Neoliberalism and Neoliberal Economics
© Anup Mukherjee i3pep.org, (March, 2003)
Neoliberalism is revival and extension of classical liberalism, neo-classical economics and policies of lassez-faire in its more orthodox, global and trans-national reach. At a conceptual level, it is an extension of the core values of liberal ideology- individual freedom, private property, free competition, and self-regulating market. This way, Neoliberalism means - “newer” “liberal” “economics” - meaning a newer perspective of liberal economics in a world that is moving towards more monetized transactions, more markets, more organization and more technology. However the term itself seems to have been invented and propagated by the opponents of free market ideas. Neoliberalism in many ways is a term used by critiques of liberal economics to portray all that is wrong with economic liberalisation and globalisation. Taken this way, the critiques would argue that Neoliberalism transcends the acceptable limits of free market economics. Much of the confusion prevails among the critiques of Neoliberal Economics in this regard, and all that which is technically and legally unjust viz unfair trade, unequal trade etc. are taken as examples representative of Neoliberalism.
Neoliberalism is a European term, but it shares some of its basic principles with other ideologies like those of American Conservatism and Neoconservatism. But there are certain qualitative differences among these ideologies with which Neoliberalism seems to share certain commonality. For example, Neoconservatives accept the social and economic programs of the New Deal and even some of the President Johnson’s Great Society initiatives such as Medicare. In contrast, Neoliberalism is opposed to the logic of the New Deal and also to the subsequent Keynesian theorisation of the government intervention in the market to increase the aggregate demand. Neoliberalism rather relies on the monetary phenomena as the basis of demand growth. Neoliberals rather stick to the validity of the Say’s Law. For it, the macro problems of disequilibrium are often a consequence of bad policies rather than a problem of the natural system. Also, Neoliberalism does not share the concerns of social conservatism like authority, law and order etc having a domineering influence on the social, political or economic life.
The Neoliberal ideology to a large extent grows out from Libertarian foundations, to an extent that some leading exponents of Libertarianism are also the main theorists of Neoliberalism. Again while Neoliberalism and Libertarianism share similar ideological foundations, they have certain differences- the Libertarians of the Austrian School like Friedrich A. Hayek, Israel M. Kirzner etc., criticise the tenets of Neoclassical Economics. However, Libertarianism itself has different positions of emphasis to the extent that it is often thought that some like Ludwig von Mises of the Austrian School was less Libertarian than the Chicago School Economists.
Neoliberalism developed in a way so as to adopt the analytical tools from the Neo-classical economics and the underlying philosophical dimensions, both moral and political, from the Austrian Libertarians. This is despite of the fact that Liberalism predates the Austrian Libertarian movement and the understanding of the liberal economics predated the Austrian Libertarians. Though it is thought that Neoliberalism bases itself on the ‘perfectly competitive market’ of the neoclassical economics as part of its ideological foundation, none of the Economists even of the Neoliberal genre would consider Market to be “perfectly” competitive.
Neoliberalism also shares some ideas with Post-Fordism (or Neo-Fordism), which is a leftist description of changes in the working of capitalism towards disorganised form. This is also related to cultural fragmentation of modern societies and reflected in movements of Postmodernism. This Postmodernism is considered as cultural dimension of Postmodernity. In this, there are similarities in the social, economic and political positions of Neoliberalism and Postmodernity- both relying on self-reliance, competitiveness, virtue of market, private enterprise, and minimalisation and withdrawal of government from economic activities. Neoliberalism is also very closely related to the phenomenon of Liberalisation and Globalisation of economic activities.
Neoliberalism can also be thought of as a label put up by the anti-capitalists and anti-globalists for those who are in favour of free market economics. Though the Marxists are also opposed to the capitalists and the free market, the difference between Marxists and those belonging to the ‘Third Way’ is that, while the Marxists would prefer to have nothing with the current system and put up an alternate, the ‘Third Way’ would prefer that the system recognise the futility of the free market and correct itself appropriately - something similar to the Keynesian interventionist way. Moreover, the anti-Neoliberals feel threatened by the Globalization process. The Globalization process is an inevitable outcome of liberalisation and falling of economic barriers between different countries.
