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Neoliberalism

(Redirected from Neo-liberalism)
This text is part of
the Liberalism series

Neoliberalism is a political philosophy and a political-economic movement beginning in the 1970s -- and increasingly prominent since 1980 -- that de-emphasizes or rejects government intervention in the economy, focusing instead on achieving progress and even social justice by more free-market methods, especially an emphasis on economic growth, as measured by changes in real gross domestic product. Because of close association between this philosophy and neoclassical economics, and confusion with the overloaded term "liberal", some advocate the term "neoclassical philosophy". In some cases, where liberal parties collapsed or disappeared in the early 20th century, it is simply called "liberalism".

The term neoliberalism does not mean a version of new liberalism of John Dewey, Woodrow Wilson, John Maynard Keynes, Franklin Roosevelt, or the Liberal Party of Britain. Rather, it focuses on the establishment of a stable medium of exchange, and the reduction of localized rules, regulations and barriers to commerce, and the privatization of state run enterprises. Classical liberal philosophy justified and encouraged the "first era of globalization" which came to an end with the shocks of the First World War, the collapse of the Gold Standard, and the Great Depression, just as neoliberalism is associated with the contemporary "second era of globalization," the seeds of which were planted after World War II. Neo-liberalism, since it focuses on international relationships, is pursued by socialist, liberal and conservative parties. Some portray neoliberalism as advocacy of "free markets from the top-down" since it has been imposed by international institutions, that is, the IMF, the European Union, or the World Bank, others identify it with corporatism, and the rise of multinational corporations.

Neo-liberalism's roots begin with the re-establishment of international monetary stability with the Bretton Woods Agreement, which fixed currencies to the US Dollar and the US Dollar to gold. However, as a specific movement it became increasingly prevalent based on the work of Robert Mundell and Arthur Flemming as well as the theories of the Austrian School of economics and monetarism. Neo-liberalism argued that protectionism produced economic inefficiencies, and that developing nations should open their markets to the outside, and focus on exporting. This meant the liquidation of state owned corporations and enterprises, and the reduction in rules designed to hinder trade, as well as lowering tariff barriers. Neo-liberal ideas found expression in a series of trade talks to form the World Trade Organization as well as regional free trade agreements such as the European Union and the North American Free Trade Agreement.

The slow and quantitative development of neoliberalism after World War II became more rapid in the 1970s, and not always by peaceful means. One of the often touted neo-liberalism success stories is General Augusto Pinochet's Chile - which began with a CIA backed coup, violently ousting the democratically-elected government of Salvador Allende in Chile. The Allende government government had pursued radical social-democratic policies and has sometimes been labeled "Marxist", and had been opposed by conservative elements in the US since the early 1960s. "Free market" policies, including privatization of state assets, were imposed by "los Chicago Boys," Chicago school economists inspired by Milton Friedman. These policies were later imitated by the Bretton Woods institutions operating in many other poor countries, particularly in Latin America.

The rise of neoliberalism culminated with the Reagan government in the United States and that of Margaret Thatcher in Britain, along with the fall of the Soviet Union and the fading of social democracy and new liberalism as alternatives to unbridled capitalism. These governments not only shifted their own countries' policies toward laissez-faire but used their control of the major Bretton Woods institutions to impose their policies on the rest of the world. So nowadays, neoliberalism is generally seen as synonymous with the "Washington Consensus," the dominant policy view at the International Monetary Fund (IMF), the World Bank, and the U.S. Treasury at the end of the 20th century and the start of the 21st. A major axiom of the neoliberal school is that (to quote Thatcher) "There Is No Alternative" to unbridled capitalism. This slogan is often abbreviated as "TINA".

In the late 1980s and early 1990s neo-liberal policies swung back towards the left, as Bill Clinton of the United States backed the North American Free Trade Agreement and America's entry into the WTO. Free trade was seen as essential to Rubinomics, which promoted the creation of equity and technology as the means by which America would be able to manage a persistent balance of trade deficit. Left leaning, neo-liberal economists such as Joseph Stiglitz pointed out that protectionism is not a left or right issue, but an issue of asymmetry, and therefore a general cause for concern.

