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.
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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.