A prominent feature of economics which tends to evade majority of the people outside the field is that there are many competing narratives and philosophies vying for attention of practitioners and policymakers alike. Even more striking is the fact that just like the troughs and peaks witnessed in terms of economic growth (commonly referred to as business cycles), competing philosophies in economics have also see rise and decline over time. The ‘neoliberal’ economic model, as it is known, has been experiencing the same as of late. From its undisputed superiority as the primary model of economic growth over the almost four decades (staring with the 1970s), it has now been on a downward trajectory since 2008, when the ‘Great Recession’ shook the foundations of the global economy.
It is instructive to look at the history and factors that led to this decline since it can inform us of the factors that propagate a particular economic philosophy to its zenith or push it towards decline.
Broadly speaking, Neoliberal economic philosophy is used to denote free market, the ‘laissez faire’ thinking in economic policy making. Independent, unregulated and unfettered workings of markets are the main feature of this model since these attributes are what give rise to the accumulation of capital and wealth. A growth in income and wealth would, in turn, be beneficial to the society since the wealth would ultimately trickle down to the population, thereby ensuring that the fruits of prosperity are distributed more equally. Governments should have a very limited role in economic affairs since regulations could stifle the overall process of growth. Put another away, neoliberal economics is akin to the laissez faire version of capitalism.
It has its antecedents in what is called the ‘neo-classical’ school of economics, whose growth was the result of opposition to Keynesian school of economic thought. In the early 1970’s, when the spectre of stagflation (high inflation plus high unemployment) haunted the industrialized nations, neoliberal philosophy gradually began to take hold. Propagated mainly through the Chicago school of economics and economists like Milton Friedman and Robert Lucas, it advocated liberalization of economies and the unhindered workings of markets since they (through forces of demand and supply and price signals) are the best guide to where resources need to go.
At that time, this philosophy (and capitalism in general) were jostling for supremacy against the communist economic philosophy. The 1980s saw the meteoric rise of neoliberal economic thinking as the economic policies under Ronald Reagan and Margaret Thatcher met with tremendous success. At the time when western nations were realizing notable economic gains, the Soviet economy under communist workings was gradually withering away, ultimately resulting in complete dismemberment of the Soviet Union. There now remained no doubt as to which economic philosophy triumphed! Francis Fukuyama, a noted political scientist, even went to the extent of proclaiming The End of History, the title of his celebrated essay. For him, there now remained no hindrance in terms of an integrated world under the umbrella of democracy, market economy and neo-liberal economic policymaking.
Other economic policies and thought, even the one’s attached to capitalism, were given short shrift by some leading lights of the field of economics. Robert Lucas, a Nobel prize winner and a leading proponent of neo-liberal economic thought, once boasted that economics should only be concerned with the issue of economic growth as other pressing issues (business cycles, poverty, inequality) were now irrelevant to economic debate. Moreover, he further bragged that any mention of Keynesian economic ideas elicits giggles!
But he was made to eat his words as the recession struck in 2008. The shock that spread with the default of a few investment firms almost brought the entire global economic order to its knees. It was only the large-scale intervention by governments that averted a complete collapse, from recession turning into outright depression. Since government intervention at such massive scale was considered an anathema for economic health by the neo-liberal model, the events post-recession raised queries about the neo-liberal model rather than the government intervention in economic affairs.
Issues that have led to neo-liberal economics to be increasingly questioned vary in its scope and character. Arguably the most pressing issue is the uneven distribution of gains from economic growth. The much-touted ‘trickle down’, which was supposed to act as an automatic mechanism in terms of distributing economic gains, has failed to deliver. Income inequalities, globally and within countries, are at its historic high. This is something that leading economists like Joseph Stiglitz (a Nobel prize winner) have been pointing out for some time. This is what drove the outpour of masses onto streets in the Wall Street vs. Main Street protest around the industrialized nations. More tellingly, this widening gap between the gains accruing to various classes (measured through income gains of various tiers of income earners) has been traced to 1970s and early 1980s, a time when neo-liberal economic philosophy began to take hold. Neo-liberal economics does not offer much in terms of addressing the widening income disparities.
A particularly obnoxious outcome is the growth of powerful rent-seeking groups and billionaire entrepreneurs, who use their financial muscle to extract favours from the ruling elite. A glaring example is the financial contribution to the political campaigns of various contenders to lead a country. Since politics in general, and political campaigns in particular, are now critically dependent upon monetary contributions, it is an avenue that has been ruthlessly exploited by the rich through their wealth. The result is that more often than not, they tinker with the system (through elected representatives) to tweak its working in their own favour, resulting in addition to their already considerable wealth. The notable resistance to higher taxes on capital (or wealth tax) and increasing minimum wages are two reflections of their influence that flows through government channels.
The notable decline in share going to the lower tiers of income earners has been accompanied by other adverse outcomes for workers. Not only have they lost bargaining power (primarily due to the decline of unions) but have also seen job security vanish. Although neo-liberal policies have given us outsourcing and Uber, these phenomena have come without the kind of security that were once associated with jobs (insurance, post-retirement benefits like pension, etc.). When one hears the refrain that ‘good’ jobs have vanished, this loss of security is what is being implied.
Before concluding this written piece, a word of caution is in the offing. The above stated are not necessarily relevant to every single nation around the globe. For example, the problem in Pakistan’s case is not minimum or no government interference in economic affairs, but rather too much intrusion in almost every sphere of economic life. One result of this interference, similar to neo-liberal policies in its ramifications, is the presence of powerful rent-seeking groups that afflict considerable damage to the working of the economy in a manner that fruits of growth are distributed evenly.
