Is Neoliberalism in Crisis Today - Term Paper Example

 Is Neoliberalism in crisis today? INTRODUCTION Neoliberal policies have been implemented in virtually every society in the world over the last 3 decades and therefore ‘neoliberalism’ is not a concept that emerged overnight. This proliferation of the concept into the system took place in different ways- under the strict dictatorship environment in Chile, implemented as the namely structural adjustment in compliance with the Washington Consensus, imposed alongside the conservative policies in the U.S. and U.K., making its way into the post-socialist countries of Eastern Europe, and also penetrating into the form of social democratic ways in Germany or the Scandinavian societies, resulting in area specific Neoliberal configurations. In the last months of the year 2008, following the financial crisis, people readily accepted that it was the demise of neoliberalism, and thus whether it was a total end of neoliberalism and would it lead to the emergence of new political and economic policies, and what form they would take were the crucial questions which require deliberate attention and time (Brand and Sekler, 2009, 5 – 8). This paper attempts to reach a conclusion regarding the current state of neoliberalism, that whether it is in crisis today or not. Starting of with the concept of the term neoliberalism itself and how it came about, its success in the pages of history and what led to its gradual decline, furthermore elaborating over the sudden causes of its failure and finally the study culminates with the conclusion pertaining to the current standing of neoliberalism. WHAT IS NEOLIBERALISM? The concept of neoliberalism is one of the new studies, the ‘isms’ that originated in the global ideological battlefield of the modern era. This term was coined in the post First World War Germany by a small group of economists and a bunch of legal scholars, affiliated with the ‘Freiburg School’, as a part of their program to revive classical liberalism. With the advent of the 1970s, some Latin American economists adapted this concept as their pro market model, followed by the critics of the market reform in the South in 1990s, who impregnated the concept of neoliberalism with derogatory meanings connected to the Washington Crisis- an attempt to globalize the American capitalist system and the cultural system associated with it; while some regarded this term as a mere catch-phrase, which was a degradation of the monumental achievements of the neoclassical economists- Milton Friedman and Friedrich Von Hayek. It was also viewed as a postmodern version of the ‘laissez-faire’ idea of the 18th century, which upheld the values of self interest, economic efficiency and unrestrained competition. Despite all these negative connotations attached to this term, neoliberalism has managed to become the master concept of our time, and therefore it appears regularly in the headlines of the major newspapers of the world in the contemporary times. Over the period of the last quarter century, neoliberalism has been attached to the political agenda of many different political figures; to name a few the lists includes prominent leaders such as Ronald Reagan, Margaret Thatcher, Bill Clinton, Tony Blair, Manmohan Singh, Junichiro Koizumi, George. W. Bush etc., however not a single of these leaders openly accepted their association to this concept, but they nevertheless share their affinity with the Neoliberal policies aimed at deregulating the national economies, liberalizing the international trade system, and the attempt to create a single global market (Steger and Roy, 2010, ix-xi). HISTORY OF NEOLIBERALISM The rise of neoliberalism came about as a result of the deep revolutionary changes in the global economy in the 1970s, it was however a passive and tacit revolution which strengthened the capitalist system by the means of complete transformation of the social, political and the economic system of the countries of the world from the ‘above’- which was the dominant political and social forces. The major aspect of the new concept was the liberalization of the market along with the deregulation of the political system. The system was a success initially and triumphed by encompassing the national economies of numerous nations across the globe. In the 1970s, the Keynesian approach in the post World War 2 era crumbled and marked the epoch of Neoliberalism (Altvater, 2009, 73). The end of the Bretton Woods system of fixed exchange rates in March 1973 and the liberalization of the financial markets under the governance of Margaret Thatcher in Great Britain was the beginning of neoliberalism. The decisions regarding the formation of the critical prices, such as the exchange rates around the world, and the interest rates charged on borrowing and saving, and therefore the regulatory policies were no longer regulated or officially controlled. Instead, these decisions were left at the disposal of the private sector, such as multinational banks, speculative investment and other funds and also the transnational corporations. The wave of privatization of the public services and goods began, and the newly formed private sectors set off to create financial innovations, forming new instruments to increase gains. Countries which stayed firm with their regulates policies of controlling the markets were forced to give up this so-called ‘financial repression’ which consisted of exchange controls, fixed interest rates by the government, credit control system, prescribed assets and so on. And since then on, the financial markets have led to the real economic, financial and environmental repression of the world on its own (Altvater, 2009, 73). This wave of liberalization, deregulation and privatization which spread under neoliberalism led to revolutionary consequences which affected the relationship of the countries in the Global North and the Global South of the world. The liberalized trade helped the U.S. to recycle the ‘petrodollars’ in the oil-price shock of 1973, the Middle East accumulated vast debts when interest rates were low and slid back into debt crisis when the U.S. tripled the interest rates later on, which led to the halt in development in the developing world and on the contrary it further strengthened the American dollar. Globalization is not only associated with spatial expansion, world trade and migration flows etc., but also with the globalization of developmental models, and governance polices, rules, regulations, norms etc. Therefore, the ‘Washington Consensus’, which the indebted nations were forced to accept under the conditions of the International Monetary Fund, were the most globalizing forces after the liberalization of the financial markets around the world (Altvater, 2009, 74). Monetarism emerged, since the Central Bank was liberated of all controls, and it was left in charge of the monetary policy maintenance, policies of full