Monthly Archives: August 2018

“ECON101” is not neo-liberal

A quick follow up after some discussion about my post on neo-liberalism yesterday.

Sometimes people like to justify neo-liberalism with claims that it’s just “ECON101” or similar.

But neo-liberalism is not given by any level of economic theory, 101 or otherwise.

Basic micro-economic theory tells you that equilibrium in perfectly competitive markets with utility-maximising consumers and profit maximising firms will display allocative and productive efficiency.

If you lose these extreme assumptions, you can no longer assume markets are efficient, or indeed more efficient than a government alternative, on the basis of “ECON101”.

ECON101 teaches you about the direction of the relationship between price and supply and demand, but these are compatible with any elasticity. You learn about supply and demand curves that are vertical and horizontal. Hence ECON101 won’t give you any good idea about behavioural responses.

ECON101 teaches you about monopoly and monopsony models – the opposite of competition. It does not tell you how to decide which models to use.

Accordingly, you cannot infer from economic theory that there will be a substantial fall in demand for labour with higher minimum wages, as just one example. The relevant elasticities are empirical questions.

Neo-liberalism supplements ECON101 with a set of priors about how the world works. These supplementary priors are basically what Noah Smith calls “ECON101ism”. Neo-liberalism assumes that, unless there is overwhelming evidence to the contrary, perfect competition assumptions are good approximations of the real world for practical purposes. Neo-liberal policy recommendations spring from that belief.

Neo-liberalism goes further still. It has a very high regard for individuals, business and competition, and low regard for government. This means that when there is a trade-off between government failure and market failure – say in deciding between public and private ownership of a natural monopoly – neo-liberals tend to err on the side of the private sector. Theory (e.g. principle agent problem, incomplete contracts etc) tells us that privately-owned natural monopolies, private-public partnerships and outsourced government operations will be inefficient, but neo-liberals think government will be even less efficient. It’s important to emphasise this is grounded in hunches about the world; the theory is ambiguous.

All of this without even getting to the fact that ECON101 doesn’t pretend to address distributional and fairness issues. That’s not because economists don’t think these are important, but simply because they are normative concepts that cannot be taught in a simple didactic way. Later on you do learn how to incorporate distributional value judgements into analysis.

It’s vitally important to break the link between economic theory and neo-liberalism. Too often pundits, policy wonks and even some very smart economists use language that glosses over the distinction. This is crucial to the hegemony of neo-liberalism in elite policy discourse. It must be called out.

Yes, ‘neo-liberalism’ is a thing

A lot of people say they’re confused about the meaning of “neo-liberalism”. I used to say that too, but on reflection it was probably wilful confusion due to my irritation with the people who used it.

But neo-liberalism, in its standard usage, is relatively straight forward to define, and is a useful way to capture a trend in policy and politics over recent decades.

Neo-liberalism refers to the reaction against Keynesian and traditional social democratic approaches to public policy that began in the 1970s, emphasising instead the efficiency of individuals, business, competition and markets. Neo-liberalism is not absolutist in promoting free markets, but rather it changed the burden of proof: neo-liberal policy-making involves strong priors that markets are superior to government.

Unlike philosophical libertarianism, neo-liberalism is not necessarily grounded in moral dogma regarding the absolute inviolability of property rights. It is more flexible, accepting government intervention under certain circumstances.

Neo-liberalism’s intellectual godfather was Milton Friedman. In the West, its political titans were Margaret Thatcher and Ronald Reagan.

Neo-liberalism implies certain rules of thumb for policymakers. These include support for tax cuts, restrained welfare, trade liberalisation, privatisation, deregulation and private service delivery. It is sceptical about minimum wages, unionism, price controls or subsidies. It is relatively reluctant to adopt Keynesian macro-economic policies.

(Note, contrary to a common misconception, neo-liberalism is not just applying ECON101. ECON101 tells you about the efficiency of markets under perfect competition, but not about whether to assume perfect competition as the norm or the exception. ECON101 describes the direction of relationships between demand and supply – such as in the labour market – but does not claim to tell you anything about the elasticities. It does not claim to tell you anything about the appropriate distributional trade offs, etc.)

Neo-liberalism applied to development policy is the Washington Consensus – which is perhaps the gold standard example of neo-liberalism.

Carbon pricing is ambiguously neo-liberal; on one hand it extends government, on the other hand it constructs a market. It can sensibly be described as “neo-liberal carbon reduction policy”, in the that it is the relatively neo-liberal approach to carbon reduction policy. Similarly, favouring school vouchers over public education would be neo-liberal.

Neo-liberalism applied to centre-left politics is Third Way. Hawke and Keating, Clinton and Blair all moved their parties discernibly in the direction of neo-liberalism, even though they didn’t embody the ‘ideal type’. Whether they should be described as “neo-liberal” (in the relative sense above), or more softly as “influenced by neo-liberalism” is a matter of context and personal judgement. Hawke and Keating did a great deal of non-neo-liberal policy, such as Medicare, so I would lean to the latter there.

