Second World War, Western governments invested heavily in transportation networks, energy systems and other public capital. Privatisation and deregulation reversed this trend, with cutbacks to public works projects: when roads and bridges, water systems and so on aged, productivity faltered.

Promises of prosperity by Reagan, Thatcher and other advocates of neoliberalism were mistaken because it brought only fragility to previously prosperous democracies. From an SCP perspective, the trickle-down of market liberalisation and financialisation brought slowing growth, rising debt burdens, institutional weakness, and declining public trust.

Some basic facts help to understand these claims, and give a sense of the impacts of neoliberal policies. Consider financial data since 1980 for the rich liberal democracies among the members of the Organisation for Economic Co-operation and Development (OECD). Reduced tax revenue forced governments to rely on borrowings, and government debt – as shown in the left-hand graph of Figure 1 below – surged from 40 to 65 per cent as a share of GDP. Meanwhile, government expenditure kept pace with the economy at almost half of GDP.

In the right-hand chart of Figure 1 below, we see the economic consequences of high, unfunded government debt. The blue line tracks growth of GDP per capita, which gradually slowed from nearly 3 per cent annually in the........

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