Another important stream that went into formulation of Neoliberalism is Monetarism, particularly of the Chicago School. Though Monetarism has existed for a long time, it was reformulated in its newer form as a reaction to the Keynesian system that sought market intervention by government in the sphere of national economy. Then there is a similarity with the Anarcho-Capitalism, which is a more radical version of Libertarian stream. While the Anarcho-Capitalists consider the state to be morally unjustifiable, for the Neoliberals the state still has a role. [Prof David Friedman opines- “I would have said that Anarcho Capitalist’s wish a society without the state, but the reason could be moral or practical. If anything, my impression from arguing anarchy vs limited government with lots of people, is that the central disagreement is the practical one. The limited government people are uncomfortable with moral defenses of government–note that Rand didn’t even approve of taxation, although she disapproved of anarchism–but they think that without government terrible things would happen and so, reasonably enough, support government and do their best to find moral justifications for it"].
At the tactical policy level, it is the government that drives the Neoliberal policies. Any economic policy requires a power center. An organized-economy would not exist without the existence of a government, as it is the government that prescribes the rules and framework for its working. (An economy may exist without governement, but such economy cannot be advanced or developed economy.) Therefore, even though free-market is the other pole of centralized economy, it still requires a government nonetheless. As a Neoliberal theorist Milton Friedman would put it, “I am a limited-government libertarian, not an anarchist libertarian, though I have a great deal of sympathy for anarchist libertarians” (1991). At the institutional level, Neoliberalism is also closely connected to the ideas of Washington Consensus, a term that was given by economist John Williamson in 1989 to a list of ten policy recommendations of International Monetary Fund needed to reform the national economies in light of Globalization.
Most of the debates that surround the Neoliberal ideology is focussed on the issue of nature and efficiency of market economy and the relation between the market and the government. This market is not just the domestic or national market, but also the global market. And unlike the domestic market, the government is not the only controller of the global market, but there are also the supra governmental agencies like the European Commission, the International Financial Institutions like IMF, World Bank & WTO, and the various transnational corporations. To this can also be added the billions of consumers who drive the market by their infinite wants and demands and make the existence of market possible.
In the twentieth century, by the end of Second World War, the lassez faire doctrine had come under increasing pressure. The inter-war period had been witness to various situations of social, political and economic crisis. However even after the war there was no occurance of phenomena like the depression. There was also an increasing need felt for creating increased opporutniies for employment. Also, the governments that were elected in many countries by the end of the second world war, seemed to sympathise with socialist style policies - this was particularly true in the European countries. Consequently for about quarter century in the post war period, governments practiced policies that was socially and politically rooted in domestic market and made government responsible for the increasing the aggregate demand. This also strengthened the control of government over the economy of the country. These policies were a mix of Welfare Economics, Keynesianism, and Developmental Economics. This meant that government had found for itself a major role in the economic sphere. At political level, this generally functioned within the framework of Social Democracy. This is generally known as the Golden Age Economics. This was so called as the objectives of full employment and social security, benefits for organized labour etc. were addressed and there was in general economic growth and development. However it is difficult to say to what extent economic growth was really dependent on the government intervention, as the requirements of reconstruction had an inbuilt potential for economic growth. Also, the governments balanced the fiscal and monetary policies to provide for modest welfare provisions and put the businesses through state regulation, and controlled the financial markets and exchange rate mechanism.
It seemed as if the phenomena of Business Cycle could be tamed with such intervention. However, such was not the case and the seemingly Golden Age had run its course by early 1970s. The phenomena of Market Economy has gradually seeped into various economies since then.
