The economics of Neoliberalism

What is Neoliberalism? The term does not seem to be well known or much discussed, perhaps because it’s become so accepted that “this is the way the post-modern economy is” that it is not recognised as a complete philosophy in its own right. The term itself is confusing as most people associate the word “liberal” with liberal politics, whereas in this case it refers to economic liberalism. Liberalism in economics refers to the level of government intervention in the market – the “free market” is one where all participants are free to make choices and decisions without any statutes standing in the way. In theory, if never in practice, this results in the most efficient distribution of scarce resources and maximises desirable outcomes. However, such ethereal concepts as perfect competition among infinite numbers of small firms only exist in Economics textbooks.

So what’s new, or different, about Neoliberalism? After WW2, for some thirty years capitalism experienced a “Golden Age” of innovation and expanded output (growth in GDP). Wages rose in tandem with this increased output. One of the philosophies of this era was Fordism; the notion that workers should be in a financial position to be able to buy the goods that they produce. But the Golden Age was not without its problems; it was driven by factors which were inherently limited, such as urbanisation, which you only get once. Inflation was a serious by-product of prosperity. This was compounded in the 1970s when the growth rate declined to almost zero but inflation remained high – this is called stagflation. Business and financial investors, who had previously been willing to tolerate taxes, unions, social programs and regulations, began to rebel against inflation, shrinking profits and what they saw as the militancy of labour. This was no doubt influenced also by left wing revolutions in parts of Asia, Africa and Latin America. Business demanded a hardline response, and through Thatcher and Reagan, they got it.

The following is from “Economics for Everyone” by Jim Stanford; the key goals and tools of Neoliberalism:

Key goals:

– Reduce and control inflation; protect the value of financial wealth

– Restore insecurity and “discipline” to labour markets

– Eliminate “entitlements”; force families to fend for themselves

– Roll back and refocus government activities to meet business needs, cut taxes.

– Generally restore the economic and social dominance of private business and wealth

– Claw back expectations, foster a sense of resignation to insecurity and hardship

Key tools:

– Use interest rates aggressively to regulate inflation and control labour markets

– Privatise and deregulate more industries

– Scale back social security programs (especially for working age adults)

– Deregulate labour markets (including attacks on unions)

– Use free trade agreements to expand markets and constrain government interventions

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