Neo-Liberalism. How is it Related to Free Market Fundamentalism - Essay Example

? \ Neo- Liberalism How is it Related to Free Market Fundamentalism? When asked about economic ideologies, most will answer with Neo-Liberalism. This can be attributed to the fact that for those born in the 90’s there is no other alternative. Such was not always the case. But before going into the history of this movement, let us first define Neo-Liberalism. Neo- Liberalism is a young economic and social theory (when compare with others) that promotes the idea of greater capitalism, with more government deregulation and privatization, free trade and shift to leaving the decision power with the market. The Roots of Neo- Liberalism The popular ideology has its roots from the Father of Economics, Adam Smith, who advocated for less government role in markets, manufacturing and barriers to trade1. This and other basic fundamentals such as the productivity of labor are mentioned in his book An Inquiry into the Nature and Causes of the Wealth of Nations. After the end of the World War, and during the Great Depression, liberalism was highly critiqued. The high level of unemployment, and downward spiraling business activity became the major threat to the foundations of Capitalism and it was at this time that prominent economists such as John Maynard Keynes and Margaret Thatcher stepped up with their theories that questioned such matters as the employment line and government intervention. Keynes’ belief was that the government could indeed be used for the purposes of taxation and borrowing, to stimulate and expand economies rather than simply to shelter storms2. The two factors economies are measured by are employment determination and income distribution. Keynesianism felt that the economy would time and again result in weaknesses of employment demand generation, such as the Great Depression, and this could be cured with the use of monetary and fiscal policies. The Keynesian model would dominate Capitalist economies for nearly 35 years after the World War, introducing new institutions and unions. Although Keynesianism as an economic model rose to become accepted reality for more than a quarter of a century, it would be replaced by the contradictory policies of neo- liberalism by the end of the 70’s. The switch between policies occurred over many reasons. Some attributed it primarily to global events such as oil price shocks, and the Vietnamese war, while others have placed the divide between Keynesians over policies as a primary reason. Others believed it was due to the lack of implementation of Keynesian policies in particular borders or countries due to rising globalization at the time. But one factor that all historians agree unanimously on is the change in public opinion over the mixed economy. One writer of her time, Ayn Rand, is famous for penning down the fears of the public over extensive regulation and control in her magnum opus novel; a fictional work titled Atlas Shrugged. Whatever the reasons, an amalgamation of these factors is what led to the rallying of public opinion towards Neo-Liberalism. Amongst those who strove for this cause, the names of three economic philosophers are embedded in history- Friedrich Hayek, Milton Friedman, and Robert Nozick are most relevant in understanding the views of Neo- Liberals. Each man had a different viewpoint of why there was a need for an open market economy, and each has left a mark in their own right for contributions vital to the cause. Neo-Liberalism, as an economic model, has served the economy well in that the standard of living has generally been upwards since its wide acceptance. We have also, seen the development of institutions such as the World Bank and the International Monetary Fund pushing for the removal of trade barriers and a more globalized world as the by-products of this approach, and over the last half decade, we have come to observe that Neo-Liberalism has become a global phenomenon. But is this static in lieu of the Global Financial Meltdown of 2008? Are critics of Neo-Liberalist polices correct in linking it to free market fundamentalism? We shall not take sides on the matter of which model serves the world better, but we shall delve further into similarities between Neo- Liberalism and the concept of Free Market Fundamentalism by defining the latter and then comparing their core values. Free Market Fundamentalism The term free market fundamentalism is generally used as a way to criticize the free market economy. The free market economy is the belief that free markets are able to best allocate resources among citizens. The term fundamentalism has been added by Joseph E. Stiglitz and followed by other critics such J.W. Smith from the Institute of Economic Democracy, to denote the rigidity of belief of proponents of this economic model, in the face of growing evidence against it. Stiglitz, one of the most prominent economists of our time has openly criticized free market theories as being overly simplified, and serving the elite, rather than focusing on the needs of the general populace3. In his book, he vehemently claims that Neo-Liberal policies have been unkind to the housing market in the United States as well as to farmers outside of the United States. True criticism of Neo-Liberalism has begun since the Financial Crisis hit the United States in 2008. Prominent economists have finally begun to gain wider acceptance of their points against the free market, and the term free market fundamentalism has oft been used instead of the latter. To say that that the Neo-Liberal theory is synonymous with free market fundamentalism is inaccurate. However, there are many fundamental principles of Neo-Liberalism that share roots with the concept of the Free Market Economy. Let us address these to show the similarities between the two. The Similarities between the Two Terms At the core of Neo-Liberalism is the emphasis on the superiority of the market. In this principle, Neo- Liberalists argue that the free market is the penultimate machine only when it is completely free of organized forms of suppression such as government policies, and even trade unions. Critics state that the survival of the fittest is not the optimum level for any market to operate on, and the effects of this have been seen after the recent Global Meltdown. One reason why Neo-Liberalism has been a failure in protecting the rights of all has been its mentality of survival of the fittest. The pressure exerted by the U.S government and US-backed international institutions on third world governments to remove their barriers on agricultural trade has seen the profits, and lives, of poor farmers in countries like Mexico where small corn farmers saw incomes halved due to the policies implemented under the North American Trade Agreement4. In comparison, Liberalism is an advocate of minimal state intervention, to protect the interests of the suppressed against powerful institutions. The institutions of reform, the IMF and the World Bank have pushed for policies that have apparently been consistently against the interests of the poor. Stiglitz, as a former Chief Economist of the World Bank is one of those critics, who believe that these institutions have not dealt adequately with the rise of globalization, which has resulted in the wide gap between those with means, and those living under the poverty