Neoliberalism is a term commonly used to describe free-market economics. Neoliberalism involves policies associated with free trade, privatisation, price deregulation, a reduced size of government and flexible labour markets. Recently, neoliberalism has been associated with the policies of austerity and attempts to reduce budget deficits – usually by cutting government spending on social programmes.
Neo-liberalism is closely associated with the Washington Consensus – the free market approach of the IMF and other institutions. It also closely overlaps with the classical economic philosophy of laissez-faire.
The origin of Neoliberalism
Neoliberalism originated in the 1930s as an economic philosophy which advocated both state intervention and free markets. It sought to provide a middle path (social democratic) between the perceived failure of classical economics in the 1930s and a Marxist approach. However, this original meaning of neoliberalism has been lost.
In fact, neoliberalism has often been used as a pejorative term used by critics of free-market economics, globalisation and increased inequality of modern capitalist economies. Supporters of market-based approaches are more likely to use the term – free market economics.
Examples of Neoliberalism in practice
- Chile in the late 1970s under the military dictatorship of General Pinochet adopted free market policies, including privatisation, deregulation, and reduced government intervention in pensions, health and education.
- The policies of Reagan (US) and Thatcher (UK) during the 1980s are considered to have a neoliberal underpinning because they sought to privatise state-owned industries, cut income taxes and reduce government regulation. Though, in practice, extensive government intervention in the economy remained.
- Russia post-Communism. After the break up of the Soviet Union, the Russian economy saw widespread price deregulation and privatisation. The programme of privatisation was controversial as some became very wealthy overnight.
- EU neoliberal policies for Greece. During Greek debt crisis, EU officials demand Greece adopt various reforms in response to a ‘bailout’. These reforms focus on fiscal consolidation, including tax and spending reforms, could be labelled neoliberal. They also include over reforms such as reforming public administration and ‘business friendly’ reforms.
Criticisms of neoliberalism
Market fundamentalism. Critics argue that advocating the use of free markets in areas, such as health and education is misplaced because by nature these are public services, which are not subject to the same profit motivation. Also, the free market ignores the externalities of health and education. Adopting a free market approach can lead to widening inequality and under-provision of an institution important for long-term investment in the economy.
Monopoly and monopsony power. A broadly neoliberal policy has seen a widening inequality of both wealth and income in the Western world. This is due to several factors, such as skilled workers in a position to command higher wages, but low-skilled workers in flexible labour markets more likely to see stagnant wages. Firms with monopoly power can increase producer surplus at the expense of consumers. Firms with monopsony power able to limit wage growth
The growth of financial flows (e.g. speculative, hot money) from capital deregulation have not necessarily helped economic development, but instead have contributed to increased financial instability, which has caused wider economic shocks, e.g. post 2007 credit crunch. (Dell’Ariccia and others, 2008; Ostry, Prati, and Spilimbergo, 2009)
An IMF report into neoliberalism, states that the increase in capital flows has been a factor behind the increased risk of adverse create cycles.
“Since 1980, there have been about 150 episodes of surges in capital inflows in more than 50 emerging market economies; as shown in the left panel of Chart 2, about 20 percent of the time, these episodes end in a financial crisis, and many of these crises are associated with large output declines (Ghosh, Ostry, and Qureshi, 2016). IMF, June 2016
One size fits all. An important problem for neoliberalism is that policies which may work in one country doesn’t necessarily work in all countries. For example, a country with the ability to reduce interest rates may benefit from reducing the size of government borrowing (fiscal austerity). But, if interest rates are zero in an economy like the UK, the cost of austerity may be much higher than the benefits.
Fiscal consolidation in Europe has seen bigger falls in GDP than many advocates of austerity predicted.
“On average, a consolidation of 1 percent of GDP increases the long-term unemployment rate by 0.6 percentage point and raises by 1.5 percent within five years the Gini measure of income inequality (Ball and others, 2013).
Inequality. Neo-liberal policies tend to increase inequality. But, this inequality can harm long-term growth prospects. Those with low-income have limited spending power and those who become richer have a higher marginal propensity to save, so wealth doesn’t ‘trickle down’ as some hope.
- Sometimes critics use neoliberalism as a catch-all term to criticise any perceived failure of market-based economies.
- Some economists distinguish between neo-liberalism which promotes competitive markets and is suspicious of monopoly, and another type of neo-liberalism which is pro-business and (often supportive of monopoly power of business – which does little to enable genuine competition.)
- Free market reforms can lead to significant benefits, e.g. increased trade and inward investment can play an important role in increasing real wages, job creation and economic growth. Benefits that accrue to different levels of the income scale.
- Government regulations can become over bureaucratic and inefficient. In certain cases, reducing regulation can lead to a more efficient allocation of resources.
- Privatisation has had mixed results. But, some state-owned industries have seen efficiency gains and lower prices post-privatisation.
It is certainly interesting to see the IMF take a more nuanced view towards the general policy of neoliberalism. While acknowledging benefits of free trade, inward investment and privatisation in certain industries. The recent IMF blog also highlights some of the problems which come from a blind faith in free markets. In particular, there is growing concern about the role of short-term financial flows and financial instability
Also, some critics of neoliberalism would suggest the IMF doesn’t go far enough, with the costs of free markets much greater than the authors suggest. Also, it may be said that greater stress should be placed on factors affecting the quality of life, such as the impact on the environment, social cohesion and personal satisfaction. Neoliberalism like many economic philosophies has tended to place too much stress on measurable various like real GDP per capita and ignore these wider more intangible factors affecting the quality of life.
The final point is that the definition of neoliberal can become controversial. Whether Greek reforms post-2015 are neoliberal or not.