Neoliberalism

From Wikipedia, the free encyclopedia

Neoliberalism is a term referring to a reemergence and redefinition of liberalism, coined 1938 at the Colloque Walter Lippmann by the German sociologist and economist Alexander Rüstow.^[1] The label is used pejoratively by numerous critics and opponents, and according to one study, "the concept itself has become an imprecise exhortation in much of the literature, often describing any tendency deemed to be undesirable".^[2] Neo-liberals advocate policies such as free markets, and free trade.^{[citation needed]}

In the United States, neoliberalism has also been used to refer to a political movement in which some members of the American left (such as Michael Kinsley, Robert Kaus, Mickey Kaus, and Randall Rothenberg) endorsed some free market positions, such as anti-unionism, free market economics, and welfare reform.^[3] This term should not be confused with new liberalism, which is used in the United States.

[edit] Policy implications

Broadly speaking, neoliberalism seeks to transfer control of the economy from state to the private sector.^[4] The definitive statement of the concrete policies advocated by neoliberalism is often taken to be John Williamson's^[5] "Washington Consensus", a list of policy proposals that appeared to have gained consensus approval among the Washington-based international economic organizations (like the International Monetary Fund (IMF) and World Bank). Williamson's list included ten points:

Chicago School economists are known for:

The Austrian School is a heterodox^[9] school of economics that advocates adherence to strict methodological individualism. Proponents of the Austrian School hold that the only valid economic theory is logically derived from basic principles of human action. Alongside the formal approach to theory, often called praxeology, the school has traditionally advocated an interpretive approach to history.

Proponents of praxeological method hold that it allows for the discovery of economic laws valid for all human action, while the interpretive approach addresses specific historical events. On the other hand, critics of the Austrian school contend that its methods consists of post-hoc analysis and do not generate testable implications, and so fails falsifiability.^[10][11] During its history the position of the Austrian school within economics profession has changed several times from the center to the fringe. Currently its position lies between mainstream and heterodox economics.^[12]

Austrian School theorists, like Ludwig von Mises, insist that praxeology must be value-free. That the method does not answer the question "should this policy be implemented?", but rather "if this policy is implemented, will it have the effects you intend?" However, Austrian economists often make policy recommendations that call for the elimination of government institutions - anarcho-capitalist solutions. These recommendations are similar to, but further reaching than the minarchist ideas of Chicago School economists. Both schools advocate strict protection of private property, and support for individualism in general, and are often cited by conservatives, laissez-faire liberal, libertarian, and Objectivist groups for support,

[edit] History

[edit] Earlier systems

Arguments that stress the economic benefits of unfettered markets, in line with neoliberalism, first began to appear with Adam Smith's (1776) Wealth of Nations and David Hume's writings on commerce. These writings were directed against the Mercantilist ideas that had been dominant during the previous centuries, and served to guide the policies of governments throughout much of the 19th century.

Nevertheless, statist ideas slowly began to regain a following amongst the intellectuals that had rejected them during the early Enlightenment. State interventionism increased towards the end of the 19th century; in the United States the Progressive Era saw an accelerated movement to re-institutionalize government controls over the economy.

With an intellectual and political foundation in place, the onset of the Great Depression and the rapid industrialization of the Soviet Union led to increased support for government economic control as a means of securing rapid industrialization.^[13]

[edit] Embedded liberalism

The term embedded liberalism refers to the economic system which dominated worldwide from the end of World War II to the 1970s. (Harvey 2005) argues that at the end of World War II, the primary objective was to develop an economic plan that would not lead to a repeat of the Great Depression during the 1930s. Harvey notes that under this new system free trade was regulated "under a system of fixed exchange rates anchored by the US dollar's convertibility into gold at a fixed price. Fixed exchange rates were incompatible with free flows of capital."^[14] Harvey argues that embedded liberalism led to the surge of economic prosperity which came to define the 1950s and 1960s.

Across much of the world, the work of John Maynard Keynes, which sought to formulate the means by which governments could stabilize and fine-tune free markets, became a highly-influential ideology. Within the developing world, several developments – among them decolonization, a desire for national independence and the destruction of the pre-war global economy^[15], and the view that countries could not effectively industrialize under free market systems (e.g., the Prebisch-Singer hypothesis) – encouraged economic policies that were influenced by communist, socialist and import substitution precepts.