Neo-liberalism is not inherently ideological – sometimes it is no more than a set of generalisations about supposed efficiency in policy-making – but it often does take on an ideological character. This is because in segments of the public domain these generalisations have taken on a sacred status, setting the terms of acceptable social and economic discourse.

Neo-liberalism is part of the collective wisdom of policy elites. It influences senior bureaucrats, politicians, policy commentators and business lobby groups. When pundits call for “economic reform”, they are usually calling for something that could be described as “neo-liberal”. They advocate for it in terms of neo-liberal assumptions shared by their audience.

In my experience, soft neo-liberalism is part of the culture of government central agencies. “Evidence-based policy” is a nice slogan, but the reality is that central agency staff lack the time to extensively examine evidence. They have to make rapid policy recommendations based on their assumptions and deductions, according to accepted rules of thumb. The collective framework of assumptions, often unspoken but socialised into staff nonetheless, is broadly consistent with neo-liberalism. That doesn’t rule out (frequent) departures from neo-liberalism, but the burden of proof is on the one proposing the departure.

I struggle to understand claims that neo-liberalism is too fuzzy to be useful. Yes, people can define neo-liberalism a bit differently at the margins. It can be overused. The word has had different meanings in the past. There are competing accounts of its emergence. It can be used as a punching bag rather than a scholarly tool. But these comments are true for just about every ‘ism’ in the book.

I would suggest there is much more consensus on “neo-liberal” than even its root, liberal. In the USA, socialists get called “extreme liberals”; in Australia the Liberal Party is the conservative party. Socialism can refer to anything from the Soviet Union, to North Korea, to Venezuela, to Denmark to (self-described) Tony Blair. Fox News says Obama was socialist. Then there’s capitalism, and most ambiguous of all, “democracy”. Neo-liberalism is a relatively concrete phenomenon as it can be associated with specific policies, and it emerged at a specific time.

Don’t believe me there’s a broadly consistent understanding of what neo-liberalism means? Here are some examples:

IMF Research Department

The neoliberal agenda—a label used more by critics than by the architects of the policies—rests on two main planks. The first is increased competition—achieved through deregulation and the opening up of domestic markets, including financial markets, to foreign competition. The second is a smaller role for the state, achieved through privatization and limits on the ability of governments to run fiscal deficits and accumulate debt.­

There has been a strong and widespread global trend toward neoliberalism since the 1980s, according to a composite index that measures the extent to which countries introduced competition in various spheres of economic activity to foster economic growth… Chile’s push started a decade or so earlier than 1982, with subsequent policy changes bringing it ever closer to the United States. Other countries have also steadily implemented neoliberal policies…

Joseph Stiglitz, Nobel Prize in Economics

that grab-bag of ideas based on the fundamentalist notion that markets are self-correcting, allocate resources efficiently, and serve the public interest well. It was this market fundamentalism that underlay Thatcherism, Reaganomics, and the so-called “Washington Consensus” in favor of privatization, liberalization, and independent central banks focusing single-mindedly on inflation.’

Professor John Quiggin, University of Queensland

The core of the neoliberal program is
(i) to remove the state altogether from ‘non-core’ functions such as the provision of infrastructure services
(ii) to minimise the state role in core functions (health, education, income security) through contracting out, voucher schemes and so on
(iii) to reject redistribution of income except insofar as it is implied by the provision of a basic ‘safety net’.

Professor Dani Rodrik, Harvard University

That neoliberalism is a slippery, shifting concept, with no explicit lobby of defenders, does not mean that it is irrelevant or unreal. Who can deny that the world has experienced a decisive shift toward markets from the 1980s on? Or that center-left politicians—Democrats in the United States, Socialists and Social Democrats in Europe—enthusiastically adopted some of the central creeds of Thatcherism and Reaganism, such as deregulation, privatization, financial liberalization, and individual enterprise?

Neo-liberalism is not inherently pejorative, although it is true the term is mostly used by its critics. This is understandable. People don’t like it when you historicise their convictions. They prefer to describe their beliefs with bland, faux universal terms – “sound economics” or “good policy”, language that takes for granted the basic validity of the underlying assumptions. It can be easy to get away with this if your beliefs are institutionally dominant.

Critics, on the other hand, want to package up opponents’ clusters of beliefs, and label them; this assists with the efficiency of critique and highlights the beliefs’ social and historical contingency – and therefore potential transience. Explicitly contextualising something to a specific time and space can make it seem less necessary, less given.

I think another reaction against the term comes from people with nuanced beliefs who object to a concept that lumps together policies and principles they support with ones they oppose, particularly when they feel the term is only engineered for generic debunking.

The reality is this: some meritorious neo-liberal policies have improved economic efficiency. But overall neo-liberalism has contributed to the drastic surge in inequality over recent decades. It has contributed to global financial crisis. It is not surprising people want to criticise neo-liberalism.

Critiquing neo-liberalism as a broad policy movement does not (or should not) mean opposing every single policy that could conceivably be described as neo-liberal. No more so than criticising communism means rejecting universal healthcare.

It does mean that neo-liberalism’s generalisations about individuals, business and competition are just not up to the job of determining economic policy, that they are overly simplistic at best and systemically biased in favour of the wealthy elite at worst. It is an invitation to do better.