The crisis of neoliberalism and the end of illusions in Keynesianism and the “Modern Monetary Theory”

Andrοs Payiatsos



Neoliberalism has been the dominant economic policy on the planet for over three decades. Some of its key characteristics were the opening up of markets and the free mobility of capital, attacks on state intervention for social needs, massive privatisations, dismantling of the welfare state, dismantling of labour rights, increasing poverty and inequality within each country and between rich and poor countries. 

The international financial crisis of 2008-9 showed that the neoliberal model could in no way help the capitalist system avoid the crisis – on the contrary, it contributed to making it more acute. 

In order to limit the impact and depth of the recession/crisis, capitalist governments were forced to take certain Keynesian measures by injecting money into the economies through state budgets, while lowering interest rates (making money cheaper) to encourage consumption and investment. This opened up a debate on the part of centre-left economists, especially in the US, about the need to return to Keynesianism – that is, to return to an era of increased state intervention and public spending (within the framework of private sector and “market forces” dominance) in order to limit to some extent, the more aggressive anti-social features of the system and social inequality. 

The sudden and deep recession of 2020, triggered by the pandemic lockdowns, made the debate on the “need to return” to Keynesianism more intense. 

To deal with the consequences of the crisis, governments were forced during 2020 and 2021 to spend, again, huge amounts of money (creating new deficits in state budgets and new public debts) at the same time as lowering interest rates even more. Otherwise, they risked the collapse of entire sectors and economies, with the corresponding social consequences. 

2022, however, puts an end to these discussions. The policies of the previous period led, by 2021, to the re-emergence of inflation on a global scale and, particularly in the developed industrialised countries to stagflation (stagnant economy with simultaneous price increases). The war in Ukraine further exacerbated these processes. 

Under conditions of inflation there can be no serious discussion of a return to Keynesian models/variants of previous historical times. On the contrary: if Keynesianism had indeed prevailed, the process of dismantling it would have begun. 

Let us look at these processes in some detail and greater depth.  

Background of the crisis

The mortgage crisis of 2007 in the US, which subsequently turned into a banking crisis, was followed by the international financial crisis of 2008-9. It was the deepest crisis since 1929. The decade that followed was characterised by very low growth for most of its part, especially in Europe. 

To cope with the 2008-9 recession and the low growth rates of the whole decade, the capitalist world, especially the rich “developed” industrialised countries, increased public deficits and debts to unprecedented levels in times of peace. Thus, they were able to partially cushion the crisis. 

But the high deficits and debts that were created were in fact setting the stage for the next major international recession/crisis; on the one hand they destabilized the foundations of the capitalist system; and on the other they exhausted the economic tools (fiscal and monetary policies) available to capitalists to deal with economic crises.

The new recession broke out in 2020, triggered by the coronavirus pandemic. 

The fact that the recession was triggered by the covid pandemic obscured the endogenous causes that led to it, which had to do with the inherent contradictions in the functioning of the capitalist system itself. For the initial period the pandemic clouded the consciousness and caused confusion in the better understanding of the processes in action by the working class, which saw the coronavirus rather than the capitalist system itself as the cause of this crisis. 

The pandemic led to the lockdowns. In order to avoid a massive economic catastrophe (which would have no historical precedent) the governments, especially of the rich countries, again injected huge amounts of liquidity into the economies. They drove interest rates even lower, to zero or even negative territory, and public deficits and public debts to new, higher, levels. 

As a result, US public debt exceeded 130% of GDP. In the EU, the average debt-to-GDP ratio was 88% at the end of 2021. Although the EU’s founding Maastricht Treaty provides for a maximum of 60%, many countries are well above the 100% of GDP level, as the table below shows.  

The US public debt is the most important indicator of this process, because of the weight of the US economy. From about 60% of GDP before the 2007 crisis, it exceeded 130% after the 2020 recession.   

On a global level, according to the International Monetary Fund,

“Global debt [public and private] rose by 28 percentage points, to 256 percent of GDP, in 2020 [i.e., in the course of one year] … The global public debt ratio jumped to a record 99 percent of global GDP.”

Crisis of the neoliberal model…

The crisis of 2007-9 and the 2010s as a whole, showed that the neoliberal model was in crisis – it had no way of delivering either growth or stability for the capitalist system. 