In the end, it would be safe to state that neo-liberal economic policies seem to be on the decline given its failure to come up with solutions to pressing economic issues of our times.
The writer is an economist
It is instructive to look at the history and factors that led to this decline since it can inform us of the factors that propagate a particular economic philosophy to its zenith or push it towards decline.
Broadly speaking, Neoliberal economic philosophy is used to denote free market, the ‘laissez faire’ thinking in economic policy making. Independent, unregulated and unfettered workings of markets are the main feature of this model since these attributes are what give rise to the accumulation of capital and wealth. A growth in income and wealth would, in turn, be beneficial to the society since the wealth would ultimately trickle down to the population, thereby ensuring that the fruits of prosperity are distributed more equally. Governments should have a very limited role in economic affairs since regulations could stifle the overall process of growth. Put another away, neoliberal economics is akin to the laissez faire version of capitalism.
It has its antecedents in what is called the ‘neo-classical’ school of economics, whose growth was the result of opposition to Keynesian school of economic thought. In the early 1970’s, when the spectre of stagflation (high inflation plus high unemployment) haunted the industrialized nations, neoliberal philosophy gradually began to take hold. Propagated mainly through the Chicago school of economics and economists like Milton Friedman and Robert Lucas, it advocated liberalization of economies and the unhindered workings of markets since they (through forces of demand and supply and price signals) are the best guide to where resources need to go.
At that time, this philosophy (and capitalism in general) were jostling for supremacy against the communist economic philosophy. The 1980s saw the meteoric rise of neoliberal economic thinking as the economic policies under Ronald Reagan and Margaret Thatcher met with tremendous success. At the time when western nations were realizing notable economic gains, the Soviet economy under communist workings was gradually withering away, ultimately resulting in complete dismemberment of the Soviet Union. There now remained no doubt as to which economic philosophy triumphed! Francis Fukuyama, a noted political scientist, even went to the extent of proclaiming The End of History, the title of his celebrated essay. For him, there now remained no hindrance in terms of an integrated world under the umbrella of democracy, market economy and neo-liberal economic policymaking.
Other economic policies and thought, even the one’s attached to capitalism, were given short shrift by some leading lights of the field of economics. Robert Lucas, a Nobel prize winner and a leading proponent of neo-liberal economic thought, once boasted that economics should only be concerned with the issue of economic growth as other pressing issues (business cycles, poverty, inequality) were now irrelevant to economic debate. Moreover, he further bragged that any mention of Keynesian economic ideas elicits giggles!
But he was made to eat his words as the recession struck in 2008. The shock that spread with the default of a few investment firms almost brought the entire global economic order to its knees. It was only the large-scale intervention by governments that averted a complete collapse, from recession turning into outright depression. Since government intervention at such massive scale was considered an anathema for economic health by the neo-liberal model, the events post-recession raised queries about the neo-liberal model rather than the government intervention in economic affairs.
Issues that have led to neo-liberal economics to be increasingly questioned vary in its scope and character. Arguably the most pressing issue is the uneven distribution of gains from economic growth. The much-touted ‘trickle down’, which was supposed to act as an automatic mechanism in terms of distributing economic gains, has failed to deliver. Income inequalities, globally and within countries, are at its historic high. This is something that leading economists like Joseph Stiglitz (a Nobel prize winner) have been pointing out for some time. This is what drove the outpour of masses onto streets in the Wall Street vs. Main Street protest around the industrialized nations. More tellingly, this widening gap between the gains accruing to various classes (measured through income gains of various tiers of income earners) has been traced to 1970s and early 1980s, a time when neo-liberal economic philosophy began to take hold. Neo-liberal economics does not offer much in terms of addressing the widening income disparities.
A particularly obnoxious outcome is the growth of powerful rent-seeking groups and billionaire entrepreneurs, who use their financial muscle to extract favours from the ruling elite. A glaring example is the financial contribution to the political campaigns of various contenders to lead a country. Since politics in general, and political campaigns in particular, are now critically dependent upon monetary contributions, it is an avenue that has been ruthlessly exploited by the rich through their wealth. The result is that more often than not, they tinker with the system (through elected representatives) to tweak its working in their own favour, resulting in addition to their already considerable wealth. The notable resistance to higher taxes on capital (or wealth tax) and increasing minimum wages are two reflections of their influence that flows through government channels.
The notable decline in share going to the lower tiers of income earners has been accompanied by other adverse outcomes for workers. Not only have they lost bargaining power (primarily due to the decline of unions) but have also seen job security vanish. Although neo-liberal policies have given us outsourcing and Uber, these phenomena have come without the kind of security that were once associated with jobs (insurance, post-retirement benefits like pension, etc.). When one hears the refrain that ‘good’ jobs have vanished, this loss of security is what is being implied.
Before concluding this written piece, a word of caution is in the offing. The above stated are not necessarily relevant to every single nation around the globe. For example, the problem in Pakistan’s case is not minimum or no government interference in economic affairs, but rather too much intrusion in almost every sphere of economic life. One result of this interference, similar to neo-liberal policies in its ramifications, is the presence of powerful rent-seeking groups that afflict considerable damage to the working of the economy in a manner that fruits of growth are distributed evenly.
In the end, it would be safe to state that neo-liberal economic policies seem to be on the decline given its failure to come up with solutions to pressing economic issues of our times.
The writer is an economist