Saturday, June 19, 2010

Neoliberalism and laissez faire

Economist Scott Sumner makes the following distinction in the context of a discussion of the Heritage Foundation’s Economic Freedom index:
I prefer the term ‘laissez-faire’ for the small government model measured by Heritage (using all 10 categories) and ‘neoliberal’ for the model of free markets plus social insurance (such as Denmark.)
I do not much like the term 'neoliberal' but I approve of Sumner’s distinction between it and laissez faire, since what is called "neoliberalism" is best understood as economic liberalism in the context of welfare states (or otherwise significantly interventionist states). Indeed, liberalising reforms have often been undertaken by centre-left governments in developed welfare states precisely to make the welfare state more sustainable.

Sumner’s distinction picks up on a key point: the phenomenon labelled “neoliberalism” is a trend in economic policy, it is not an ideology. When even North Korea undertakes liberalizing reforms (albeit in sheer desperation) we can see that ideology is not the driving factor here.

If one is aware of wider economic history, then it makes even less sense to see “neoliberalism” as a form or manifestation of ideology. Liberalising reforms typically have three elements to them:
“De-regulation”, abolishing or loosening regulatory interventions in markets;
“Corporatisation”, turning government production units into firms; and
“Privatisation”, selling off government assets or otherwise transferring them to the private sector.
To put it another way, these reforms reduce transaction costs, redefine and reassign property rights and expand access to private funds for infrastructure development. Typically, they occur when the state is facing some sort of fiscal crisis.

If we look at them in that way, then reforms of such form go back in Western history at least to the medieval period. A medieval borough, for example, was an enterprise zone with its own governance structure.

They are a recurring pattern because the policy premium on economic efficiency goes up and down and they are all ways of increasing economic efficiency. Lowering transaction costs means there will be more transactions. Clearly defining property rights lowers transaction costs. Assigning property rights so they align with incentives encourages economic activity. Increasing the ability for private investment to profit from investing in and/or maintaining infrastructure increases the level and operation of infrastructure.

If the state is in some sort of fiscal crisis, then the policy premium on economic efficiency goes up, encouraging policy makers to look for ways of increasing it. With the expansion of Western welfare states in the 1960s (increasing obligations on the state) and the collapse in productivity growth in the early 1970s (decreasing underlying rates of economic growth), the stage was set for a wave of liberalizing economic reforms in Western countries.
Competitive jurisdictions also tend to put pressure on policy makers, either because capital and labour starts leaching away to friendlier jurisdictions or because the effective capacities of rival states increases, or both. (For example, the post-Deng reforms economic take-off of China--which produces lots of striking factoids, such as China now exports in six hours what it did in the whole of 1978--clearly put pressure on Indian policy makers not to accept the LSE/Hindu rate of growth and to start tackling the Permit Raj.)

Such reforms rest on treating public policy as something other than intentions + resources => outcomes. Those whose politics (indeed, often their sense of identity) rests on the conspicuous compassion of their intentions tend to resist such changes. Typically by attacking the alleged intentions of such policies. Often without bothering to do any serious research into what advocates of liberalizing reforms actually say or believe. Telling such people that “neoliberalism” in the Western democracies was about preserving the sustainability of welfare states is likely to get a very hostile reaction, since it deprives them of their sense of superior intentions (and the characterizing of those with different policy prescriptions as having patently “evil”, and thus inferior, intentions).

Yet it is clearly the case that keeping the welfare state sustainable was fundamental to the “policy coalitions” that supported liberalizing reforms. It is no accident that deregulation in the US got underway during the Carter Administration, that the Hawke and Lange governments in the Australia and New Zealand were liberalizing governments and that the first bout of liberalizing reforms in Australia was under the Whitlam Government.

The trend over recent decades to such liberalizing reforms, including specifically by centre-left governments, is part of the longer term trends in social democracy: which is for the liberal element to increase and the socialist element to decrease. Stage one was the adoption of liberal politics (i.e. parliamentarianism), creating the social democratic tradition. Stage two was the abandonment of further nationalization of productive enterprises. Stage three was de-regulation, corporatisation and privatization. (Which could be characterised as receiving new information about the efficiency of markets.) Stage four will be the abandonment of the nationalization of the household (i.e. substantive welfare reform).

But the tendency for economic liberalization extends well beyond the evolution of social democracy. Since incentives matter, aligning control of attributes with incentives encourages their more productive use and lowering transactions costs increases the number of transactions there will be more waves of such reforms whenever the policy premium on economic efficiency is high enough. Which is my basic difficulty with the term ‘neoliberal’: it takes the historical context out of events.