Critics of neo-liberalism in both theory and practice are numerous, particularly in developing nations whose assets have been sold off to foreigners, and their domestic political and economic institutions destroyed by the effects of being exposed to trade. Within the neo-liberal movement there is intense criticism of how many developed nations have demanded that others liberalize their markets for manufactured goods, while protecting their own domestic agricultural markets.

Anti-globalization advocates are the most vociferous opponents of neo-liberalism, particular its implementation as "free capital flows" but not free labor flows. They argue that neo-liberalism represents a "race to the bottom" as capital flows to the lowest environmental and labor standards, and is merely updated "beggar they neighbor" imperialism, dating back 200 years. In this they are in fundamental agreement with many of neo-liberalism's supporters who argue that neo-liberalism represents classical liberalism.

Some conservative economists argue that neo-liberal policies create institutions which remove "moral hazard", as governments must bail out financial crisis after financial crisis, because developing nations are "too big to fail". They point to the string of currency meltdowns in the 1990s - Mexico, Russia, Eastern Europe, East Asia and Argentina - as proof that there is a danger to allowing profit without sufficient penalty.


1 Neoliberal theory
2 External Critical Resources

Contents

Theory

As described by UC-Berkeley economic historian and defender of neoliberalism Professor Bradford DeLong, this "ism" has two main tenets:

"The first is that close economic contact between the industrial core [of the capitalist world economy] and the developing periphery is the best way to accelerate the transfer of technology which is the sine qua non for making poor economies rich (hence all barriers to international trade should be eliminated as fast as possible). The second is that governments in general lack the capacity to run large industrial and commercial enterprises. Hence, [except] for core missions of income distribution, public-good infrastructure, administration of justice, and a few others, governments should shrink and privatize)."

To critics of neo-liberalism, these two principles represent parts of the " trickle-down theory," i.e., that under free-market capitalism, economic growth and technological change benefit even the poorest countries and people, even if that process is dominated by multinational corporations, rich domestic elites, and organizations such as the IMF dominated by rich countries' financiers. To defenders, such as Amartya Sen, "Development is Freedom". More economic growth, more specialization and more opportunity create chances for individuals to achieve than more rigid structures which provide only illusory protection.

The concept of neoliberalism became popular among economists not only as the balance of political power changed (as discussed above), but as many decided that post-World War II national development strategies for poor countries were not having the intended effects. In particular, funding for mega-projects left poor countries with high debts but little growth to show for it. It is also a reaction to the perceived failures populist and modern liberal economic policies, such as import-substituting industrialization. Failures of the East-Asian ( Taiwanese, South Korean) policies of state-guided export-led economic growth and of the centrally-planned or "communist" economies also were interpreted as requiring neoliberal medicine. The export-led economies were criticized as involving "crony capitalism," while most of the centrally-planned countries fell apart economically and politically in late 1980s and early 1990s.

As noted, the neoliberal doctrine is linked to the so-called "Washington consensus," a set of specific policy goals designed for Latin American countries. In addition to the tenets of neoliberalism noted by Professor deLong, the Washington consensus stipulated that a country should have stable exchange rates and a government budget in balance.

Practice

The practice of neo-liberal ideas varies widely. Some proponents see transperancy, development and uniformity as the most important goals, while many others see the dismantling of state regulations, as such, as the primary purpose. Many leading implementors of neo-liberal policies criticize the manner in which those policies are implemented. Some blame the institutions such as the World Bank and IMF directly, while others argue that by the time the IMF and World Bank are involved, the problems have already become endemic - they blame the "shock therapy" approach which was taken in the 1980s for much of the economic damage, and argue that "big bang" marketization, such as was pursued in Russia, leads to centralized corrupt economic oligarchy, the very opposite of what neo-liberalism intends.

In practice, neoliberalism differed from much of pure free-market policy in that it emphasized the imposition of intellectual property rights (patents, copyrights, and trademarks), encouraging monopoly rather than free market competition. Often, neoliberal reforms put blue-collar workers in rich countries in competition with those in poor countries, but privileged professionals such as medical doctors are protected from such competition.

