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Neoliberalism is dead, killed by the GFC. A new, fairer era has begun.

As Australia swings dramatically away from trickle-down economics, the rich are getting a smaller slice of the pie. Those in the middle are doing better – but not, yet, those right at the bottom.

Three big events in the past hundred years provided the tipping-points which moved Australia and the world into new economic eras.

Those big events were the Great Depression in the 1930s, the oil shocks and stagflation of the 1970s, and – 15 years ago – the Global Financial Crisis. The history of the earlier eras is well known. Only now, though, is there enough evidence to show another monumental shift is not only imminent but has already occurred.

We are living in a different world.


For the first three-quarters of the last century, Australia became an economically fairer place. When the century began, the richest 1% were pocketing 15% of the nation’s income. That all changed when the Great Depression of the 1930s terminally discredited the old economic model.

Throughout the capitalist world, the ideas of Maynard Keynes triumphed. In the United States, Franklin Roosevelt’s New Deal changed that nation and the world. In Britain, the Attlee Labour government introduced the welfare state and the National Health Service.

And in Australia, the Labor governments of Curtin and Chifley staged a social and economic revolution. The federal government, for the first time, took the lead in ensuring the social well-being of all Australians.

Evatt, Chifley, Attlee
In 1946, Ben Chifley and his Attorney-General, “Doc” Evatt, steered through perhaps the most significant of all constitutional referenda. It was the legislative key to a practical application both of Keynes’s economic ideas of an expanded role for government, and of Labor’s principles of social justice.

That amendment gave the Commonwealth powers it had never had:

The provision of maternity allowances, widows’ pensions, child endowment, unemployment, pharmaceutical, sickness and hospital benefits, medical and dental services (but not so as to authorize any form of civil conscription), benefits to students and family allowances.

That era of increased prosperity and improved equality lasted until the 1970s. Then the neoliberal, small-government era began – and the whole process went into reverse.

This chart tells the story. After the 1930s the top 10% saw their share of income fall from 40% to 25%. And the share going to the bottom 50% rose sharply and stayed there.


Recessions were a feature of the neoliberal era. We had three of them in three decades. The 1990s downturn illustrates clearly how recessions are always bad for employees, leading to massive unemployment and pressure on wage claims. But they’re good for corporations and investors: costs (such as wages) fall and opportunities open up for buying lower-priced assets. Some companies go out of business, which reduces competition.

The share of income going to people who were already wealthy rose steadily from the 1970s until, by 2007, it had reached levels not seen for a hundred years. But then – unexpectedly – it began to fall. And it kept on falling.

The crunch-point was the Global Financial Crisis of 2008-2011. The big ideas of neoliberalism – small government, high unemployment, low taxation – lost their credibility. A new economic paradigm had begun.


At the core of the neoliberal approach was the determination to funnel an increased share of income to the owners of capital – corporations and investors – and away from wage-earners and (particularly) people on welfare.

The idea was that the rich would invest that extra cash in productive enterprises, boosting the economy for everyone. Academics call it supply-side economics. The rest of us know it as trickle-down economics.

Rogers ... money trickles up

The problem was, of course, that it didn’t work any better than it did before the Great Depression. In 1932 the American satirist Will Rogers put it this way:

“Mr. Hoover [the Republican president] was an engineer. He knew that water trickles down. Put it uphill and let it go and it will reach the driest little spot. But he didn’t know that money trickled up. Give it to the people at the bottom, and the people at the top will have it before night anyhow. But it will at least have passed through the poor fellow’s hands.”

Under this model, labour costs had to be kept low so the rich could get richer. To do that, the bargaining power of employees had to be weakened. That meant suppression of union power through new labour laws promoting “flexibility,” insecure employment, casualisation and self-employed contractors. There also had to be a persistently high level of unemployment: a large pool of unemployed people desperate for work who would accept lower wages and worse conditions because they had to.

The GFC, like the Depression, turned all that upside down. The current fall in  unemployment dates from the end of the financial crisis. The pandemic, apart from producing a spike during the lockdowns, had little or nothing to do with it.

The same trend is reflected in the amount being paid to workers: the Australian Bureau of Statistics calls it “compensation of employees”. Adjusted for inflation and population growth, it shows how the situation turned around from about 2015.

And it shows up in the number of hours worked.

But this increase in the share of national income hasn’t moved the line for the bottom 50%. Why?

Here’s why. It’s because the distribution of income between various kinds of wage earners has been changing for many decades. The share going to the top 10% of employees has risen strongly and consistently – and the share going to the bottom 10% has fallen, equally strongly and equally consistently.

So far, the benefit has gone to the people in the middle – employed people in secure, well-paying and highly-skilled jobs. Those with insecure employment, with lower skill levels, in occupations where there are more people looking for work than there are vacancies for them, and those on welfare, have missed out.

And until there are major changes to industrial law and to the welfare system, the poorest will continue to miss out on a fundamental and generally beneficial change to the way the economy works.

The following chart illustrates part of the problem. Theory suggests that wages should rise at the rate of inflation, plus an allowance for increased labour productivity. But average wages have consistently fallen behind inflation, and there has been no visible allowance for productivity at all.

Again, while some employees have had more appropriate wage increases, many more have had their real wages cut. Fixing this will require governments to ensure the general transition away from neoliberalism includes workplace relations. Right now, we’re still back with Reagan and Thatcher.

And wages will continue to lag unless female workers get a better deal. The increase in women’s share of national income has largely been because, over many years, more women have sought employment. That trend tends to mask the actual difference between the earning capacity of men and women.

To see that, we must look at the gender wage gap. That’s the difference between average male and average female wages.

As the following chart shows, Australia once had a leading position. But apart from a major improvement in the late 1980s and early 1990s, the trend has flatlined. Other countries have eroded the advantage Australia once had.


John Maynard Keynes is best known for his work on using fiscal policy to control economic peaks and downturns. Governments could remedy recessions by spending to stimulate demand; overheating could be controlled by taking money out of the economy by cutting government budgets or increasing taxes.

That idea, rejected for decades by neoliberal economists, was thoroughly vindicated by Australia’s response to the GFC. Other countries went into recession but the Australian Labor government of Kevin Rudd and Wayne Swan injected major government stimulus into the national economy. In many other nations, such as the US, stimulus was either absent or too weak to avoid a recession.

Recessions are nasty things. A characteristic long tail of unemployment continues for years after the economy has apparently recovered. In Australia, it took ten years for employment to recover after the 1990s recession. And many people who lost their jobs, particularly men over 50, never worked again.

Avoiding that recession was a key reason why Australia is now able to embark on a new phase of declining inequality. A study from the US National Bureau of Economic Research found this:

The loss in potential output from the Great Recession varies greatly across countries, but is large in most cases. Based on current forecasts for 2015, the loss ranges from almost nothing in Switzerland and Australia to over 30% of potential output in Greece, Hungary, and Ireland. The average loss for the 23 countries, weighted by the sizes of their economies, is 8.4%.

A key feature of the neoliberal era was the paradoxical insistence that a high rate of unemployment was essential to control inflation. If too many people had jobs, wages would rise and the economy would overheat. Because controlling inflation – rather than unemployment – was the singular fixation of the Reserve Bank and Treasury, many hundreds of thousands of people were unemployed. A pity, said the well-paid econocrats, but we really have no choice.

This policy spawned a whole new concept in economics: the Non-Accelerating Inflation Rate of Unemployment, or the NAIRU. This theory asserted that there was a firm figure for the unemployment rate, and if that was exceeded, inflation would inevitably ensue.

But that firm figure kept changing. And as time went on, it became increasingly obvious (though not to the Reserve Bank) that the NAIRU was a fatally flawed concept. Did it even exist?

A study by the Australia Institute explained:

Numerical estimates of the NAIRU have been wildly inconsistent over time. This is partly because of a process called “hysteresis”: whereby the existence of even temporary or cyclical unemployment can create long-term barriers to employment that seem to inhibit subsequent job-creation. If policy-makers believe in an elevated NAIRU, and act to ensure that unemployment stays at or above that level, then it becomes a self-fulfilling prophecy – and economic performance is undermined for decades.

The NAIRU concept arose from a 1958 research paper by a New Zealand economist (who paradoxically was a strong Keynesian), A.W. (Bill) Phillips. He invented the “Phillips curve”, showing that at very low rates of unemployment, wages tended to grow rapidly.

Phillips (pictured) did not intend that his theory should be used in a rigorous, mechanical way. “If I had known what they were going to do with the graph,” he later lamented, “I would never have drawn it.”

There are two obvious problems with the whole NAIRU concept. Until the 1970s, unemployment was around 2%. And between 1955 and 1970, average annual inflation was just 2.5% – right in the middle of the Reserve Bank’s current target range.

And since the GFC, unemployment (with a bump during the brief pandemic recession) consistently fell. So did inflation. Between the end of the GFC and the beginning of the pandemic, inflation averaged just 1.76%. There was no clear relationship between the two.

(The burst of high inflation since the pandemic had nothing to do with employment and everything to do with the misdirected stimulus efforts of the Morrison government and the Reserve Bank, which pumped too much money into the wrong parts of the economy.)


The GFC was not supposed to happen. According to some of the best minds in the economics profession, the boom-bust business cycle had been tamed. This feat was, we were told, the final triumph of the free-market, small-government policies that had been in vogue since the collapse of Keynesianism in the 1970s. It got a name: the Great Moderation.

But the GFC did happen. As that crisis unfolded, a shocked Alan Greenspan, the former longtime chairman of the US Federal Reserve, admitted: “The whole intellectual edifice … collapsed in the summer of last year.”

Fisher ... wrong!
The business cycle had been declared to have been tamed before. Almost a century earlier, one of the most prominent American economists, Irving Fisher, proclaimed: “Stock prices have reached what looks like a permanently high plateau … I expect to see the stock market a good deal higher within a few months.”

That was in October 1929. A few days later, global share markets collapsed. Irving lost almost all his own money.

The GFC ended an age of hubris and unjustified uncertainty. Gone were the fundamental elements of the neoliberal age.

Privatisation was supposed to make almost everything more efficient because private enterprise was always more resourceful, more agile and cleverer than those cardigan-wearing public servants. The reality is perhaps best illustrated by the fate of Britain’s water and sewerage system, privatised by Margaret Thatcher. Profits have consistently been funnelled to shareholders and executives and away from essential maintenance. Now, you can’t swim in many English rivers and beaches because raw sewage is leaking into them. Everywhere, privatisation has become political poison.

High unemployment, as we have seen, is no longer a prerequisite for low inflation. It probably never was.

Trickle-down economics. Dead.

Expansionary austerity is the idea that slashing government expenditure and taxes – particularly during a downturn – allows “room” for the private sector to expand and save us all. If you think “expansionary” and “austerity” are contradictions in terms, you’re right. Almost everyone now agrees. Almost.


At the heart of all this change is the role of government. The core idea of the neoliberal era was that the role of government should be reduced to its bare minimum. Regulation was minimised or abandoned, government enterprises sold off and welfare cut to the bone or beyond. But the further an economy got to pure free-market capitalism, the more unequal that society became. It also became far less efficient.

High unemployment reduces the amount of money people have to spend, and so reduces demand. In turn, production – the supply side – cuts back or fails to expand, fuelling further unemployment. Less tax is paid and there’s more pressure on welfare. And so on.

And can we seriously regard an economy – a society – as efficient if so many of its people live in deprivation, shut out of education, healthcare and hope?

There’s a very old idea in philosophy, summed up in three words: thesis, antithesis, synthesis. It describes how change happens: an original idea (thesis) is challenged by its opposite (antithesis). They finally cohere into an entirely new idea, the synthesis, combining elements of both.

Pure capitalism didn’t work in the era of 19th century laissez-faire and doesn’t work now. But neither does its opposite, socialism – the public ownership of the means of production, distribution and exchange. By the 1950s, the western world had largely settled on the synthesis of these two opposites. That was the era of the mixed economy, in which the public and private sectors do what each does best.

Neoliberalism met the challenges of the 1970s not by evolving the post-war Keynesian system into something newer and better but by reverting to the approach that had fallen apart in the 1930s. The cost in economic output and social distress has been enormous and avoidable.

Now, at last, we can try again; but it won’t happen evenly. Countries which have governments and systems of governance that allow these changes to happen will prosper. Australia is in this category. Others, most notably the United States, probably are not.

As a nation, we have a remarkable opportunity to create a better country and to show others how to create a better world.

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