Neoliberalism defined

I’ve been arguing since the dotcom boom and bust that the poor performance of (particularly US) financial markets provides strong evidence against the claim that neoliberalism provides a coherent and effective alternative to social democracy. One objection that’s been made to this argument is that “neoliberalism” is a poorly-defined pejorative. It’s true all political terms are elastic and it’s hard to find any that are used, with more or less the same meaning, by both friends and foes. The only one I can think of is “social-democratic”, though you could perhaps make a case for “liberal” in the US sense. Words like “conservative”, “democratic” and “socialist” have become just about meaningless.

By contrast, I think “neoliberalism” is a comparatively well-defined term. It’s mostly, though not exclusively used in a pejorative sense, so perhaps something like “free-market liberalism” would be better. This post from 2002 gives my definition and some reasons why I thought then that neoliberalism was a failure. I don’t see much reason to revise my assessment in the light of events between now and then.

One obvious problem with my claim that neoliberalism has failed is that I haven’t provided a definition of either ‘neoliberalism’ or ‘failure’. Taking the second point first, there are several ways in which a political ideology may be a failure.

First, it may never attract sufficient support to have a serious influence on political outcomes. In this sense, ideologies like libertarianism and guild socialism may be regarded as failures.

Second, an ideology may be adopted and implemented, then discredited and discarded, or superseded by some new idea. This is the eventual fate of most political ideologies. Communism is the most recent example of a failure of this kind.

Third, an ideology may fail to deliver the promised outcomes. This is much more a matter of judgement, since promises are never delivered in full and failures are rarely complete.

It is important to remember that failure is never final. Democracy, for example, seemed like a failure until at least 1800. Although many democratic governments arose before that time, all had either collapsed in anarchy, given rise to demagogues who made themselves tyrants or decayed into oligarchy. The United States was the first country to establish a sustainable democracy, and there were plenty who opposed it there. Abraham Lincoln was not engaging in hyperbole when he said at Gettysburg that the outcome of the Civil War would determine whether government ‘of the people, by the people for the people’ could be sustained.

Now for a definition of neoliberalism. As the name implies, neoliberalism is a descendant of classical liberalism, defined by the fact that it is a reaction against social democracy, which also draws heavily on the liberal tradition. The US use of ‘liberal’ to mean ‘social democrat’ reflects the latter point.
Because it is primarily based on a critique of social democracy, neoliberalism places much more weight on economic freedom than on personal freedom or civil liberties, reversing the emphasis of classical liberalism. Indeed, it is fair to say that on matters of personal freedom, neoliberalism is basically agnostic, encompassing a range of views from repressive traditionalism to libertarianism.

In terms of economic policy, neoliberalism is constrained by the need to compete with the achievements of social democracy. Hence, it is inconsistent with the kind of dogmatic libertarianism that would leave the poor to starvation or private charity, and would leave education to parents. Neoliberalism seeks to cut back the role of the state as much as possible while maintaining public guarantees of access to basic health, education and income security.

The core of the neoliberal program is
(i) to remove the state altogether from ‘non-core’ functions such as the provision of infrastructure services
(ii) to minimise the state role in core functions (health, education, income security) through contracting out, voucher schemes and so on
(iii) to reject redistribution of income except insofar as it is implied by the provision of a basic ‘safety net’.
With this definition, a reasonably pure form of neoliberalism (except for some subsidies to favored businesses) is embodied in the program of the US Republican Party, and particularly the Contract with America proposed by Gingrich in 1994. The ACT Party in New Zealand also takes a fairly clear neoliberal stance, as do the more ideologically consistent elements of the British Conservative Party and the Australian Liberal Party.

My claim that neoliberalism has failed therefore uses several different meanings of the term ‘failure’. In Europe, apart from Britain, neoliberalism has mostly failed in sense (i). The EU is inherently social democratic in its structure and attempts by poltical groups in some Eastern European countries (notably the Czech Republic and Estonia) to pursue a free market line have failed in the light of the superior attractions of the EU. It is true that the European social democracies have given some ground, notably with respect to privatisation, but no genuinely neoliberal party has arisen or seems likely to. The political right has moved back to the older and more fertile ground of law and order and xenophobia.
In Britain, neoliberalism has failed in sense (ii). The Conservative party is hovering on the edge of extinction and, as I have arged previously, the ‘New Labour’ government has shifted steadily away from neoliberalism and towards a mildly modernised form of social democracy. The same is true in New Zealand, where the advocates of neoliberalism, once dominant, are now completely marginalised.