Neoliberal Theorists: The basis of Neoliberal thinking was propelled by the economic thought that was a confluence of neo-classical, libertarian and monetarist economics. The political economy followed the economic thinkers to adopt the Neoliberal mode in their policies. The important Neoliberal theorists have been Friedrich von Hayek, Milton Friedman, George Stigler, James Buchanan, Gordon Tullock, Anna J. Schwartz, Anne Krueger, Ian Little, Alan Peacock, among others. Central bankers like Alan Greenspan, Paul Volcker etc, have adopted this viewpoint in their monetary policies and have been successful. Among the various political leaders, foremost of whom being Margaret Thatcher and Ronald Reagan, have adopted this stream of ideology. In terms of theoretical orientation it was consequent of the ideas of Austrian school of Ludwig von Mises and, the Chicago school of Milton Friedman. Despite their differing on details of methods, they aim at the similar things and favour free market, minimalisation of government, private enterprise, low taxes, and sound money policy. The Chicago school has generally stressed quantitative empirical work, an example of which is the Milton Friedman and Anna J. Schwartz work Monetary History of the United States, 1867-1960. Friedman’s empirical research demonstrated that it was the government and not the free enterprise capitalism that led to Great Depression. The Austrian school was theoretical and not empirical. Mises and Hayek did not believe in mathematical aspects of economics. Thus the absence of rigorous mathematical analysis, regression analysis and econometrics of the Austrian school did not make it popular compared to the Chicago School. Neoliberal thought emerges from these schools of economic analysis, often known as free market schools.
Role of International Institutions: The Neoliberal reforms are greatly influenced by the policy prescriptions of International Monetary Fund (IMF), World Bank, and World Trade Organisation (WTO). The World Bank and IMF have their origin in the Bretton Woods conference of 1944 and were seen as progressive institutions. Behind their formation were the ideas of Keynes and Harry Dexter White. The objectives of these institutions included lending for reconstruction and development and to bail out countries from temporary balance of payments problems. Now, Keynes and White aimed at greater trade integration between the counties. However, they were equally concerned that this would mean that greater exchange rate instability. Consequently, the Bretton Woods system was built on fixed exchange rate regime. This was also related to the Keynesian concern of economic growth with low unemployment. These institutions had no control to prescribe policies to individual government’s economic decisions nor could intervene in matters of national economy. However the international trade situation in the 60s and early 70s witnessed intense competition especially among US, Japan, and Germany, leading to increased deficits in balance of payment. This culminated in the ending of the fixed exchange rate regime of these institutions. Also, over the years, emerging market friendly economic thought has influenced these institutions. Moreover, these institutions are lending agencies and have the responsibility to protect their loans that they gave to the countries to bring them out from economic problems. Consequently, they started to prescribe policies the debtor countries that would protect their loans. This meant that the loans were now strings-attached, which are known as ‘conditionality’. The Structural Adjustment Program (SAP) is an example of such set of conditionality. Acceptance of these conditionalities provides the borrowing countries that they will continue to receive IMF financing, and also provides safeguards to IMF that borrowers would be able to repay their loans by adopting these policy measures that are conducive to national and international prosperity. These have become an important part of the Neoliberal policy tools as corrective measures to the national economy. The Washington Consensus and SAP mean the same policy prescriptions. In this direction, IMF monitors economic and financial developments and policies of its member countries and gives policy advice to them taking into view the global aspects of economy. This includes lending and technical advice so that the macroeconomic corrections are done and the economy is put on a sustainable growth path. Through these Neoliberal policy prescriptions, it aims to bring about a more equitable development of the economies and rapid growth of GDP. While IMF focus is on macroeconomic performance and financial sector policies, World Bank is concerned with longer-term development and poverty reduction. This includes extending loans on infrastructure projects. The latest addition to this group has been the WTO, which is a successor organisation of GATT, but with more powers to promote and regulate world trade.
Notes:
[This essay on Neoliberalism was to be a part of a larger essay on the same subject. However the project did not materialise. Here I am only putting through the basic introduction on the subject. I would express my thanks to Prof. David Friedman of Santa Clara University, who went through the essay and offered his valuable suggestions on it.]
Further Reading:
