Sunday, October 7, 2007

Neoliberalism 101

By Ted Lechterman


It’s not your grandmother’s liberalism, that’s for sure. There are, in fact, two brands of neoliberalism. When contrasted against neorealism, neoliberalism can mean the approach to international relations that stresses collective security through interdependence, supranational institutions, and soft power. In the economic realm, however, neoliberalism forms the backbone of the right-wing intellectual movement. Today, neoliberalism—sometimes referred to as free-market capitalism or market fundamentalism—has ascended to the point where it has co-opted the title of “mainstream” economics. While neoliberalism presents a legitimate approach to economics, its hegemony obscures equally legitimate approaches from the fields of study, debate, and policy. The following presents a brief introduction and a critical analysis of certain aspects of neoliberalism, which I will use as a shorthand for the convergence of similar streams of mainstream economic thought. I first examine the reach of neoliberalism’s influence; next I draw out some of its guiding principles before discussing its policy prescriptions and evaluating their impact.

Neoliberalism at Harvard and Beyond

Neoliberalism is the lingua franca of Harvard’s economics department and the only school of thought to which a credulous student of economics will be exposed. [1] Neoliberalism is the guiding philosophy behind the Harvard Corporation, which helps to explain why movements toward socially responsible investing and employment policies encounter bitter resistance. A frequent critic of student labor activism is N. Gregory Mankiw, professor of the giant introductory economics class Social Analysis 10: Principles of Economics (“Ec 10”). Mankiw has worked as chairman of President Bush’s Council of Economic Advisors. Mankiw was preceded by Martin Feldstein, who taught Ec 10 for 20 years and was chairman himself under President Reagan. Feldstein mentored none other than Lawrence H. Summers, former Harvard president, Secretary of the Treasury, and chief economist at the World Bank. Summers, whose economic policies, like those of his colleagues, leaned heavily to the right, in turn mentored the infamous Andrei Shleifer. With the help of Summers, Shleifer later settled a lawsuit with the Justice Department that charged him with defrauding the U.S. Government for corrupt dealings while advising Russian industrial privatisation. While I do not mean to imply a link between neoliberalism and corruption, I do want to emphasize that the political positions and controversies that have become associated with these Harvard economists are not mere coincidences, but rather predictable consequences of neoliberal economic philosophy. Many of President Summers’ polarizing statements, for example, came out of the context of neoliberal policy positions, and, to an extent, Shleifer’s missteps in Russia resulted from the policies he was implementing. These conspicuous characters and events, however, overshadow the day to day influence of neoliberalism at Harvard, where economics is the largest undergraduate concentration and the financial industry draws in the highest percentage of students after graduation.

Economic liberalism has governed several periods of American history, including the period leading up to the Great Depression. The Keynesian welfare state emerged from the Depression and World War II as a model compromise between a growing market economy and an inclusive distribution of wealth. This model lacked the dynamism that many economists believe to be central to economic health. What began as a critique of the largess of the welfare state, however, resulted in a concerted effort to unbridle the forces of capitalism. The progenitors of neoliberalism, such as Friedrich Hayek, Milton Friedman, and Ayn Rand, reacted to the egalitarian ethos of the welfare state with a call to restore the spirit of rational egoism, advocating for a society in which each individual pursues her self-interest. Neoliberalism took center stage during the Reagan Administration, and has been the guiding force behind U.S. economic policy ever since. The so-called Washington Consensus, the term for the neoliberal package of policy prescriptions that the U.S. has exported internationally, now governs the policies of many U.S. allies, recipients of U.S. aid, the Bretton Woods institutions, and the World Trade Organization (WTO). Recently, neoliberalism has been encroaching on the European Union, one of the few remaining bastions for social democracy, such as with the election of Nicolas Sarkozy in France.

What’s Wrong with Self-Interest?