The ruling classes were forced, as mentioned above, to resort to increasing public spending, deficits and debts – i.e., policies with Keynesian characteristics. But the main pillars of the neoliberal model remained. Open markets, labour market deregulation, attacking living standards and rights, massive privatisations, export-oriented economies, the goal of returning to zero deficits and reducing debt, etc., were the dominant elements. The deviations from the established neoliberal model were temporary, exceptional measures; we had not entered a new era of dominance of Keynesian policies. 

At the same time, there was a decline in the growth rates of international trade and investment, which opened up a debate about the end of neoliberalism and the reversal of globalisation. But such views were –and are– superficial; neither neoliberal policies nor globalisation are to be abandoned as the main trends and basic features of the capitalist system in the current era. 

… and a shift to Keynesian illusions

As mentioned above, in conditions of crisis, a large part of the centre-left economists turned to the ideas of Keynesianism, believing that they could provide the answer to the crisis. 

The essence of Keynesianism is state intervention in the economy through increased government spending in order to boost public investment, public consumption and aggregate demand (which refers to the purchasing power of the general population) in the economy. 

Keynesianism was first tested in the US in the 1930s and then –internationally, as the dominant model– in the first decades after World War II. While in the first phase of its implementation, Keynesianism gave a boost to economies, it eventually led to a situation where they became “dependent” on constant injections of public money, resulting in an out-of-control increase in public deficits and public debt. One of the effects was the emergence of inflation. 

The rise of inflation was combined with the recession/crisis of 1973-4, which marked a turning point in post-war capitalism. It was a time of high inflation and simultaneous stagnation/recession in the economy. This was the phenomenon of stagflation, one of the key economic features of the 1970s. 

The contradictions/crisis of capitalism in the 1970s signaled the end of Keynesianism and gave way to the era of neoliberalism: i.e. policies of low and then zero public deficits, strict control of public debt (the Maastricht Treaty, which served as the basis on which the  EU was built reflected this), constant attacks on workers’ incomes and rights in order to increase profits and strengthen competitiveness on the international market, attacks on the public sector, privatisation of “everything” that was in public ownership – even of the most essential social goods such as water, education and health. 

After the 2008-9 crisis, centre-left economists internationally, based mainly in the US and the left wing of the Democratic Party, rightly denounced neoliberalism as a reactionary economic model leading to huge inequalities, anti-working-class policies and economic crises. They rightly explained that the constant reduction of income and wealth available to the working and popular classes would eventually undermine the stability of the capitalist system. In all this they were right. But unable to reach revolutionary anti-capitalist conclusions and limiting their critique to neoliberalism, they turned to Keynesianism (or “neo-Keynesianism”, as they made some adjustments to the classic ideas of John Maynard Keynes of the 1930s).

The Modern Monetary Theory (MMT) 

One problem that neo-Keynesian economists had to deal with, however, was that the crises of 2007-9 and 2020 had already pushed deficits and debts to extremely high levels. How could the government fund new spending when it was already in debt, with debts and deficits already out of control? 

This gave rise to the Modern Monetary Theory (MMT).

According to it, public debt and budget deficits were not a big problem, because they could be covered by new loans that would pay off the previous ones, thus perpetuating a situation of high debt that is being “recycled”. A precondition for this, according to the MMT, was that interest rates remained low, close to 0% as they were until 2021 (after 11 years of continuous reductions). Given zero (or even negative) interest rates, a country like the US could constantly issue new money which would be injected into the economy as government debt. The total government debt could thus keep going up, but there would be no problem because as interest rates would be at around zero the debt could simply be perpetually recycled.

The re-emergence of inflation and stagflation

The re-emergence of inflation during 2021, after more than four decades, and its further rise during 2022, has overturned all the optimism of the neo-Keynesians and MMT proponents. It showed that neo-Keynesian economists’ narrative had no realistic basis in the real economy. 

High inflation is a destabilising factor for the profits of big capital as well as for the cohesion, socially and politically, of capitalism. It is a symptom of the instability of the system, but once it occurs, it acts as a cause of further instability. 

In an article in the US Wall Street Journal, on June 17, 2022, the author describes what the stagflationary era of the 1970s meant for capitalists:  

“…what U.S. investors should probably fear the most is a replay of the stagflationary slog from 1966 to 1982, when economic growth was spotty, inflation stayed in double digits for years and stocks went utterly nowhere. 

“On Feb. 9, 1966, the S&P 500 closed at a then-record 94.06. More than 16 years later, on Aug. 12, 1982, it stood at 102.42.