The period of government interventionism in the 1950s and 1960s was characterized by exceptional economic prosperity, as economic growth was generally high, inflation was contained^[16], and economic distribution was comparatively equalized.^[17] This era is known as les Trente Glorieuses ("The Glorious Thirty [years]") or "Golden Age", a reference to many countries having experienced particularly high levels of prosperity between (roughly) World War II and 1973.

[edit] Collapse of embedded liberalism

David Harvey notes that the system of embedded liberalism began to crack beginning towards the end of the 1960s.^[18] The 1970s were defined by an increased accumulation of capital, unemployment, inflation (or stagflation as it was dubbed), and a variety of fiscal crises.^[18] He notes that "the embedded liberalism that had delivered high rates of growth to at least the advanced capitalist countries after 1945 was clearly exhausted and no longer working."^[18] A number of theories concerning new systems began to develop, which led to extensive debate between those who advocated "social democracy and central planning on the one hand" and those "concerned with liberating corporate and business power and re-establishing market freedoms on the other.^[19] Harvey notes that by 1980, the latter group had emerged as the leader, advocating and creating a global economic system that would become known as neoliberalism.^[19]

Some argue that the strains which occurred were located in the international financial system,^[20][21] and culminated in the dissolution of the Bretton Woods system, which some argue had set the stage for the Stagflation crisis that would, to some extent, discredit Keynesianism in the English-speaking world. In addition, some argue that the postwar economic system was premised on a society that excluded women and minorities from economic opportunities, and the political and economic integration given to these groups strained the postwar system.^[22]

[edit] Post-1970s economic liberalism

[edit] Chicago School

The Chicago school of economics describes a neoclassical school of thought within the academic community of economists, with a strong focus around the faculty of University of Chicago, some of whom have constructed and popularized its principles.

The school emphasizes non-intervention from government and rejects regulation in laissez-faire free markets as inefficient. It is associated with neoclassical price theory and libertarianism and the rejection of Keynesianism in favor of monetarism until the 1980s, when it turned to rational expectations. The school has impacted the field of finance by the development of the efficient market hypothesis. In terms of methodology the stress is on "positive economics" â€“ that is, empirically based studies using statistics to prove theory.

Approximately 70% of the professors in the economics department have been considered part of the school of thought. The University of Chicago department, widely considered one of the world’s foremost economics departments, has fielded more Nobel Prize winners and John Bates Clark medalists in economics than any other university.

Those who attend to the Chicago School prefer some form of competition law, school vouchers, a central bank, intellectual property and prefer Milton Friedman's negative income tax as a replacement to the existing welfare system, arguing that it is simpler and has fewer of the "perverse incentives" of "government handouts".

According to the 2008 Index of Economic Freedom and The Economic Freedom of the World, issued by the Heritage Foundation and the Fraser Institute respectively, seven countries with the most free economies in the former index are currently the following: Hong Kong, Singapore, Ireland, Australia, United States, New Zealand and Canada (all of them former constituents of the British Empire). Hong Kong is ranked number one for 14 consecutive years in the Index which attempts to measure "the absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself." Because of this, Milton Friedman described Hong Kong as laissez-faire state and he credits that policy for the rapid move from poverty to prosperity in 50 years.^[23] Much of this growth came under British colonial control prior to the 1997 resumption of sovereignty by the People's Republic of China.

[edit] United Kingdom

Margaret Thatcher became Prime Minister with a mandate to reverse the UK's economic decline. Thatcher's political and economic philosophy emphasised reduced state intervention, more free markets, and more entrepreneurialism. She once slammed a copy of Friedrich Hayek's The Constitution of Liberty down on a table during a Shadow Cabinet meeting, saying, "This is what we believe." Thinkers closely associated with Thatcherism include Keith Joseph, Enoch Powell, Friedrich Hayek and Milton Friedman. She was the first female ever elected and served as British Prime Minister from 1979 to 1990.

