Text Noam Chomsky spoke Sept. 22 to a crowd of about 3,400 at the Jack Simpson Gymnasium on the University of Calgary campus.
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Well again there's more to say, but let's proceed to the third point: the international economic order - the Bretton Woods system, as it's called, and its institutions. That's all over the front pages now with the fears of a global meltdown that might affect privileged folk like us, as well as just the usual victims, so therefore it's news. Well, the Bretton Woods system had two basic principles: set up institutions like the World Bank and the IMF, which are called the Bretton Wood institutions - but it had two basic principles which one has to keep in mind, they're important. One principle was to liberalize trade; a goal was to liberalize trade, more free trade. The second principle had to do with capital flow and it was the opposite. The goal was to regulate capital flow and control it, keep fixed exchange rates, keep capital controls and so on. That was agreed by both the U.S. and the British negotiators - the U.S. main negotiator was Harry Dexter White, the British, John Maynard Keynes - and it expressed a very common conception at the time, which has a lot of plausibility. It's built into the rules of the IMF. There is now an effort, the U.S. is leading an effort, to try to change those rules, but up until now they have been breached many times. The rules of the IMF still authorize countries to regulate capital flow and they prohibit the IMF from giving credits to cover capital flight. Many of you who follow these affairs all know how well that one's been observed, but anyhow it is a rule.
There was thinking behind this, there were reasons. The reasons were in part theory, what some international economists call an incompatibility thesis, which in fact remains the guiding principle of UNCTAD, the main UN Conference on Trade and Development. The theory is that capital flight, so short-term speculative flows which lead to exchange rate fluctuations and so on, that they are going to undermine trade and investment, so they are inconsistent with one another. You can't liberalize both; and recent experience is, I think, consistent with that assumption. The second reason was not a theory, it was a truism. The truism is that free flow of capital definitely undermines democracy in the welfare state, which was at that time far too popular to ignore (it's the mid-20th century). The basic point (I'm essentially paraphrasing White and Keynes here) is that capital controls allow governments to carry out monetary and tax policies to sustain unemployment incomes, social programs, maintain public goods, without fear of capital flight, which will punish this irrational behavior (irrational in that it's only for the benefit of people, not for the benefit of investors and speculators, and it will be punished by capital flight for obvious reasons). That's the essential point - free flow of capital quickly creates what some international economists call a virtual senate of financial capital which will impose its own social policies by the threat of capital flight, which leads to higher interest rates, economic slowdown, budget cuts for health and education, recession, maybe collapse. It's a powerful weapon.
All of that was articulated quite explicitly in essentially in the words I've repeated at the time by the U.S.-U.K. negotiators, and it's not particularly controversial. (In fact not controversial at all, then or now. If you think it through it's kind of obvious, as it was to them.) And all of that is quite important to keep in mind in looking at the current period because there's a challenge to that in the last 25 years and we see the consequences. (And it's now being re-evaluated because the consequences are even hitting the rich people and that's where we are now.) Well, the Bretton Woods system as formulated, that is efforts to liberalize trade and regulate capital, that was in place Ö to a substantial degree through the first half of this period, the first quarter century after it was established. That's what's sometimes called the golden age of post-war state capitalism - high rates of growth of the economy, of productivity, expansion of the social contract right through the '50s and '60s. The system was dismantled from the early 1970s. Richard Nixon unilaterally abrogated its basic principles; other major financial centres joined in. By the 1980s capital controls were mostly gone in the rich countries and the smaller economies like South Korea were simply compelled to drop them. That, incidentally, is widely regarded now as a major factor in its recent collapse, alongside of quite extreme market failures in the private sector throughout East and Southeast Asia and of also the west, which was involved in crazed lending.
I should add at this point that, in the light of the recent economic crisis in East Asia, the more serious analysts recognize and insist that the East Asian economic miracle was quite real. (I'm distinguishing East Asia from Southeast Asia here - they're quite different.) So one of the most important and influential, and I think intelligent, Joseph Stieglitz, who is now the chief economist of the World Bank (he was formerly head of council of economic advisors here, and it plays a very important role) he emphasizes in recent World Bank publications and elsewhere that this is post-crisis - that the East Asian economic miracle was not only real but it was in his words an amazing achievement historically without precedent and, furthermore, he points out, based on very significant departures from the official doctrines of the so-called Washington consensus and that it should last, it should thrive, in fact, unless it is destroyed by irrational markets as it could be. Stieglitz points out - remember this is the chief economist of the World Bank I'm
talking about in a World Bank publication - that in East Asia the basis for the amazing achievements and the miracle, which has no precedent, is that governments took major responsibility for the promotion of economic growth, abandoning the religion that markets know best, and intervening to enhance technology transfer, relative equality, education, health, along with (he doesn't stress this but he should have) industrial planning and coordination, and in fact strict capital controls until they were forced to relinquish them in the last few years. Stieglitz also mentions, though he doesn't go into it, that the rich countries, every one of them - from England on through the United States up to the
present, every single one of them had followed a somewhat similar path, actually far more so than the World Bank has yet acknowledged. Another big topic I can't go into, but an interesting one and again worth keeping in mind.
Well what has happened since the Bretton Woods system essentially collapsed in the early 1970s? It did end the golden age of post-war state capitalism. Just focusing on the rich countries, primarily the United states and Britain, although it happens to others in various degrees in an integrated economy, over the rich countries as a whole, the growth of the economy and the growth of productivity have slowed very markedly. Actually, contrary to what you read, trade also slowed, if you look closely, in the United States specifically and England. Incomes stagnated or declined throughout this period for the great majority of the population; working conditions deteriorated, social services have been significantly cut, infrastructure is in serious danger with very little required public spending, the welfare state has significantly eroded.
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There has also been a closely correlated, dramatic increase in incarceration. It's closely correlated because a large part of the society is just becoming superfluous for wealth formation. In an uncivilized society you send out the death squads to kill them; in a civilized society you throw them in jail. Since 1980, when this system really took shape, when it was in place, at that time incarceration rates in the United States were roughly like that of other industrial countries, kind of at the high end but not off the scale, and so crime rates in the United States are not unusually high, contrary to what you read. Again they're sort of toward the high end but not unusual, with one exception: namely, killing with guns. But that's a separate matter that has to do with laws, cultural patterns and so on, it doesn't have anything to do with crime. And that remains the case. In fact, crime rates have declined since 1980, but the incarceration has gone way up. I think it's a direct reflection of the inequality and the need for social control. It tripled in the 1980s and it's been rising very fast through the 1990s; it's now five to 10 times as high as other industrial societies. In fact the U.S. is world champion in imprisoning its population, at least among countries where there is any minimally reliable statistics. If you take the prison population into account, that adds another two per cent to the unemployment rate, which places the U.S. squarely in the middle of the European level. Actually, even without that it's not at the bottom, believe it or not, it's about 30 per cent. Of course, you have to decide what you're talking about; if you count in
prison labor, which is not trivial, and very good for folks like Boeing Aircraft and AT & T and others (a terrific work force), if you count them in, then of course the unemployment figures change again. Anyhow these two parallel developments have been going on and I think have integrated.
Throughout the same period profits have soared, particularly in the 1990s. The current jitters on Wall Street have to do with the concern that there may be an end to what for the last couple of years the business press has been calling this stupendous and dazzling and extraordinary growth of profits. They've run out of adjectives and they may now be worried that the facts are ending too. There has been an astronomical increase in capital flows, a huge increase, mostly very short term. About 80 per cent now is estimated to have a round trip -- it goes out and back, in a period of a week or less, often hours or even minutes. That means it's virtually unrelated to the real economy, to trade and investment. In fact, current estimates are that about five per
cent of the roughly trillion and a half-dollar per day capital flow is related to the real economy. The rest is speculative. If you go back to 1970, the figures were essentially reversed. It was about 90 per cent of a much smaller sum was related to the real economy and maybe 10 per cent was speculative. It's also based very heavily on extensive borrowing; it's highly leveraged, in the jargon, and that's a factor that accelerates something which is often also ... oops. whoever owns these microphones is going to have a problem. Ignore them? OK. Happy to ignore microphones all the time.