line. The second similarity between the two types of ideologies is the portion of the budget allocated to social services and public welfare. Under the pretext of cutting a government’s role in the economy, say critics, activists for completely free markets are the first to push for the reduction on spending for health care, energy and education. Notably, in the past 25 years more, if not equal to previous years, we have seen that social welfare is the item on the budget to be cut back on, despite mammoth increases in military spending year upon year. The same lobby is said to push for tax subsidies to corporations, and bailouts for banks. Along with this, both Neo- Liberalism and Free market fundamentalism are against the concept of public goods- goods enjoyed by everyone, without diminishing advantages to anyone5. Individualism is promoted as the means to the end of satisfying needs. Working on the concept of letting individuals acquire their own services and seek benefits as please their individual needs, both economic models are cohesive in this regard. This type of extreme fundamentalism in Neo- Liberal politics has led to the current state of affairs that the U.S healthcare system is in. A third paradigm shared by the two models is that of the state’s role in the governance of corporations. In previously popular models, essentials such as utilities were controlled and operated by the state. As a result necessities such as electricity, transportation, water and schooling were subsidized. The Neo-Liberal trend is of the belief that the government’s role in this regard should be minimized and these services should be left in the hand of private companies, which under the perfect competition of a free market, would result in better efficiency and higher profits. Once again we see the ugly head of free market fundamentalism in play. Though efficiency is a prominent need in terms of provision of such necessary goods to all, it also means that the gap between the haves and the have nots will further worsen, as private investors pass on higher rates for consumption of these goods and pocket the profits. The fourth principle that Neo-Liberalism shares with Free Market Fundamentalism, is the issue of deregulation. Both theories are right wing in this regard, demanding that governments play lesser roles in any acts that can cut profits for private firms and investors. Although the government still regulates many sectors of the society and pushes for important matters such as employee rights and corporate social responsibility, we have seen our fair share of deregulation since the acceptance of the Neo- Liberal model. An example from a not so long ago, and not easily forgotten event is that of Enron Corporation. While Neo- Liberalism was still widely unquestionable in Corporate America, one Power Giant was able to push for less government regulation over trading practices and the introduction of speculation for contracts. The government was convinced to let gas prices float with current supply, and to allow mark-to-market contracts to be signed. After successfully campaigning for the deregulation, at the start of the new millennium, California suddenly saw a rise in the price of power as well as severe shortages. It was found later that deregulation had led to certain people intentionally creating these shortages through withholding of power in the name of greed. This push for deregulation has not stopped though, despite such a haunting scandal, and companies still push for greater deregulations across industries- a push classical liberalism would not support. Since Neo- Liberal policies would seek to in fact remove such important practices as social welfare, and trade unions that protect employees as a means to push up profits, it can be aptly said that there are loud right wing political bells in this model. The difference between Liberalism and Neo- Liberalism becomes evident in one sphere. Neo- Liberalism speaks of completely free markets, often referred to by the term Laissez Faire capitalism. On the other hand, modern liberalism believes in open markets, with minimal government regulation that is required to up hold social justice. That the world has seen the gap between the rich and the poor rise is not deniable. In 2010, the National Bureau of Statistics, in its annual census, found that the gap between the rich and the poor in the United States of America was at its highest ever. This came as shocking news to a country that could not fathom doing worse than the times of the Industrial Revolution, when money was accumulated by some on the backs of many. As an example of how Neo-Liberalism has served as the lion’s mouth is the fact that the switch from Keynesianism has only hurt the masses following its failure. Perfect competition, which seeks to supply exactly at the amount of the demand to set prices has seen one key artery of the entire economic system choked- that of the wages of those on the lower extreme of the income strata. Research shows grim statistic upon another in every data collection in regards to equitable income growth. One data concluded that in 2010, the period where the average income real income per family grew by 2.3%, the top 1% saw their income grow by 11.6%, while the rest of the 99% only saw theirs up by 0.2%6. Thus, the bells of rebellion and revolt have not been sung without reason. The developed and the developing world alike is furious with the status quo of the elitist policies pushed under the pretext of free market demand. Brigadistas in Mexico, Occupy Wall Street and New Yorkers Against Budget Cuts are just some of the groups launching protests against Government policy making which they find to be the last resort of saving the fickle balance that is still in favor of the rich. To those, and many in the academic world, it seems the time for letting markets run free is over, and the government must live within modest means, just like the rest of the 99%. To summarize, one cannot simply claim that Neo- Liberalism and Free Market Fundamentalism are interchangeable terms. Yes, both emerge from right wing politics, and yes, both do favor a free market economy, but in a varying form. However, at the same time, considering how the core values of most schools of thought in Liberalism have been questioned by the Financial Crisis, Stiglitz’ term is not far from the truth. The extremes that individuals can rise to under such conditions, the extremes to which governments can deregulate, the extremes to which international organizations dictate trade policies, are all coming down in one big pile of heap. To recover from such excess will take time, and there are sure to be many heated debates to follow over which ideology will remain once the dust settles. Bibliography Harrison, Ann. Globalization and Poverty. National Bureau of Economic Research Conference Report, 2006, 536. Keynes, John Maynard. The General Theory of Employment, Interest and Money. London: Palgrave Macmillan, 1936. Saez, Emmanuel. Striking it Richer: The Evolution of Top Incomes in the United States (Updated with 2009 & 2010 estimates). Berkeley: Department of Economics, 2012. Samuelson, Paul A. The Pure Theory of Public Expenditure. Massachusetts: MIT Press, 1954. Smith, Adam. Wealth of Nations. 1776. Stiglitz, Jospeh E. Globalization and its Discontents. New York: W. W. Norton & Company, 2002. Read More