Neoliberalism begins from a particular view of human nature: homo economicus. The “economic man” is one who acts rationally, by maximizing his self-interest. Self-interest, in this context, traditionally means material resources, though revisionists have pointed out that the maximizandum (i.e., that which we are to maximize) could be any resource, from something as mundane as physical sustenance, to something instrumental like money or power, to something as abstract as happiness. Economic man, and neoliberal thought more generally, engages in instrumental reason, the process of determining the best means to a given end. According to neoliberal psychology, human beings have limited, if any, authentic concern for each other, or for higher principles such as community, religion, justice, or the good life. The economic man, therefore, is invariably selfish, distrustful of cooperative ventures, and pessimistic about human capabilities. He is reminiscent of a being in Hobbes’ state of nature, where a constant war of all against all proscribes social behavior.

We must ask ourselves whether (1) the concept of homo economicus presents an accurate description of human behavior, and (2) whether it presents a desirable or legitimate form of such behavior. I believe it does neither of these. In fact, homo economicus has undergone significant criticism for its atomistic assumptions (cf. methodological individualism) about human sociality; it is continually facing challenges from the natural sciences for its descriptive fallacies, and from normative fields, such as theology and moral philosophy, for the implications of its amoralism.

Despite its dubious claims to truth, just as subatomic particles ground the natural sciences, homo economicus is the fundamental principle of mainstream economic analysis. Even more surprising, given its limited generalizability even at the individual level, homo economicus is extended to analogize aggregate social units, such as the firm and the state. For the firm it has the effect of justifying its raison d’ĂȘtre of maximizing profits for its shareholders and minimizing costs. Likewise it justifies the nation-state as a unitary rational actor attempting to maximize power of one kind or another. Homo economicus thus sustains the corporate ethic that governs the economy and increasingly invades other domains of social life, economizing our relationships with one another. What begins as a claim to scientific impartiality becomes a normative ethic unto itself. Yet neoliberalism often cloaks itself in scientific rhetoric, and its normative underpinnings, which at the very least merit debate, elude the public conscience.

Privatization and “Free” Markets

When neoliberals argue for privatization of government services, they are claiming that private industry, through the profit motive, can run services better or more efficiently than government agencies. Value claims like “better” and “most efficient,” however, beg the question as to what might constitute goodness or efficiency. As I explained earlier, instrumental reason, the process by which one determines the best means to a given end, is the sine qua non of neoliberal thought. Concerns for efficiency and maximization, therefore, always rule out over alternatives. The fact that the profit motive might not be appropriate in many government activities—e.g., health care, defense, education—cannot enter into neoliberal reasoning, and thus often escapes public discussion.

The buzzword “choice” also comes up a lot in the context of privatization. By turning public goods over to individual stewardship, neoliberalism argues that through the ensuing competition of the market individuals can gain more options at various prices. While this may be true, it is rarely desirable. One function of government is to solve collection action problems by holding public goods in common and providing services to which each citizen has an equal claim. Privitization, on the other hand, tends to exacerbate inequalities. For example, those who are already wealthy and financially astute have the most to gain from the privatization of Social Security. Those who have less money often have less time and financial experience to administrate their own retirement funds effectively. Rhetorically, choice benefits everyone. Practically this is rarely the case.

Privitization is one element of the argument for free markets, the idea that governments are maladroit at economic management, and that regulations and taxes infringe on innovation and production. Rather, neoliberals insist, the “invisible hand” of the market will regulate the natural give-and-take of supply and demand. An unregulated market can produce more, they argue, and an ever-enlarging economic pie is best because it provides more “choice,” which benefits everyone. Neoliberals advocate against labor unions and minimum wages, which they regard as artificial barriers to efficiency.

“Free” Trade

According to the theory of comparative advantage, when nations specialize in industries in which they are most adept and trade their excess production, more goods enter into the economy with the potential to benefit all of the trading partners.

In reality, specializing in the production of certain goods takes away a country’s self-sufficiency and leaves it vulnerable to fluctuations in the global economy. Furthermore, the rallying cry of free trade finds conspicuous sympathy from multinational corporations, who are more than happy to exploit untapped markets for labor and consumption in hitherto recalcitrant regions. Free trade contributes to the rise in inequality among nations and the uneven distribution of the benefits and losses from globalization. Neoliberals argue that global poverty is the result of local policies, rather than globalization itself. However, when a developing country, recovering from the yoke of colonialism, finds its options closed off by aggressive foreign investment and dogmatic trading regimes, it is hard to argue that local policies are the result of autonomous choice.