Although the Australian government started out with a clearly neoliberal framework it has gradually dropped it in favor of the kind of law and order/xenophobia/militarist position that characterises the traditional right. The repeated resort to ad hoc levies as fixes for industry-specific problems is indicative of a government that has lost its economic bearings. Moreover, the Liberals look like being in semi-permanent opposition in most of the states and the Howard government is unlikely to survive the end of the housing bubble (although given the quality of Federal Labor, anything could happen).

Finally, in the US, neoliberalism remains the dominant ideology but is increasingly failing in sense (iii). Three years ago, American pundits could seriously predict a never-ending economic boom. The combination of continued prosperity and ‘the end of welfare as we know it’ seemed to be on the verge of eliminating crime and unemployment. Now the most charitable assessment of US economic performance is ‘better than average’ and even this cannot be sustained of the current recession/stagnation drags on much longer. The basic problem is that, given high levels of inequality, very strong economic performance is required to match the levels of economic security and social services delivered under social democracy even with mediocre growth outcomes.

73 thoughts on “Neoliberalism defined

  1. “This is how Marx captured the left, Before Marx the left was what could be described loosely as classical liberalism, empowering the masses with property rights and limiting government.”

    Yes, Robespierre and Napoleon were all about limiting government.

  2. The CRA’s impact on subprime lending was minimal – and as I pointed out earlier Bush succeeded in significantly weakening the CRA back in 2004.

    The main driver of subprime lending was Republican relaxation of the regulations on the amount of risk monoline mortgage originators could take on.

    The CRA applied only to Federally-insured savings banks, the monolines were always exempt from it.

    Generally speaking, I’m in favor of minimal regulation and Labor Outsider identified some of the many areas where reductions in regulation have had major economic benefits.

    However, in this specific case, it’s pretty clear that the specific “deregulation” of the US finance sector undertaken by the Republicans was a major cause of the financial crisis.

    I don’t think that this tells us much if anything about deregulation in general. It does however tell us that letting banks effectively design their own prudential standards is a bad idea.

  3. John, with respect to the financial crisis facing the Bush administration, State intervention was necessitated as liquidity dries up and the free market fails to self correct. Bush had no alternative but to forego the neoliberal dogma in favour of old Keynsian economic school of thought.

  4. John – you missed the point of my comment.

    1 – I did not say that the Democrats bear responsibility for the financial crisis. Both sides of politics do. I was merely pointing out that both sides of politics had an incentive to keep the music playing while the party was going. Nobody comes out of this thing looking good.

    2 – Your call in 2002 about the state of the liberals in Australia was a bad one, because you took too short-term a view of state politics. State electoral cycles are often long. There have been many periods where the Liberals were in power across the country. Do you remember the commentary after the early 1990s recession swept a number of Labor governments out of power? It is more than likely that within 3 or 4 years there will be more conservative governments in power across the country than Labour governments – does that mean the Labor will be in semi-permanent opposition? No.

    3 The current policy positions of the Tories in the UK do not fit neatly into the neoliberal/non neoliberal dichotomy you are fond of. Cameron has just announced a program to build a large number of new private schools. He has also pledged to extend the reform of the public services begun under Blair, including making it easier for NHS patients to top their care up from private sources. He also argued for the reduction in inheritance tax. Yes, they have shifted away from some of the Thatcherite positions, but many of their policy positions still fall within the definition of neoliberalism that you offered in your post.

    4. What is your view of Sweden’s education voucher program? Is that neoliberal too?

    5. I’m a member of the Labor party and have been for over a decade. I’m also an economist. I think the government is too heavily involved in some economic spheres, and not enough in others. In many where the government is and should be involved, I think the nature of that involvement is sub-optimal. The essence of economic policy debate here and in other countries is over what the right level of government involvement should be. There are very few “neoliberal” parties in the world because what you wrote out was an ideology that very few poeple in the world identify with.