“Corporate earnings, after inflation, shrank 15%, according to data from Yale University economist Robert Shiller. 

“Yes, stocks paid generous dividends, reaching nearly 6% by the end of the period, but inflation devoured them whole…”.

In other words, the stagflationary era of the 1970s was a time of depressed profits. It was, at the same time, a time of great social instability and of an upsurge in the class struggle. With inflation hovering around 10-20% in most industrialised countries (in the neo-colonial countries the rates were much higher), workers were forced to constantly fight for wage increases so that inflation would not eat away at their incomes. 

Capitalist governments constantly sought to keep wage and benefit increases below inflation, so as to reduce “aggregate demand” in order to gradually reduce inflation (actually blaming the working class’s incomes for the rising prices). Eventually they went on the offensive, led by Thatcher in Britain and Reagan in the US: they plunged the economies into recession, attacked labour income and its share in the gross domestic product, pushed unemployment to record levels and dismantled the welfare state. This was the beginning of the neoliberal era which became dominant by the end of the 1980s and particularly so in the 1990s after the collapse of the Soviet Union. 

The end of the neo-Keynesian illusions 

Inflation is currently at its highest level in over 40 years for the US and the EU, hovering at 10%. Capitalists and their governments cannot let the “monster” get out of control (it already partially is); they are forced to take action. This means: 

  • They have to stop the policy of “cheap money”. Interest rates from 0% are estimated to reach 3-3.5% by the end of the year in the US. In the EU they will move in the same direction with some time lag. 
  • They will cut government/public spending even further and go for even more privatisations to reduce the deficits and debt that fuel inflation. 
  • They will attack labor income – accepting nominal wage increases below inflation, which equals a drop in real incomes.
  • These policies are, in addition, linked to the fact that capitalists are forced to make their economies more competitive on the international market. The recession, crisis and stagflation, intensify capitalist competition on the global level. Capitalist economies will continue as a rule to remain “export-oriented” and “export-dependent” (despite the “bipolarism” that is developing, particularly since the war in Ukraine) since the capitalist system has largely exhausted its limits in the national markets. 

To sum up, after the implementation of some Keynesian measures in the 2008-9 crisis and then in the Covid pandemic phase (such as state benefits to the unemployed and to businesses to avoid bankruptcies during the lockdowns) that pushed deficits and debts to new heights, there comes, necessarily for the capitalist system, a return to new waves of austerity and neoliberalism in order to tame inflation. 

This new turn to neoliberal measures will push many economies into recession, but this is the lesser evil for capitalism at this juncture. Because if it lets inflation run rampant to avoid the risk of an immediate recession, the “landing” will come later and will be steeper and harder. 

During the 1980s, the shift to neoliberalism had the character of the shock doctrine – it was too abrupt and too painful for economies and societies. In the current era, during the past years, neoliberalism has actually never been abandoned. Within the general framework of the neoliberal model, some Keynesian measures were taken to alleviate the consequences of the crisis. Today these Keynesian measures, or rather, half-measures, because we have never entered an era of Keynesianism, are gradually being abandoned. 

Deep organic crisis of the system

From the point of view of the economic policies that could be applied, the capitalist system is actually facing a blind alley. Neither can neoliberalism boost (temporarily) the world economy, as it did in the period after the 1980s, nor can Keynesianism, as it did in the post-war decades. 

This is reflected even in the forecasts of the International Monetary Fund (IMF) and the World Bank (WB), which estimate that the 2020s will be the decade with the lowest growth rates since World War II. This estimate by the IMF and the WB is not actually related to the war in Ukraine, it was published before the war. 

At the same time, the centre of gravity of global capitalism is shifting from the West to the East, from the US and the EU to China and the rest of Asia. The competition between US and China for world dominance is a process that will take decades and will mean enormous tensions and instability at both the economic and geopolitical levels. 

In other words, the crisis of the system is very deep and generalized. This however does not mean that the system will collapse on its own and an alternative economic and social model be born in its place. This will never happen. Capitalists may go as far as destroying life and civilization on the planet (as is shown by their criminal policies in relation to the environment) but they will not willingly give away their power, interests and profits. 

The creation of new mass left formations determined to fight for the overthrow of capitalism and the building of an alternative society based on equality, the abolition of exploitation, on democracy and freedom is the only way forward; and it is the most important and –albeit admittedly difficult task– that we are faced with today.

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