Neoliberalism and Contemporary Crisis - Essay Example

Neoliberalism and Contemporary Crisis One of the most common explanations of globalization phenomenon emphasizes the role of political choices associated with the neoliberal paradigm of economic development. According to this view, globalization is the international symptom of the shift toward the neoliberal economic model that has replaced the previous Keynesian model. The neoliberal economic policy is characterized by unregulated markets and “….the shift to free-market domestic policies such as privatization, capital market deregulation”i. The term ‘neoliberalism’ consists of two words: neo that means ‘new’ and liberal that means ‘absence of government interventions’. Liberal paradigm stems from the studies of Adam Smith, an outstanding economist of the late 18th century, who argued that minimization of government’s role in economic relations would facilitation growth of trade. The liberal economic model had dominated in national and international economic relations for almost two centuries until the new Keynesian model took over in the 1930s. This model advocated interventions of the state in economic relations and proved its efficiency helping effectively rebuild European economies after the devastating world wars. However, despite the apparent success of Keynesian paradigm liberalism resurrected in the early 1970s with increasing numbers of economists supporting the claim that deregulation of markets, privatization and minimization of government intervention would foster further growth of the international economics. That resurrected model of economic liberalism was called neoliberalismii. Also known as ‘economic rationalism’, the neoliberal model “…has an interest … to provide reason to limit government in relation to the market”iii and incorporates the “…beliefs in the efficacy of the free market and the adoption of policies that prioritize deregulation, foreign debt reduction, privatization of the public sector...and a (new) orthodoxy of individual responsibility and the “emergency” safety net - thus replacing collective provision through a more residualist welfare state”iv. In other words, neoliberalism stresses the role of self-conduct in economic relations requiring individuals to exercise more power and control over their life and well-being. This is often called ‘the entrepreneurial self’v. Government that promotes neoliberalism stimulates individual to adopt highly practical and rational relationships to themselves without limiting their freedom in economic relations. Therefore, this model is reasonably perceived as a fundamental challenge to the principles and ideas underpinning the concept of ‘welfare state’vi. Almost immediately after its onset in the 1970s, the basic ideas, especially the concept of unregulated market, underlying neoliberalism have been debated intensively in the economic community. The philosophy of neoliberal economy views unregulated market as the most ethical and fair method of producing and distributing goods with the Keynesian principles of welfare state and social fairness being labeled as biased and not fairvii. However, the developments that have been occurring globally have provided sufficient evidence to understand that the criticism poured on the neoliberal ideology in economic relations is reasonable. Over only a few years unregulated and barely controlled market forces have almost brought capitalism to verge of collapsing. The banking systems, financial system, industrial and agricultural sectors and industries of the Western states that had adopted neoliberal paradigm as the key concept of their economic development were strongly affected. Consequently, policymakers and economic experts revised their attitude toward the selected pattern of economic relations with many of them claiming that the roots of contemporary crises should be sought for in the system itself. Thus, George Soros stated that “...the salient feature of the current financial crisis is that it was not caused by some external shock ... the crisis was generated by the system itself”viii. One of the key beliefs underlying the neoliberal paradigm is that unregulated market is the superior form of economic relations. This belief rests upon the so-called ‘efficient-markets hypothesis’, the orthodox form of which implies that prices determined solely by the market, and particularly financial market are based on comprehensive data and, therefore, are the most effective and appropriate option to estimate any assets, either tangible or intangible. According to this assumption, no risk of asset-price bubble emergence is involved since the prices incorporate all available information. And even in the highly improbable case of the asset-price bubble emergence, the efficient-market hypothesis postulates that the market will correct itselfix. Evidently, if this hypothesis is true, than there is simply no justification for any intervention of governments into the realm of economic relations. On the contrary, the neoliberal approach implies that such interventions are the only potential cause of bubbles emergence that must be avoided. However, the reaction to current crisis demonstrated by different states across the world provides clear evidence that the hypothesis failed to live up to its promise. The response to multiple minor crises that have occurred over the past two decades was largely similar. For example, in the United States, the Federal Reserve played the key role in saving the market via lowering of the federal funds rate. This step helped reinstate liquidity and prevent any further deterioration. This measure was taken in 1987 when the stock-market almost collapsed, during the Mexican crisis of 1994 and subsequent crisis of the Asian stock markets, and other smaller disturbances that have taken place over the last yearsx. Although such interventions were apparently out of the scope of neoliberal policies they were really efficient. Surprisingly, no substantial revisions have been made in the unregulated market ideology despite the signs of the efficient-market hypothesis failure. Instead, investors that adopted neoliberalism as their basic policy started to believe that government would save them in case any disturbance occurs though such belief was clearly outside the neoliberal paradigm. The result was further spread and strengthening of neoliberal philosophy in economic relations, which undoubtedly contributed to the seriousness of contemporary crisis. The typical model of crisis origination can be illustrated with the example of the United States. Decreased interest rates attracted a number of new borrowers to the mortgage market. These borrowers, in their turn, brought substantial amount of new capital into the growing market that, according to the neoliberal paradigm, was free of any strict regulations and government control. As a result, mortgage brokers took loans from banks and sold them to borrowers, hedge funds and other institutions. Such activities eventually led to the situation “...where the two worlds met: the world of easy credit as the defining characteristic of Greenspans neo-liberal financial order, and the other neo-liberal world of unregulated financial institutions with its new banking model that effectively atomised risk. The combination was toxic: it produced an asset bubble of unprecedented proportions and, most critically, with unprecedented reach across the global financial system through the bank-intermediation market”xi. Although the theory justifies the neoliberal paradigm in economic relations as a fair and efficient one the fact that the neoliberal principles bear the roots of collapse in themselves can hardly be denied in the aftermath of contemporary crisis. This is precisely the case when theory is not justified by sufficient practical evidence. Read More