History of the Iraq War, Part II: American Economic Background (1945-present)

Keynesianism, 1945-1973

The postwar era has also been marked by a shift from Keynesian to neoliberal economic ideas. Keynes viewed unregulated capitalism as a system that benefited society’s wealthiest to the detriment of the poorest (Meier & Seers, 1984:152-154). In order to mitigate capitalism’s destructive economic bubbles, inequality and insufficient demand during economic downturns, Keynes argued that governments must institute countercyclical economic policies, including deficit spending (Quiggin, 2010, pp. 86-89).  In addition to state investment, Keynes called for investment from private foreign and domestic sources (Toye, 2005, p. 127) and rejected the fanciful notion that unemployment in a market economy was voluntary (Krugman, 2009). 

As Keynes was primarily concerned with the First World (Toye, 2005, p. 123), Keynesianism reflects the interests of theorists’ own nations. In other words, in order to enrich their own nations, Keynesians seek to place their group at the top of the capitalist pyramid, albeit in a more stable and equitable way than in neoliberalism.  Keynesianism is associated with the period circa 1945-1973, a.k.a. the Bretton Woods system (Hossein-Zadeh, 2006, pp. 60-61).  The end of this era is also associated with the removal of the United States from the gold standard (Quiggin, 2010, p. 80), stagflation (Palley, 2004), the ascendance of an intellectually “pure” and “beautiful” school of neoclassical economics backed by politicians and moneyed interests (Krugman, 2009), a backlash against the Great Society (Peet, 2009, p. 12) and the OPEC oil shocks, which led American policymakers to push the World Bank to invest in petroleum exploration and technology (Hossay, 2006, p. 86). For all of these reasons, neoliberal economics began to affect Bretton Woods policies.

Neoliberalism, 1973-present

Neoliberalism provides a counterexample to Keynesianism and is characteristic of American foreign policy since the early 1970s. John Williamson, who coined the phrase Washington Consensus (1990), argues that neoliberalism has come to mean implementation of the following market-oriented economic policies: 1) fiscal discipline; 2) lower social spending; 3) flat tax rate; 4) financial liberalization; 5) floating exchange rate; 6) trade liberalization; 7) unregulated foreign direct investment; 8) privatization; 9) deregulation; and 10) property rights (2000, pp. 252-255).  Neoliberal reforms have traditionally been carried out in the Third World by the successors of Bretton Woods: the IMF, World Bank and WTO.

The United States essentially controls the IMF and operates it to its own advantages. The US holds 17% of the votes at the IMF, while an 85% supermajority is required to make substantial changes to rules or governance (Vreeland, 2006, pp. 39-42). Consequently, “the Managing Director has been reported to rarely act against the will of the US.” IMF reforms involve offering developing countries large loans with attached economic reforms (Dreher and Jensen 2007:105-106). Countries receiving loans must move towards:

1. Privatization of state industries;
2. Deregulation of foreign capital flows;
3. Dismantling of social safety nets;
4. Floating their currency; and
5. Dismantling regulations designed to inhibit the negative effects of business activities.
The World Bank is similarly dominated by the United States (Peet, 2009, pp. 127-128; Stiglitz, 2006, p. 13). We will see how American policymakers in Iraq implemented neoliberalism.

Considering that “property and markets rest on government and law” (Hacker and Pierson, 2010, p. 82), neoliberal anti-government fervor is more myth than reality. As Peet and Hartwick (2009, pp. 47-48) maintain, proponents of neoliberalism argue that “there are relatively limited instances when government should intervene to promote economic ends, other than encouraging market competition, providing adequate schooling, and encouraging savings and investment” and economic growth. In Chomsky’s view (1997), development policies reflect neoliberal values only when they benefit the ruling class in dominant countries. Then, the victims of neoliberalism are blamed by its proponents on some deviation from pure market discipline (Quiggin, 2010, p. 53).

In the early 1970s, neoliberalism began to be foisted on other countries. Nixon was a fine exemplar of this attitude, both orchestrating the violent Chilean coup that installed the neoliberal cabal of so-called “Chicago boys” (on the “other 9/11” – September 11, 1973) and famously claiming at home that “we are all Keynesians now” – echoing Milton Friedman, of all people (Klein, 2007, pp. 104, 133). Ultimately, the lessons of Keynesianism fell by the wayside as previous depressions and asset bubbles were re-characterized as consequences of insufficient adherence to market fundamentalism (Quiggin, 2010, p. 60).

These facts are illustrated within the WTO, which dictates the terms of international trade favoring rich countries (Stiglitz, 2006, pp. 94-107). Agricultural subsidies in rich countries, which lower the prices that farmers in the Third World receive for their goods, exceed all of the foreign aid to the Third World combined.  The Agreement on Trade Related Aspects of International Property Rights (TRIPS) was orchestrated in 1994 to stem the loss of comparative advantage and increase profit drain from poor countries. TRIPS effectively extends American patent laws worldwide (Delgado 2002, pp. 297-298). Under TRIPS “the advanced industrial countries could at last use trade sanctions to legally enforce intellectual property rights” (Stiglitz, 2006, p. 117). Now, fines can be leveled on countries or corporations that violate TRIPS rules. TRIPS are but one example of how corporations can use the WTO’s nearly global legal regime to compel countries to nullify laws that decrease profits.

Neoliberal theory has a profound sway over contemporary journalists and scholars. One popular pundit in this vein is Pulitzer Prize-winning propagandist Thomas Friedman, who argues that the rich countries became so through embracing a form of state capitalism involving austere property laws, governmental restriction of labor flows, opening of markets to foreign competition and cuts in social services (i.e., neoliberalism) (2000, p. 102). For the richest perhaps ten percent of people in the world, on whom Friedman bases his book, undoubtedly globalization can feel this way. But for the vast majority, globalization is primarily a process of economic and military subservience to power, tracing the confines already outlined. Mainstream leftist scholarly literature is similar. In his celebrated work The Bottom Billion (2005), Oxford economist Paul Collier calls for expansion of foreign aid (p. 100) and neoliberal-style markets (p. 88), while dismissing the possibly relevant facts that “aid indeed makes a coup more likely” (p. 105) and “the exodus of capital from the bottom billion [people in the poorest countries] was only phase one of the global integration of the bottom billion. Phase two will be an exodus of educated people” (p. 94). He claims that practitioners of development should resist the temptation to focus on “photogenic social priorities – health and education” (p. 108) in favor of infrastructure projects like roads and ports and, if citizens resist, should utilize “military intervention” (p. 124).

If we reject these vulgarizations, we see that “almost all recent cases of collapses into anarchy were preceded by heavy World Bank and IMF involvement” (Easterly, 2006, p. 67) and every developed country became so through state protection of industry (Chang, 2007, pp. 15-16; Peet & Harwick, 2009, pp. 50-51) with the critical support of colonial violence (Chomsky, 1999, pp. 7-11). The brutal consequences of these policies for poor people have been recorded in detail (Chomsky, 2003; Birdsall & Subramanian, 2004; Chang & Grabel, 2004; Porrit, 2005; Easterly, 2006; Rodrik, 2006; Stiglitz, 2006; Chang, 2007; Klein, 2007; Lines, 2008) and are currently being faced by the Iraqi people.
Neoliberalism is a doctrine to foist on other countries, while American policymakers prefer to stick to a more Keynesian model at home. The underlying economic, military, and diplomatic factors driving the shift to neoliberalism from the Keynesianism characteristic of the Bretton Woods system will be reviewed in the following sections. We will see the tensions between neoliberalism abroad, Keynesianism at home and neocolonial violence in later discussion of the Iraq War.


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