Thatcher's political and economic philosophy emphasised reduced state intervention, free markets, and entrepreneurialism. She vowed to end what she felt was excessive government interference in the economy, and did this through privatizing nationally-owned enterprises selling public housing to tenants.^[24] After the James Callaghan Government had concluded that the Keynesian approach to demand-side management failed, Thatcher felt that the economy was not self-righting and that new fiscal judgements had to be made to concentrate on inflation.^[25] She began her economic reforms by increasing interest rates to slow the growth of the money supply and thus lower inflation.^[26] In accordance with her less-government intervention views, she introduced budget cuts^[27] and reduced expenditures on social services such as health care, education, and housing.^[24] She also placed limits on the printing of money and legal restrictions on trade unions.^[24]

In January 1982, the inflation rate had dropped to 8.6% from earlier highs of 18%. By 1983, overall economic growth was stronger and inflation and mortgage rates were at their lowest levels since 1970.^[28] The term "Thatcherism" came to refer to her policies as well as aspects of her ethical outlook and personal style, including moral absolutism, nationalism, interest in the individual, and an uncompromising approach to achieving political goals.^[24]

Thatcher, the former chemist, became publicly concerned with environmental issues in the late 1980s. In 1988, she made a major speech communicating the problems of global warming, ozone depletion and acid rain.^[29] Referring to her role in the struggle against ozone depletion, Carl Sagan opined that she demonstrated the importance in the modern world of leaders having an understanding of science.

After the 1983 election, the Conservative majority expanded, Thatcher continued to enact her economic policies.^[27] The UK government sold most of the large national utilities.^[27] The policy of privatisation, while anathema to many on the Left, was a main component of Thatcherism.

Since Thatcher resigned as British Prime Minister in 1990, UK economic growth was on average higher than the other large EU economies (,i.e. Germany, France and Italy). Additionally, since the beginning of the 2000s, the UK has also possessed lower unemployment, by comparison with the other big EU economies. Such an enhancement in relative macroeconomic performance is perhaps another reason for the apparent "Blatcherite" economic consensus, which has been present in modern UK politics for a number of years.

In 2001, Peter Mandelson, a Member of Parliament belonging to the British Labour Party closely associated with Tony Blair, famously declared that "we are all Thatcherites now."^[30]

In reference to contemporary British political culture, it could be said that a "post-Thatcherite consensus" exists, especially in regards to economic policy. In the 1980s, the now defunct Social Democratic Party adhered to a "tough and tender" approach in which Thatcherite reforms were coupled with extra welfare provision. Neil Kinnock, leader of the Labour Party from 1983-1992, initiated Labour's rightward shift across the political spectrum by largely concurring with the economic policies of the Thatcher governments. The New Labour governments of Tony Blair have been described as "neo-Thatcherite" by some, since many of their economic policies mimic those of Thatcher.^[31]

Most of the major British political parties today accept the anti-trade union legislation, privatisations and general free market approach to government that Thatcher's governments installed. No major political party in the UK, at present, is committed to reversing the Thatcher governments reforms of the economy. Such a convergence of policy is one reason that the British electorate perceive few apparent differences in policy between the major political parties.^{[citation needed]}

Moreover, the UK's comparative macroeconomic performance has improved since the implementation of Thatcherite economic policies.

[edit] Scandinavia

Scandinavian countries have embraced many neoliberal policies.^[32]

In Sweden, Carl Bildt's government program was one of liberalizing and reforming the Swedish economy as well as making Sweden a member of the European Union. It initiated the negotiations for Sweden's accession to the European Union. Carl Bildt signed the accession treaty at the European Union summit of Corfu, Greece on June 23, 1994. Economic reforms were enacted, including voucher schools, liberalized markets for telecommunications and energy as well as the privatization of publicly owned companies, privatization of health care, contributing to liberalizing the Swedish economy.

On the Economic Freedom of the World, Iceland had the 53rd freest economy in 1975 and it was one of the poorest countries in Europe. In 2004, it had the 9th freest economy and it was one of the richest. ^[33] In 2007, Iceland was ranked as the most developed country in the world by the United Nations' Human Development Index.^[34]

Anders Fogh Rasmussen, the Prime Minister of Denmark and the leader of Venstre, has written books advocating minimal state. Denmark is a European leader on economic freedom indices. Denmark has ranked as the world's 11th most free economy, of 162 countries, in an index created by the Wall Street Journal and Heritage Foundation, the Index of Economic Freedom 2008.