This high borrowing, this highly leveraged character of investment, which is something new, incidentally (a lot of things are old but this is new), that's accelerating the irrationality of financial markets. They've become much more volatile and unpredictable; there have been wildly fluctuating exchange rates related to speculative flows and there have been increasing financial crises. The IMF recently did a study of the period 1980-1995, a 15-year period, and it found that about 80 per cent of its roughly 180 members had had one or more banking crises, ranging from significant to quite serious. Again, that wouldn't have surprised Keynes and White or any of the framers of Bretton Woods, or the economists' thinking behind them.
In the same period, again in conformity with their thinking, has been an assault, an attack on free markets, a sustained assault on free markets, to quote the head of economic research of the World Trade Organization, in a major technical study. That was led by the Reaganites. They were
talking free markets for the poor but doing something else for the rich. This analyst, Patrick Low, estimates the effect of Reaganite protectionist measures at about three times as high as those of the other industrial countries which were bad enough. Well again, that's what was expected. During the Reagan years, lots of lofty rhetoric but protection was virtually doubled. The public subsidy, which is another violation of free trade principle, was increased, bailouts increased, both for domestic banks and international banks. In the Untied States - it's happened throughout the world but mostly in the United States - In the United states the goal was to somehow overcome very serious management failures that were leading to a decline of U.S. industry and were a matter of great concern at the time. Those of you who read the business press remember a lot of discussion and concern about the need to reindustrialize America. American industry was collapsing, mostly because of management failures. The Pentagon was called in to fill its traditional role to do something about this problem. (That's actually a role that goes back to the early 19th century before there was a pentagon.) The pentagon was called in to develop a program under Carter which was greatly extended under Reagan, to design what was called the factory of the future, based on lean production and automation and other developments in which the American management had fallen way behind and then to hand it over to industry as a gift. The purpose was to save central components of the industrial system from mainly Japanese competition, which was wiping it out, and to place them in a position to dominate the emerging technologies and markets of the next era. The Internet and information technology, generally, are rather dramatic examples of this but not the only one.>
Question: Is this globalized economy really out of control? What about the nature of the institutions? Are they in fact legitimate?
Well, that's a serious matter. You know you can't just issue proclamations. If you say the organization of society and its domination by unaccountable tyrannies, which is what it is, is improper and unjust, and I think it is, you have to consider what the alternatives are and how you move towards the alternatives, if you want to. And those are not trivial matters; they require organized popular movements which think things through, which debate, which act, which experiment, which try alternatives, which develop the seeds of the future in the present society, as Bakunin put it a long time ago. And that's a long-term project.
How do you do that?
Well, the same way you got rid of kings and slavery and lots of other bad things through history. There's no magic formula. What you do depends on what the conditions are, where you are, what can be done. But I think it's possible to have a long-term vision about this, and it's in fact one that draws very much from our own tradition, you know, not any foreign borrowings and all that bad stuff. So if you go back to, say, eastern Massachusetts in the mid-19th century without the dubious benefit of radical intellectuals, working class people were running their own newspapers, I mean artisans in Boston and young women coming off the farms who were working in the textile mills were called factory girls and so on, and they're interesting. They weren't claiming as we do, you know the radicals among us, that corporations have too many rights, they were claiming they don't have any rights. They were not asking them to be more benevolent. They were not asking for the dictators to be more benevolent, they were saying they had no right to be dictators. They were saying that those who work in the mills should own them - simple, and the communities should run them, and so on. It's not an unusual position.