Wednesday, August 20, 2008

Economist's Notebook: Is Neoliberalism Dead?

Generally considered synonymous with the fabled “Washington Consensus,” neoliberalism has been on the ascendancy since the early 1990s with the fall of the Soviet Union and subsequent weakening of state control in many economies, most notably China and India. The basic neoliberal agenda is to keep government as minimally involved in the economy as possible, to promote private property (laws/courts/enforcement of private property rights) and economic integration through free trade. The success of China and India in following neoliberal policies practically closed the book on state intervention that had been very common in the 1970s and 1980s.

Now, however, with the impact of economic activity on the global climate coming under intense scrutiny, the adverse affects of increased commodity prices especially on the poor, and the recent failure of world trade negotiations, there has been some very serious questioning of the entire neoliberal agenda by such prominent economists as Nobel laureate Joseph Stiglitz. These very vocal critics represent a sea change in the way neoliberalism has been viewed by the economic cognoscenti. The essence of these critiques, in my view, is whether the increased challenges of such externalities as environmental degradation, global climate change, poverty and inequality and the structural adjustments of domestic economies when integrating with the global economy (most notably in agriculture) can be adequately addressed by the market based neoliberal agenda. Or, put another way, can a neoliberal agenda bend enough to appropriately address these new challenges (well, not new, but of significantly increased seriousness)? Many think no, that as long as the neoliberal agenda is the starting place you can never have a serious enough effort to address the problems of poverty, inequality and global climate and environmental degradation. They argue that the world needs more, not less, governmental intervention and coordination across borders and neoliberalism is anathema to these efforts.

I am not ready to go as far as this. I will defend neoliberalism as it certainly has been shown to be effective in creating wealth and prosperity for hundreds of millions of people who would probably not otherwise have been able to obtain it. As a starting place then, I think neoliberalism has proven very effective. I also share the basic belief, common among economists, that markets are inherently democratic. I am not yet ready to say that neoliberalism is unable to accommodate government intervention to the extent necessary to solve the world’s ills. I think some evidence of this is the recent, massive shift in the awareness of global climate change. It was not very long ago that awareness was low and the impetus to meet the coming challenges was nonexistent. It was largely the (free-market) success of Al Gore’s movie and scientists and environmentalists working within the free marketplace of ideas that has brought the issue to the forefront of popular consciousness. Despite the current administration’s efforts to suppress these very efforts, the very neoliberal nature of the United States has proven too great to overcome and their efforts have failed.

So, I am still an advocate of free markets where appropriate and I remain a staunch defender of free trade in principle, but I also think that neoliberalism needs to become much more sympathetic to government intervention and must also be able to be flexible. Not every country is ready for a neoliberal revolution and the very immediate problems of poverty, inequality and environmental degradation must be addressed along with free market reforms. It is not enough to expect free markets to solve these problems over time, or to wait for government intervention until the reforms have had time to take hold. But is also impossible to utilize the resources of a country to address these problems without first creating these resources.

Consider this a first pass to start a discussion. So, discuss….

1 comment:

Dave Porter said...

This is a good, if slippery, question. It is a good question because it cuts to the core issues: more or less government regulation/intervention and what kinds of regulations and interventions. It is a slippery question because “neoliberal” is a slippery, not well defined, term. Often policies, or effects of policies, are call “neoliberal” when they are not: free market rhetoric is concealing government intervention on behalf of the powerful. And even most neoliberals would admit, I think, that free markets need rules, aka regulation. The issues become what rules are best or fair and who should make them.

Another way of posing this issue is to ask “What should be the rules of globalization?”

My thoughts:

(1) Markets do need rules. International markets need international rules. Much of the perceived failure of neoliberal economics is that we have reached the limits of what the current international political institutions can deliver in terms of global economic rules. New political institutions are needed. New issues need to be addressed (global warming) and new participants need to be part of the rule making process (China, India, Brazil, etc).

(2) Powerful economic interests manipulate political institutions, both domestic and global, to get what they want. Many of Joseph Stiglitz’s criticisms, for example, are cases of free-market rhetoric covering government intervention on behalf of the politically powerful. So what may start out as an economic question can become a political question: how does the globe, or a nation, maintain political institutions that are fair, that do not favor the powerful?

(3) Free trade is good in theory, and in practice globally has produced remarkable global growth, bringing billions out of poverty. But in practice it also suffers greatly from the manipulation of powerful economic interests. A trade agreement that may sound good in general is often loaded with so many special interest provisions as to make it far from “free” or “fair.”

(4) Change produces discontent. Across the global, new economic opportunities are opening up. Not everyone is happy even as they become richer. Being uprooted from culture and tradition creates blowback. Many become confused about what they really want or what the choices are before them. Not everyone understands economic, especially international trade issues.

(5) Free markets and democracy do not need to go hand-in-hand (think China). This gets at the issue of who makes the market rules. Much of the 21st century will be spent figuring out what mixtures of free markets (how free and what rules) and democracy (how democratic or who makes the rules) work best. The track record of the US so far this century in not dealing with our big issues does not argue well for our particular set of political institutions.