    Lets argue over the real issues, and not use terms that obfuscate rather than enlighten the debate. The political point-scoring is demeaning. You hate the republicans, we get it. Lets move on.

  5. 51, Gould

    Nope classical liberalism is not the french model but based on the Adam smith, David Hume British model, in fact Hume played a big role in guiding the writing in the American Constitution, which is very much a classical liberal document

  6. 52, Gould

    the bubble was already in play in 2004, it was well too late, even the proposed changes to the GSE (mae and mac) by the Republicans would not have stopped the bubble (see Clinton’s remarks last week acknowledging this fact)

    And just for the record I am just opposed the Bush administrations Big Government Conservativism and I am to Big Government Leftism.

    And lets get it right, governance and regulation are different issues.

    See my question on Mon post.

  7. “Nope classical liberalism is not the french model but based on the Adam smith, David Hume British model, in fact Hume played a big role in guiding the writing in the American Constitution, which is very much a classical liberal document”

    Your initial statement that Marx created the left in the modern sesne by “capturing” liberalism was simply nonsense.

    There was pre-existing left which had little ot nothing to do with classic liberalism.

  8. “This is how Marx captured the left, Before Marx the left was what could be described loosely as classical liberalism, empowering the masses with property rights and limiting government.�

    What an ignorant and stupid comment. You won’t find a single reputable historian who’d agree with rubbish like that.

  9. Termujin (John Humphreys) it takes a certain kind of dissembly to accuse Prof Q of snarking whilst engaging in exactly that habit yourself.

    Whilst, to you, the difference between neo cons and neo liberals is quite clear they are very often the same people in different circumstances. It can be compared to one person having two different names for different purposes.

    #4 made the point that there are differences in opinion on what constitues an economic liberal, which is your definition of a neo-liberal.

    However the neo cons who were keen on war in Iraq were operating on the basis that private firms should take over govt business as well as getting oil sales back into US $$$ plus a number of other economic imperatives. Perhaps you can explain why this doesn’t fit the neo-liberal framework.

  10. Jill — you were calling other people air-heads while clearly distorting their philosophy. Not very friendly. I suggest you either (1) play nice; or (2) get your facts right. Preferably both.

    Neo-cons are often internventionist on economic issues. The opposite of neo-liberals. And neo-liberals have a variety of opinions regarding foreign policy.

    Many economic liberals are classical liberals (ie also believe in social liberalism), which is pretty much the exact opposite of the neo-cons. I think you’ll find that you agree with more neo-con economics than I do.

  11. The only things that the dot com bubble and the current US financial crisis seem to demonstrate is that having a big government authority that regulates interest rates and prints money is entirely consistent with booms and busts. The precise problem that central banks were created to avoid and which they have failed to avoid and arguably helped to create more of.

    In comment #1 Gerard said:-

    Neoliberalism is ‘Neo’ because it arose as a reaction to the social democratic reforms of the post-war period – a period when rates of economic growth and improvements in living standards for every social class have been better than any other period of history before or since.

    I’d be quite happy to work with Gerard to return Australia to the tax, welfare and regulatory levels that we had between 1945 and 1970 and to see a return to the gold standard. Perhaps he calls that social democracy but I’d work for those specific ideals even if you called them Communism. We could also bring back firecrackers, liberalise gun laws and put heroin back on the pharmacy shelf.

    Social democracy seems to advocate a mixture of regulation and markets in the context of democracy. However the specifics are so ill defined that almost anybody can call themselves a social democrat if their looking for a unity ticket. It’s a really huge tent. For instance what is to stop me saying that I’m a libertarian social democrat?

  12. I’d suggest to claim you’re a “social democrat” implies you believe that markets don’t always produce the best social outcomes, and that governments have a responsibility to correct for possible failures. I don’t think Friedman, for instance, who largely seemed to accept that whatever the sum total of free individual choices was, it was almost by definition the “optimal” outcome, would meaningfully quality as a “libertarian social democrat”.

    However, I will say that if you accept democracy is a good thing, then you surely accept that the role of governments will necessarily change to reflect the collective wishes of the majority, and if you acknowledge that the majority are overwhelmingly likely to vote for social democratic parties, then you implicitly accept that social democracy is better than any other currently realistic alternative.