  1. Because I lived through the first three stages I recognize them but by stage four I am not clear what you mean by 'nationalization of the household'. I understand 'welfare reform' as governments trying to cut their costs and that since they now have less money they will cut a lot - but beyond that nationalization of the household could mean many things. More broadly your explanation of neoliberalism makes some points I find helpful. Like Carter was a deregulator - it was he, not Reagan, who signed the S&L legislation I believe. Yet Reagan did a lot of deregulator too. Were Reagan and Thatcher neolibnberals in your view? I think your formulation catches the Hawke Keating years nicely. But again I wonder if labor market deregulation is part of neoliberalism in your view? I'll go out on a limb and say that I can't think of any government that has done it better than the Hawke Keating government although I didn't appreciate it fully at the time. Thatcher and Reagan did it by confrontation and I think the latter did a poorer job and left socially destructive unionism (ie the kind that will eat thier host) with too much control of the US automotive industry. (I would see the Greek public service as a 'soverign' variation.)The US progressives currently in power seem to me to be a kind of American variant of 'conspicuous compassion' that haven't really changed all that much since Henry Wallace was marginalized in 1948 by Harry Truman. That is they seem determined to enact the mid century welfare state that Europe did after WWII because as you point out they have superior intentions without any apparent awareness for the neoliberal reforms needed to pay for them.:-)

  2. My view is that no-one is a 'neoliberal' (except in a very specific uses of the term in the US and Germany): there are, however, people who undertake or support "neoliberal" reforms. Both Reagan and Thatcher undertook such reforms.

    Labour market deregulation is certainly part of the pattern, though a difficult one since de-regulation generally reduces incumbent privileges and incumbent employees are such a large part of the electorate. And yes, Hawke-Keating did more of it than they were given credit for at the time. A major reason why Australia sailed through the recent Great Recession is so many people were employed in ways that allowed them to take an income hit but not lose their jobs.

    The Howard Government helped by doing what "good" Coalition governments do--improve the budget bottom line. No one was even slightly worried about the value of Oz bonds or the prospect of a Oz debt default.

    'Nationalisation of the household' is a term I use for the various ways governments financially support household activities. Various forms of welfare reform certainly are motivated by cost-cutting but doing things like encouraging superannuation is a way of reducing pension usage, for example.

  3. The two greatest neoliberal regimes of the 20th century were the Hawkeating and Clinton regimes. "Social democracy" has never had anything to do with the Anglosphere.

    And yet, we currently have a discourse propagated by the foot soldiers and heirs to Hawkeating/Clinton that the Anglosphere is in thrall to a Manichean struggle between neoliberalism and social democracy. They are in complete denial that it was their own heroes who gave us neoliberalism in the first place and haven't looked back since.

  4. I argue that US "liberals" are politically cross-dressing social democrats. Similarly, Labour/Labor parties are essentially social democratic in outlook. That people did not and do not officially call themselves social democrats does mean that they do not lie in that tradition of mixing socialism and liberalism.

  5. But you are correct about the weirdness of the progressivist intellectuals Manicheanism.

  6. I don't see how this isn't theft. Neoliberals and Neoconservatives both defund the state intentionally, then buy up its assets dirt cheap as if they're doing something noble for the country. Take Bill Gates... He sells his software to the state for ridiculous prices, then decries that there is a crisis in the funding of our public school system. Then he buys it up dirt cheap and forces down wages for teachers and drives down the quality of education by encouraging a for-profit model. It's theft, plain and simple!

  7. Anon: both defund the state intentionally False, government revenues as a share of GDP increased dramatically in the 1960s/70s in most Western countries and then plateaued or increased more slowly. Since GDP continued to rise overall, that means government revenues actually increased. The problem was not lack of revenue, the problem was obligations rising faster than revenue.

    As for buying assets "dirt cheap", that rather depends. In Victoria, for example, one could make an argument that the many of the buyers of the public assets sold by the Kennett Government paid rather too much for them. Even in other jurisdictions, generally, the assets were sold in some form of auction, so it is unlikely they were seriously underpriced.

    Also, the notion that a for-profit version of something has lower quality is not exactly supported by general experience. (Soviet goods were notoriously shoddy, for example.)

    So, your analysis does not work.

  8. Schroder was another important left-neoliberal reformer

    Lorenzo I dig ur work here but I have to insist that ur intentions for the vocabulary will not hold :)