Three Critiques of Market Fundamentalism

1. Inequality and Distributive Justice: It should be no surprise that we enter the world endowed with a set of resources entirely contingent on the family, country, and circumstances into which we are born. Without modest regulation, such as collective bargaining or minimum wages, those of us who must sell our labor fall at the mercy of those born with a better hand of cards. The logic of profit maximization, meanwhile, leads firms to compensate labor at the bare minimum. An unregulated market confers disproportionate benefits to the most well-off while exploiting the labor of the least well-off. These trends tend to be self-reinforcing: increasing concentration of wealth corresponds to an increasing concentration of power in monied interests. Poverty—the inability to provide for one’s basic needs—is but one endemic consequence of inequality.

Neoliberals are generally deaf to concerns about inequality because of their obsession with Pareto optimality. Pareto optimality holds that if someone can be made better off without making anyone else worse off, one can, and one should, make a “Pareto improvement” by accepting the exchange. Economic growth, therefore, takes precedence over economic justice. From this logic, if the rich get richer and the poor stay poor, society experiences a net gain. The logic of Pareto tends to form the horizon of neoliberal responses to distributive justice

2. Public Safety and Environmental Degradation: Without any counterbalance, the lack of regulation under a free market paradigm threatens public health and depletes the environment. Marketing dangerous products and polluting the environment are tremendously efficient practices in the short-run, as firms can write off the costs of safety mechanisms and environmental sustainability. Conservation and wellness only enter into the neoliberal calculus when they can be seen as profitable for one reason or another. Currently, what seems to be most profitable (or least costly) is to use public relations techniques to convince consumers that a particular company or product is “green,” regardless of its true environmental impact. Examine the current ad campaigns of the energy industry for a case in point.

3. Consumer Culture and Escapism: The hegemony of the reigning economic order conspires to convince the losing parties of the inevitability of their plight. The escapism of consumerism and mass-produced popular culture distracts the least well-off from their declining standard of living and erodes civil society. We tend to be much more interested in Paris or Britney’s latest exploits than the fact that 30,000 children under the age of 5 die each day from preventable diseases, or that many of us lack health insurance. Particularly under the gloss of neoliberalism’s scientific rhetoric, the economy as we know it seems monolithic and immutable, so much so that we feel like no amount of our own effort could have an impact. Neoliberalism bears particular blame for this state of affairs because it promotes the skewed distributional patterns that lead to despair and despondency. It encourages the escapist enterprises that prey upon our vulnerabilities and prolong our struggle.

Alternative Schools of Thought

The overriding theme of this piece has been that markets, while appropriate in certain circumstances, can be dangerous in others. Market values need to be weighed against other values, and this is something neoliberalism, the dominant economic ideology of our time, fails to do. How can we promote a dynamic vision of the economy without sacrificing our beliefs about the right and the good? Not all heterodox theories are equally advanced or consistent in their tenets, but an inquisitive student owes it to herself to apprise herself of all the options. A common misconception—one which neoliberal demagogues have relished in perpetuating—is that the only alternative to neoliberalism is some form of socialist command economy. This could not be further from the truth. Countless schools of economic thought are advancing critiques of the reigning dogma as well as alternative ways to organize the production and distribution of resources, particularly with an eye toward social and environmental justice. The onus, however, is on the student to discover these alternatives. Chances are, you won’t find them at Harvard.


[1]: A critic might contend that the Economics Department subscribes, rather, to neoclassical foundations, which might serve as a jumping off point for neoliberal ideology. I argue, however, that neoclassical foundations lend themselves too easily to neoliberal ideology, to the point where distinguishing between the two is not instructive. Whether or not this has always been the case is debatable. Today, though, we see a convergence of neoclassical and neoliberal thought, so much so that to call oneself a neoclassicist but not a neoliberal has become self-contradictory.