[edit] United States

The Administration of Ronald Reagan governed from 1981 to 1989, and made a range of decisions that served to liberalize the American economy. These policies are often described as Reaganomics, and are often associated with supply-side economics (the notion that policies should appeal to producers, in order to lower prices, and therefore make products more affordable, rather than consumers, in order to cultivate economic prosperity).

During Reagan's tenure, the economy recovered and grew during Reagan's remaining years in office at an annual rate of 3.4% per year.^[35] Unemployment dropped and inflation significantly decreased.^[36]

[edit] Hong Kong

It has ranked as the world's freest economy in the Index of Economic Freedom for 14 consecutive years, since the inception of the index in 1995^[37][38]. It also places first in the Economic Freedom of the World Report.

This policy has often been cited as an example of the benefits of laissez-faire capitalism.^{[citation needed]}

A 1994 World Bank report stated that Hong Kong's GDP per capita grew in real terms at an annual rate of 6.5% from 1965 to 1989. This consistent growth percentage over a span of almost 25 years has been described as remarkable for any economic analysis^[39].By 1990 Hong Kong's per capita income officially surpassed that of the ruling United Kingdom^[40].

[edit] Chile

The Miracle of Chile is a term coined by Milton Friedman to describe the Augusto Pinochet's support for liberal economic reforms in Chile carried out by the "Chicago Boys." Implemented economic model had three main objectives: economic liberalization, privatization of state owned companies, and stabilization of inflation. These market-oriented economic policies were continued and strengthened after Pinochet stepped down.^[41] At the time, Milton Friedman stated that the Chilean experiment was "comparable to the economic miracle of post-war Germany."^[42]

Successive governments have continued and expanded neoliberal policies in Chile.

According to the 2007 Index of Economic Freedom, Chile is the world's 11th "most free" economy today. Chile is ranked 3rd out of 29 countries in the Americas and has been a "regional leader" for over a decade. Chile had GDP growth of 6.1% in 2004, and has averaged a 4.0% annual increase in GDP over the last five years for which data is available. [2]

Currently, Chile is one of South America's most stable and prosperous nations.^[43] Within the greater Latin American context it leads in terms of competitiveness, quality of life, political stability, globalization, economic freedom, low perception of corruption and comparatively low poverty rates.^[44] It also ranks high regionally in freedom of the press, human development and democratic development. Its status as the region's richest country in terms of gross domestic product per capita (at market prices^[45] and purchasing power parity^[46]) is countered by its high level of income inequality, as measured by the Gini index.^[47]

The experience of Chile in the 1970s and 1980s, and especially the export of the Chilean pension model by former Labor Minister Jose Pinera, has influenced the policies of the Communist Party of China and has been invoked as a model by economic reformers in other countries, such as Boris Yeltsin in Russia and almost all Eastern European post-Communist societies^[48].

[edit] Canada

In Canada, these policies are often associated with Brian Mulroney, Mike Harris, Ralph Klein, and Gordon Campbell.

[edit] Australia

In Australia, these policies were originally associated with the centre-left Australian Labor Party, under the Hawke/Keating governments led by Prime Minister Bob Hawke and his Treasurer and later also PM Paul Keating from 1983 to 1996. The centre-right Liberal Party of Australia became neoliberal (see New Right) during this time whilst in opposition.

[edit] Japan

The largest privatization in history was Japan Post. It was the nation's largest employer and one third of all Japanese government employees worked for Japan Post. Japan Post was often said to be the largest holder of personal savings in the world. The Prime Minister Junichiro Koizumi wanted to privatize it because it was thought to be an inefficient and a source for corruption.

