Neoclassical economics may be on the way out in the mainstream, to be replaced with geoeconomics: winning the battle for political and economic power by all means necessary.
Michael Roberts is an Economist in the City of London and a prolific blogger.
Cross-posted from Michael Roberts’ blog
Geonomics is a new term for international economic theories and policies. According to Gillian Tett at the FT, in the past, “it was generally assumed that rational economic self interest ruled the roost, not grubby politics. Politics seemed to be derivative of economics — not the other way around. No longer. The trade war unleashed by US President Donald Trump has shocked many investors, since it seems so irrational by the standards of neoliberal economics. But “rational” or not, it reflects a shift to a world where economics has taken second place to political games, not just in America, but many other places too.”
Lenin once said that “Politics is the most concentrated expression of economics.” He was arguing that policies of states and war (politics by other means) were driven in the last analysis by economic interests ie the class interests of capital and the rivalries between ‘many capitals’. But apparently, Lenin’s view has now been turned upside down by Donald Trump. Now economics is to be ruled by political games; the class interests of capital have been replaced by the separate political interests of cliques. So apparently, we need economic theories that can model this ie geonomics.
Now apparently, geonomics has surfaced to make this hegemonic power politics respectable and ‘realistic’. Liberal democracy and ‘internationalism’ along with liberal economics ie free trade and free markets, is no longer relevant for economists, trained before to promote an economic world of equilibrium, equality, competition and ‘comparative advantage’ for all. That’s out of the window: now economics is about power struggles conducted by states furthering their own national interests.
A recent paper argued that economists must now consider that power politics will rule over economic advantage; in particular, a hegemonic power like the US will try to improve its economic advantage not by better productivity growth or investment at home, but by intimidation and force over other countries: “Hegemonic countries, however, often seek to influence foreign entities over which they have no direct control. They do so either by threatening negative consequences if the target does not undertake the desired actions, thus lowering the outside option of the participation constraint; or by promising positive benefits if the target does undertake the desired actions.”
According to these World Bank authors, this ‘power economics’ can actually be beneficial to both the hegemonic power and to the target of its threats: “hegemony can be modelled in a macroeconomist-friendly way.” Really? Tell that to China which faces the strangulation of its economy by sanctions, bans, huge tariffs on its exports and the blocking of its investments and companies globally – all initiated by the current hegemonic power, the US, fearful of losing its status, and determined to weaken and cripple any opposition through politics by any means (including war). Tell that to the poor countries of the world facing significant tariffs on their exports to the US.
Of course, international cooperation among equals to increase trade and markets was always an illusion. There never has been trade among equals; there never has been ‘fair’ competition among capitals of broadly equal size within economies or between national economies in the international arena. The large and strong have always eaten the weak and the small, especially in economic crises. And the imperialist core in the Global North has extracted value and resources in the trillions out of the peripheral economies over two centuries.
Nevertheless, it is true that there is a change in view among part of the elite on economic policy, particularly since the Global Financial Crash of 2008 and ensuing Long Depression in economic growth, investment and productivity. In the immediate post-WW2 period, international trade and financial agencies were formed under the control primarily of the US. Profitability of capital in the major economies was high and this allowed international trade to expand along with the revival of European and Japanese industrial power. This was also the period when Keynesian economics dominated ie. the state acted to ‘manage’ the economic cycle and support industry with incentives and even some industrial strategy.
This ‘golden era’ came to an end in the 1970s, when the profitability of capital fell sharply (according to Marx’s law) and the major economies suffered the first simultaneous slump in 1974-75, followed in 1980-2 with a deep manufacturing slump. Keynesian economics was exposed as a failure and economics returned to the neoclassical idea of free markets, free flow of trade and capital, deregulation of state interference and ownership of industry and finance, and the crushing of labour organisations. Profitability was (modestly) restored in the major economies and globalisation became the mantra; in effect the expansion of imperialist exploitation of the periphery under the guise of international trade and capital flows.
But again, Marx’s law of profitability exerted its gravitational pull and from the turn of the millennium, the major economies experienced a fall in the profitability of their productive sectors. Only a credit-fuelled boom in finance, real estate and other unproductive sectors disguised that underlying crisis of profitability for a while (the blue line below shows the profitability of US productive sectors and the red line, the overall profitability).
Source: BEA NIPA tables, author calculation
But eventually this culminated in the global financial collapse, the Euro debt crisis and the Long Depression; further enhanced by the impact of the pandemic slump of 2020. European capital has been left in tatters. And US hegemony now faced a new economic rival, China, after its stupendous rise in manufacturing, trade, and more recently technology, unaffected by economic crises in the West.
So in the 2020s, as Gillian Tett put it: “the intellectual pendulum is now swinging again, towards more nationalist protectionism (with a dose of military Keynesianism), thus fits a historical pattern. In America, Trumpism is an extreme and unstable form of nationalism, now apparently to be studied seriously by the new school of ‘geonomics’. Government intervention/support Keynesian style to protect and revive America’s weakened productive sectors was launched by Biden with an ‘industrial strategy’ of government incentives and funding for the US technology giants, coupled with tariffs and sanctions on rivals, ie China. Trump has now doubled down on that ‘strategy’. “
Protectionism internationally is being combined with government intervention domestically in decimating government services, ending climate change mitigation spending, deregulating finance and the environment and boosting the military and homeland security forces (particularly to increase deportations and intimidation).
This hegemonic crude power politics is now being made logical and even advantageous to all Americans by right-wing economists. In a new book called Industrial Policy for the United States, Marc Fasteau and Ian Fletcher, two economists beloved by the Maga crowd. They are part of the so-called Council for a Prosperous America, which is funded by a bunch of smallish companies mainly engaged in domestic production and trade. “We are an unrivaled coalition of manufacturers, workers, farmers, and ranchers working together to rebuild America for ourselves, our children, and our grandchildren. We value quality employment, national security, and domestic self-sufficiency over cheap consumption.” It’s a body based on class unity between capital and labour to ‘make America great again’.
Fasteau and Fletcher argue that America has lost its hegemonic position in global manufacturing and technology because of neo-classical free market liberal economics: “laissez-faire ideas have failed and that a robust industrial policy is the best way for America to remain prosperous and secure. Trump and Biden have enacted some elem ents, yet America now needs something systematic and comprehensive, including tariffs, a competitive exchange rate, and federal support for commercialization—not just invention—of new technologies.”
F&F’s ‘industrial policy’ has three ‘pillars’: re-build key domestic industries; protect these industries from foreign competition through import tariffs and sanctions on foreign economies where government place obstacles in the way of US exports; and ‘manage’ the dollar exchange to the point that the US trade deficit disappears ie devaluation of the dollar.
F&F reject the Ricardian trade theory of comparative advantage, a theory that is still the basis for mainstream economics to argue that ‘free’ international trade will benefit all countries, ceteris paribus. They consider that ‘free trade’ can actually reduce output and incomes for a country like the US because of cheap imports from low-wage countries destroying domestic producers and weakening the ability of home producers to gain export market share globally. Instead, they argue that protectionist policies of import tariffs can boost productivity and incomes in the home economy. “America’s free trade policy, forged in a long-vanished era of global economic dominance, has failed in both theory and practice. Innovative economic modeling has shown how well-designed tariffs, to give only one example of industrial policy, could give us better jobs, higher incomes, and GDP growth.” Yes, according to the authors, tariffs will deliver higher incomes for all.
F&F express the interests of American capital based at home, no longer able to compete in many world markets. As Engels argued back in the 19th century, free trade is supported by the hegemonic economic power as long as it dominates international markets with its products; but when it loses dominance, it will adopt protectionist policies. (see my book, Engels pp 125-127). This is what happened in the late 19th century to UK policy. Now it is the turn of the US.
Ricardo (and the neoclassical economists of today) are wrong in claiming that all countries gain from international trade if they specialise in exporting products where they have ‘comparative advantage’. Free trade and specialization based on comparative advantage does not produce a tendency towards mutual benefit. It creates further disequilibrium and conflict. This is because the nature of the capitalist production processes creates a tendency toward increasing centralization and concentration of production, which leads to uneven development and crises.
On the other hand, the protectionists are wrong to claim that import tariffs and other measures will restore a country’s previous market share. But F&F do not rely on tariffs alone for their industrial strategy. They define industrial policy as “deliberate governmental support of industries, with such support falling into two categories. First are broad policies that assist all industries, such as exchange rate management and tax breaks for R&D. Second are policies that target particular industries or technologies, such as tariffs, subsidies, government procurement, export controls, and technological research done or funded by government.”
F&F’s industrial strategy will not work. In economies, productivity growth and lower costs depend on increased investment in productivity-enhancing sectors. But in capitalist economies that depends on the willingness of profit-driven companies to invest more. If profitability is low and/or falling, they will not do so. That’s the experience of the last two decades, in particular. F&F want a return to war-time policies and cold war strategy to build domestic industry, science and military forces. But that would only work if there was a massive switch to direct public investment through publicly owned companies with a national industrial plan. F&F don’t want that and neither does Trump.
F&F say that their economic policy is neither left nor right. And in one sense, that’s true. Industrial strategy is proclaimed by left Keynesians in Britain, by Elizabeth Warren and Sanders in America and even by Mario Draghi in Europe. And ‘industrial strategy’ was adopted as economic policy in most East Asian economies in the latter half of the 20th century (although increasingly no longer).
But of course, F&F’s apparently ‘neutral’ industrial strategy is no such thing when it comes to China because as they say, China is “the first combined military and economic threat America has faced in more than 200 years.” They put it bluntly: “An increasing number of Chinese industries are in acute rivalry with high-value American industries, and China’s gains are our losses. The US cannot remain a military superpower without being an industrial superpower.” This sums up the motivation for the switch from neoclassical laisser faire, free trade economics that has dominated the academic ivory towers of economic departments and international economic agencies up to now. America’s (and Europe’s) economic domination has been weakened to the point that there is a significant risk that China will rule globally within a generation. So the gloves are off.
Away with the concept of free competition, markets and trade – which never really existed anyway. Bring in the realism of winning the battle for political and economic power by all means necessary. This is the nature of the new geonomics, presumably soon to be in the economic departments of universities in the Global North, despite the rearguard opposition of the currently dominant neo-classical, neo-liberal professors.
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