  13. I think governments should correct for market failures when they can successfully do so without incurring costs that are worse than the cure. I tend to think that such occasions are quite rare. Is that sufficient to make me a libertarian social democrat?

    On the issue of democracy I frequently see those that refer to themselves as social democrats seemingly upset with the outcomes of democracy. Few politicians today campaign on a platform of raising taxes or nationalising industries. The ALP was unelectable at the federal level until they dumped their rhetoric opposing tax cuts. The only area where politicians regularily find popular support in synch with self described social democrats is when it comes to defending existing areas of government control or in increasing government spending. When did a politician last get elected on a platform of higher tax rates?

  14. Then sure Terje, anyone who’s prepared to say “governments should correct for market failures” (and, in my experience, mighty few libertarians are) deserves to qualify as a “social democrat”.

    Being a social democrat certainly does not require “wanting higher taxes”. But it does require accepting that there are times when higher taxing and higher government spending is likely to lead to better outcomes. I don’t see a lot of evidence that Australia would presently benefit from higher taxes, and given the current economic uncertainty, in hindsight the tax cuts promised at the last election were probably a good a thing. What’s surely most important is making sure that taxes are collected and spent as efficiently as possible. There’s significant room for improvement there before much need to look at actually raising the tax take.

  15. Being a social democrat certainly does not require “wanting higher taxes�.

    Yet in practice desperately few people that call themselves “social democrats” will ever advocate tax cuts. As such us libertarian social democrats have abandoned the “social democrat” label because we wish to differentiate ourselves from this mindset.

    What’s surely most important is making sure that taxes are collected and spent as efficiently as possible.

    The dead weight costs of taxation mean that the most efficient imanginable tax office, coupled with the most careful of government spending will still cause significant inefficiency and economic loss if the tax take is high. In short high taxes can not be efficient.

    Under John Howard the price we pay for federal government in real per capita terms rose 34% (not even counting GST). Nearly all this time the self described social democrats from the ALP and the Greens were chanting “no tax cuts”.

    In Australia we have had income tax rate reductions over several budgets. They have done nothing to dent federal revenue (the cost of government). They could cut a lot more without any impact on the spending capacity of the public sector and with significant benefit to the private sector.

  16. Terje, there’s no shortage of people advocating tax cuts, so it hardly surprises me that social democrats don’t see any create need to join in the chorus there.

    FWIW, I absolutely agree that the raise in the tax rate during the Howard year was indefensible – not because I don’t believe there was any case for raising taxes, but because it didn’t appear to result in any tangible improvement in the provision of government services.

    And yes, there are unavoidable dead weight costs of taxation, but I’m not sure they need be much higher than the dead weight costs of private money collection. And further, the alternative to taxation is leaving the private sector to provide all the services that taxes now pay for, which can easily generate all sorts of other long term social and/or environmental costs that never show up on anyone’s balance sheet.

  17. Oops, read “great” for “create”.
    I also meant “raise in the tax take” not “tax rate”.
    Where’s that “edit post” button!

  18. As Oliver Wendell Holmes Jr (a giant compared to the pygmies currently occupying the US Supreme Court bench) wisely said, taxes are the price we pay for civilisation. I doubt that the neo-liberals would enjoy being recharacterised as neo-barbarians, but that nonetheless is their program.

  19. Huh? Taxation is as central to the neoliberal program as it is central to pretty much every socio-political philosophy that is not libertarianism or anarchism. What on earth are you talking about, Hal9000?


  20. The equally absurd and opposing view is fairly easy to construct: social democracy cedes control of human action to unelected bureaucracies whose decisions are largely informed by the politics of paid-for representatives in hopelessly corrupted parliaments and whose modern modus operandi is the mediation of opposing group interests through ‘stake-holder’ decision making. I doubt that the social democrats would enjoy being re-characterised as neo-fascists, but that nonetheless is their program.


  21. Hal9000,

    Taxation is the price we pay for government. Government is not civilisation and is often not even civilised. To confuse government with civilisation or with society is the common thread of intellectual failure that characterises so much of what social democrats think. It is hard to have a meaningful discussion about society and it’s direction if you have already decided that society = government. Typically larger and / or more central government displaces civil society and erodes notions of community. However if you hold that society = government you are probably blind to the effect.

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