There were also catastrophic failures. In particular, Nobel prize winner and former World Bank chief economist Joseph Stiglitz argues that the IMF is guilty of forcing neoliberal and Washington consensus policy goals on countries at times when it was not appropriate (i.e., the Asian Economic Crisis), with devastating results. The "cookie cutter" approach of applying the same policy no matter what the specificities were can be seen in this crisis, as the I.M.F. pushed for government budget cuts even though government budget deficits had nothing to do with the crisis. Neoliberalism has also been criticised by populists, social democrats, and anti-capitalists, who argue that unbridled market forces inevitably increase inequality in wealth and hence power.

In a recent book, Professor Robert Pollin summarizes the neoliberal record. Excluding the People's Republic of China, which did not follow the neoliberal lead, the era of the "developmental state" (1961-80) saw a per capita growth rate of real gross domestic product that averaged 3.2 percent per year. On the other hand, during the neoliberal era (1981-99) this growth rate fell to 0.7 percent per year, slowing both absolutely and relative to the wealthier countries of the OECD. China, which shifted from pure state planning to state-guided export promotion, saw its per capita growth rate rise from 2.5 to 8.4 percent between these periods. (See Robert Pollin, Contours of Descent, p. 131. ISBN 1-85984-673-4) Thus, according to the neoliberals' own standards, their policies can be seen as a failure. Pollin also shows the rapid increase in income inequality between these periods, especially when China is excluded from the sample. The increase in economic inequality is one major hallmark of neoliberalism.

This short entry cannot end the debate. One question is whether it is better to define neoliberalism in terms of its self-image (as Professor deLong does) or in terms of its actual practice. Either way, these critiques do not automatically indicate that neoliberalism should be dumped. It is possible, as the more militant advocates of laissez faire say, that neoliberal policies were not applied in a pure enough form. Alternatively, one might argue that if neoliberalism had not been pursued, economic events would have been even worse. Further, it is possible that neoliberalism could be reformed.

Neoliberal theory

While some use the terms neoliberal and libertarian or classical liberalism interchangeably there is a difference between the two philosophies. While both share a belief in market economics and free trade, neoliberal economics theory shares with neoliberal international relations theory (and liberal internationalism ) a belief in international regimes and a degree of global governance as a means of negotiating and administering international agreements. Neoliberals believe that greater economic and political interdependence will lead to progress and a reduction of international tensions or at least divert states from utilizing military means to resolve conflict. Libertarians reject the neoliberal belief that global governance bodies or state negotiated treaty regimes that bind the individual are desirable.

Neoliberalism accepts macro-economic theory that assumes full employment and rational expectations, that is, it is a modern neo-classical and free market economic theory, which holds that monetary policy is capable of making Say's Law apply in practice, even if it does not apply in theory. The central question is the cost burden imposed by regulations in the Mundell-Fleming Model . In the Mundell-Fleming Model of open exchange trade, nations may have policy autonomy -- that is regulation of internal markets -- monetary policy freedom and fiscal freedom only as trade-offs. That is, having monetary policy freedom reduces the ability to regulate the economy. The central argument is then how effective each of these mechanisms are for producing economic growth. It is generally recognized that monetary policy is better than fiscal policy which is better than regulation, but how much, and under what conditions is a matter of intense debate. During the peak popularity of the monetarist school, it was asserted that monetary policy was so much better than the other mechanisms, that it was therefore worthwhile to sacrifice, or drastically reduce, the other two components of government action, in return for greater effectiveness of monetary policy.

With the 1990s and the productivity surge, and the events where the correlation between money demand and money supply weakened, this assertion was called into question, serving as the theoretical basis for "The Third Way" and a neo-liberal economics which was not so explicitly associated with conservative policies.

Neo-Liberalism's theoretical basis, however, has been called into question with the failure of its implementation, however imperfectly, to produce the expected result of capital flowing from the industrialized core nations and out to the peripheral nations. This failure, noted by Stiglitz, Delong and Krugman, is not explained easily in theory. Instead, capital has pooled in the industrial core, as seen by the increasing investment deficit of the United States.

Prominent exponents of neo-liberal policies include former US Treasury Secretary Robert Rubin, as well as economists such as Robert Solow, Gregory Mankiw, and Robert Mundell.

See also: anti-capitalism, privatization, Keynesian economics, globalisation, Neoconservatism, Friedrich Hayek

External Critical Resources



Last updated: 10-24-2004 05:10:45