In September 2003, Koizumi's cabinet proposed splitting Japan Post into four separate companies: a bank, an insurance company, a postal service company, and a fourth company to handle the post offices as retail storefronts of the other three. After privatization was rejected by upper house, Koizumi scheduled nationwide elections to be held on September 11, 2005. He declared the election to be a referendum on postal privatization. Koizumi subsequently won this election, gaining the necessary supermajority and a mandate for reform, and in October 2005, the bill was passed to privatize Japan Post in 2007.^[49]

[edit] New Zealand

The term Rogernomics, a portmanteau of "Roger" and "economics", was created by analogy with Reaganomics to describe the economic policies followed by New Zealand Finance Minister Roger Douglas from his appointment in 1984.

The policies included cutting agricultural subsidies and trade barriers, privatising public assets and the control of inflation through measures rooted in monetarism, and were regarded in some quarters of Douglas's New Zealand Labour Party as a betrayal of traditional Labour ideals. The Labour Party subsequently retreated from pure Rogernomics, which became a core doctrine of ACT. The Labor Party leader planned to create a 15% flat tax in New Zealand, and to privatise schools, roads and hospitals, which was moderated by the Labour cabinet at the time,^[50] although the resultant reforms were still generally considered radical in a global context. After Douglas left the Labour party, he went on to co-found ACT in 1993, which regards itself as the new liberal party of New Zealand.

Since 1984, government subsidies including those for agriculture have been eliminated; import regulations have been liberalised; exchange rates have been freely floated; controls on interest rates, wages, and prices have been removed; and marginal rates of taxation reduced. Tight monetary policy and major efforts to reduce the government budget deficit brought the inflation rate down from an annual rate of more than 18% in 1987. The Deregulation of government-owned enterprises in the 1980s and 1990s reduced government's role in the economy and permitted the retirement of some public debt, but simultaneously massively increased the necessity for greater welfare spending and has led to considerably higher rates of unemployment than were standard in New Zealand in earlier decades. However, unemployment in New Zealand is again low, hovering around 3.5% to 4%.

Deregulation created a very business-friendly regulatory framework. A survey 2008 study ranked it 99.9% in "Business freedom", and 80% overall in "Economic freedom", noting amongst other things that it only takes 12 days to establish a business in New Zealand on average, compared with a worldwide average of 43 days. Other indicators measured were property rights, labour market conditions, government controls and corruption, the last being considered "next to non-existent" in the Heritage Foundation and Wall Street Journal study.^[51]

In its Doing Business 2008 survey, the World Bank (which in that year rated New Zealand as the second-most business-friendly country worldwide), gave New Zealand rank 13 out of 178 in the business-friendliness of its hiring laws.^[52]

New Zealanders have a high level of life satisfaction as measured by international surveys; this is despite lower GDP per-head levels than many other OECD countries. The country was ranked 20th on the 2006 Human Development Index and 15th in The Economist's 2005 worldwide quality-of-life index.^[53] The country was further ranked 1st in life satisfaction and 5th in overall prosperity in the 2007 Legatum Institute prosperity index.^[54][55] In addition, the 2007 Mercer Quality of Living Survey ranked Auckland 5th place and Wellington 12th place in the world on its list.^[56]

[edit] South Africa

South Africa’s GDP has grown since the beginning of the new government system in 1994, which ended the rule of apartheid in South Africa. A cause of this rise in GDP has been the implementation of neoliberal policies inside South Africa to direct the South African market to a freer market. Another result of these free market policies have caused a decline in employment that started after the new government in 1994, which caused an incline in South Africa's poverty level. As a result inequality still exists today that was once under apartheid.

[edit] Global spread

Chronic economic crisis throughout the 1980s, and the collapse of the Communist bloc at the end of the 1980s, helped foster political opposition to state interventionism, and in favor of free market reform policies. From the 1980s onward, a number of communist countries initiated various neoliberal market reforms, such as the Socialist Federal Republic of Yugoslavia under the direction of Ante Markovic (until the country's collapse in the early 1990s), and the People's Republic of China under the direction of Deng Xiaoping.

[edit] Reach and effects

Neoliberal movements ultimately changed the world's economies in many ways, but some analysts argue that the extent to which the world has liberalized may often be overstated. Some of the past thirty years' changes are clear and unambiguous, like^[57]:

Other changes are not so apparent, and are debated in the literature^[57]:

[edit] Supporting economic liberalism

[edit] Living standards

Proponents of neoliberalism argue that: