Successive governments in Pakistan, since independence, have been promising to turn the country into a social welfare state. But the socio-economic policies that each of these governments framed and implemented, except one (between 1972 and 1977), have instead turned Pakistan into a captive of the country’s elite.
There was no way Pakistan could have escaped this fate as from the 1980s onward when it entered into the first Afghan war to fight as the so-called front line state of the so-called free world against the occupying Soviet forces Islamabad became frequent recipient of dole from both the IMF (International Monetary Fund) and the US on the condition that it would embrace the Washington Consensus as the very Gospel and base its socio-economic policies on the so-called trickle-down theory.
While one can write any number of books why one cannot build a welfare state by framing one’s socio-economic policies on this whacky theory, Pakistan’s economy in any case never grew any time in its 72 years at more than 6-7 percent on an annual average whereas the authors of the theory had theorized that you need to grow at the rate of at least ten per cent per annum consistently at lease for ten consecutive years for the trickle –down to be enough to help build a modicum of a welfare state. An impossible proposition. More so when you hand over the business of running the government to the private sector, as big government was considered to be bad and private greed was supposed to be good.
But here is how the welfare state was actually created by the rich world: Declaring that every American deserved “freedom from want” and that it was the government’s responsibility to lead the way US President Roosevelt, the author of the New Deal, took the unprecedented step in 1941 of creating new industries and millions of jobs. This spending rescued countless Americans from poverty and ultimately fueled the remarkable post-war economic boom. It was Paul Anthony Samuelson, an American economist, who is said to have promoted the theory of spending and larger government for sustaining the welfare state.
Democracy is said to be the worst form of government—except for all the others that have been tried. Similarly, market economy too is regarded as the worst form of economy— except for all the others that have been tried. The combination of the two that worked in unison in many Western European countries and the US until about the late 1970s had given rise to welfare states.
By the 1980s when Reaganomics of the US and the UK’s Thatcherism inspired by Milton Freidman’s free market economy invaded the democratic world the welfare state was virtually guillotined.
Nicholas Wapshott’s new book, Samuelson Friedman: The Battle Over the Free Market, tells that story—the victory of 1980s free-market libertarianism over the midcentury welfare state—as a battle between two economic titans, Paul Samuelson and Milton Friedman. Samuelson was a Keynesian, best known for his work on the so-called neoclassical synthesis, which advocated a measure of government intervention in the economy. Friedman, by contrast, was a one-time New Dealer who by the 1950s had become perhaps the most pugilistic and passionate libertarian of his day.
Indeed, by the 1980s a new bipartisan consensus had taken hold of the US economy, one that saw small government and low taxes as the key to economic prosperity. An indulgence of rich countries. Pakistan, a poor developing country, was hardly in a position to adopt this theory and still remain economically sovereign.
The turbulent 1960s and 1970s as the US fought the Vietnam War, experienced the sexual revolution, and the civil rights movement upended the United States’ old social, racial, and economic orders — although these changes were often liberating — the accompanying chaos led many middle-class white Americans, including suburban housewives in the Sunbelt and business leaders in the South, to reject Samuelson’s vision of federal government intervention in favor of Friedman’s simple and well-ordered system of free enterprise.
For many white Americans, Friedman’s supposedly politics-free version of economics proved to be the most compelling. The theory’s monetarism—the policy of using the money supply to influence the whole economy instead of relying on complicated legislative decisions around taxing and spending—was similarly elegant and apolitical.
Felicia Wong, President and CEO of the Roosevelt Institute, says in a review essay (Market Prophets — The Path to a New Economics, published in Foreign Affairs of November/December 2021) of Wapshott’s book that today, as in the 1960s and 1970s, the assumptions of a previous era are falling away.
“The small-government, low-tax economy that Friedman and others imagined and brought into being is finally slipping from power. Experts from across the political spectrum are also increasingly admitting that the assumptions that markets are best when they are free and governments are best when they are small have proved false. Laissez-faire system has only produced rising inequality rather than shared prosperity. With these deeply held convictions under assault, leaders have a crucial opportunity to design a more equitable economy.
“In Wapshott’s narrative, the two economists represent almost the entirety of the debate between Keynesianism, a shorthand for active government management of the economy through fiscal policy, and libertarian-inflected monetarism, by which central banks and the money supply take center stage.
“The conventional wisdom holds that the inability of Keynesianism to explain so-called stagflation, a period of paradoxically low growth and high inflation, was the major reason for Samuelson’s fall and Friedman’s rise. Stagflation presented a puzzle to which Keynesians had no answer. Inflation, which averaged about seven percent annually throughout the decade, was not supposed to be possible if unemployment was high and growth sluggish. Friedman’s characteristically simple answer to the problem was for the Federal Reserve to arrange “a 3 to 5 percent increase in the stock of money.” Otherwise, too much money would chase after too few goods, causing prices to rise even more.
“Over many years, Samuelson and Friedman argued about whether stagflation was caused by persistently high wages propped up by union contracts, the costs of the ongoing Vietnam War, or shocks to the global supply of oil. Even today, the causes of the inflation of the 1970s remain the subject of fierce debate.
“The solution that Samuelson eventually proposed was to raise taxes and maintain high levels of public spending—remarkable for contemporary economists accustomed to thinking of increased interest rates as the only inflation cure. Friedman, for his part, continued to advocate a combination of lower public spending and careful control over the money supply. By the early 1980s, Samuelson’s argument for greater spending had lost. Sharply higher interest rates and a focus on inflation rather than employment became the order of the day. Ronald Reagan won the presidency, having built his political career on a Friedman-inspired promise to cut taxes and a false, racially coded campaign against so-called welfare queens—a stereotype of Black single mothers raking in government checks. Once in office, he cut taxes on the wealthy (while raising them for working people) and fought against trade unions—famously firing striking air traffic controllers. The postwar Keynesian welfare state was dead, at least in the United States. Although the economy was in deep recession, the paradigm had shifted.”
But as the author points out subsequently, Americans’ veneration of private capital faltered with the collapse of the financial giants Bear Stearns and Lehman Brothers. Everyday people quickly came to believe that these institutions no longer had their best interests at heart. According to Gallup polling, public confidence in the banking system dropped from 53 percent in 2004 to 22 percent in 2009 and has never recovered.
The emerging framework is about encouraging the federal government to play various roles meant to promote the health of the U.S. economy and society. Public institutions, its advocates argue, should make and enforce strict rules to prevent corporate monopolies, invest in green energy, and spend much more on such public goods as health care, childcare, and education. Government should also deliberately seek to close racial gaps in wages, wealth, housing, education, health, and other areas. And perhaps most important, the United States might become a country whose idea of freedom is not primarily based on market transactions but instead built on the promise of a more egalitarian and democratic future.
This is what should also be the socio-economic goal of Pakistan. Let us have more public sector and more public spending, even if it meant printing notes to invest in physical infrastructure like building roads, bridges and dams, creating millions of jobs, more and more cash in the hands of employed millions, leading to creating demand which in turn leading to more investment curbing in the process the expected inflationary trends.