Sozialalmanach - Caritas Luxembourg

economies. The key goal of neo-liberalism was to free up markets, institutions, rules and
regulations, which under the post-war settlement of embedded liberalism were reserved
for collective political decision-making. With due caution, it would therefore seem justified
to characterise neo-liberalism as a broadly based process of ‘institutional liberalisation’
of the fairly organised forms of capitalism that emerged out of the era of embedded
liberalism. If the era of embedded liberalism was a time of institution building, then the
era of neo-liberalism is best understood as a time of institutional disembedding. Important
qualifications notwithstanding, the neo-liberal transformation in the 1980s and 1990s
made modern capitalism more market-driven and market-accommodationist, releasing
ever more economic transactions from public-political control, and turning them over to
private actors and contracts. Throughout the advanced world, price stability rather than
full employment became the principle objective of macroeconomic policy.
If Keynesian economics was the intellectual product of the 1930s, the 1970s crisis
of stagflation brought Keynesian paradigmatic hegemony 10 to an end. In its wake anti-
Keynesian monetarism gained respectability by being better able to explain the predicament
of stagflation as the result of stop-and-go fiscal demand stimulus measures by governments
and, following the ‘new classical’ macroeconomics of rational expectations, wage hikes
adapted to inflationary expectation. In rational expectation models of macroeconomics,
it is the combination of exogenous shocks and slow transmission that creates cyclical
movements in the economy. In this vein, Blanchard and Summers 11 suggested a reason why
wages did not fall when unemployment was high in Europe in the 1980s. They argued that
‘hysteresis’ in wage setting can prevent the real wage from falling enough to restore full
employment, if wages are set to preserve the jobs of those people already employed, rather
than to move others out of unemployment. In these mainstream models there is no place
for endogenously generated business cycles. Likewise, the preoccupation of business-cycle
macroeconomists had been to prevent inflation by keeping interest rates up, just below the
level that would risk precipitating a recession. Modern macroeconomics, especially within
central banks, became excessively fixated on taming inflation and much too benign about
housing price and asset bubbles.
As the global economy started to pick up in the second half of the 1980s, European
economies were behind the curve compared to the stronger rebound in countries like the
US and Japan. The European Commission, under Jacques Delors, rose to the occasion by
introducing the concept of the Single Market, promoting privatisation and deregulation
in an attempt to open up national markets. The Single European Market Act of 1986 was
10 Hall (1989).
11 Blanchard & Summers (1987).
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