employment were rejected by the neoliberals, and the fiscal policy had no affect in the longer run, therefore all were subject to the monetary policy which was no longer regulated by the Government of the State. The rule of independence prevailed, and therefore monetary stability was to be achieved through reaction to the market conditions and the policy measures could no longer be used an expedient political tool. The result of all these policy rules however was not convincing and did not substantiate the reliance on the Neoliberal mode of economic governance. The rise in unemployment became the ideological foundation of economic policies in virtually all countries around the globe, and if this somehow failed, then it was attributed to the expansion of the informal economy, of precarious labor and the high disparity in the income and wealth levels in most countries and also in the world as a whole. The number of rich millionaires in the world increased, but so did the number of poor people, thus depicting the major income disparity. The future of the working classes was also excruciating under Neoliberal capitalist policies, furthermore many economies were in crisis, at the social, political and environmental front, which displayed quite a negative image of the Neoliberal policies. Therefore, it was not long before it was rightly diagnosed that the epoch of neoliberalism was disastrous for many nations around the world, it might have been a time of temporary boost for the financial asset owners, marking their short golden age, however on a larger scale it was dramatically negative for the labor. Finally the Neoliberal era saw its demise in the August of 2008, when the highly liberalized system of the global financial markets witnessed a setback in the form of a financial market crunch, wherein huge losses of more than U.S. $1.4 trillion were suffered according to the IMF, and it was in the last days of the Neoliberal ideological system that even the hardcore neoliberals were earnestly seeking refuge with the State and asked even for the nationalization of the major private banks in order to avoid the situation of a complete financial meltdown (Altvater, 2009, 74 - 75). NEOLIBERALISM IS IN CRISIS TODAY Keynesian economic policies comprised of the clause that the lack of purchasing power of the people could be cured with the help of the government investments which would in turn create employment and stimulate income in the economy, and therefore it would stabilize the economy. On the contrary, the neoliberal ideology minimizes the role of the government, and it must be noted that in the absence of a proper controlling government, the free market system can only work smoothly if the under-consumption i.e. the market failure, could be rectified by the banks’ credit to the low income sector of the population in order to continue the consumption at the same levels. However, when the people are indebted and are unable to repay the credit loans they have taken, the economy is stuck in a crisis situation (Torbat, 2008). In such circumstances, lowering the interest rates is useless as a tool since it would lead the economy into the condition of ‘liquidity trap’ having no effect on prices of quantity of goods or services as in Keynesian economics (Eggertsson, 2011), which happens as a result of the denial of banks to lend loans to individuals who are likely to default on loan repayment, this would snatch away control from the monetary authorities over the interest rates. This was witnessed in 2008 August, when the consumer credit fell by $7.9 billion to $2.8 trillion, which was the largest since 1943, marking the inability of the consumers to borrow. Since consumer spending constitutes the largest part of the U.S. economy, the banks hoard money and thus endeavor to prevent defaults, hence substantiating that reliance on neoliberal policies is doomed towards failure. Reliance on the free market systems, which are completely free of any government intervention, has failed till date, and therefore today the central banks set interest rates and devise the monetary policies. However, cutting down of interest rates in the crisis of 2008 would not have been a feasible act (Torbat, 2008). The idea of ‘trickle down’ under neoliberalism economics does not have any stable logical basis, it basically entails that the free market system would generate profits for the owner of the capital and eventually this gain in profits would drip down to the lower strata of the nations. This ideology is contradicted by the actual results, as 30 years of neoliberal policies have led to a wider income gap between the rich and the poor in the U.S. as compared to other nations. As according to the GINI coefficient, the income disparity has grown significantly, and in 2008 it were the top 20% of the American population which received 50% of the income generated in the economy. While the lowest 20% got only 3.4% income, and the top 1% owned about 40% of the total wealth in the economy. Simultaneously, the real wages were either stagnant or had declined, furthermore, the excessive accumulation of wealth in the upper strata has led to political domination by the rich, to rule over the impoverished poor (Torbat, 2008). Several key factors for the U.S. financial meltdown are similar to the great financial setback of 1929, which are highlighted by John Kenneth Galbraith in his compilation ‘Great Crash of 1929’. In a nutshell, the major of these problems are (Torbat, 2008; Hughes, 1999): Worsened income distribution Balance of trade issues Lax regulations and policies of the banks and other financial institutions The neoliberal economic policies can be blamed for all of these problems that the world economy suffered back in 2008; they increase disparity by concentrating the wealth of the world in the top stratum of the society at the cost of the lower stratum’s survival. The free trade policies have forced the U.S. to compromise by having a continuous trade deficit in the past three decades owing to the liberalization of the world trade system under neoliberalism, which has led to the U.S. being the worst off in trade deficits as compared to other developed nations in the world. Simultaneously, during all these crises, the deregulation had led to the creation of large corporate oligopolies, which force the controlling authorities to lax the regulations and policies. Furthermore, neoliberalism has incessantly increased the size of corporations through mergers and acquisitions, and has led to the reduction in competition which is a necessary factor in preventing monopolies and controlling prices. These are the problems which were replicated in the 2008 crisis due to neoliberal policies (Torbat, 2008). Neoliberalism has failed in the proper and efficient allocation of public services- health care services, housing, education and other basic requirements. The healthcare industry is recognizably inefficient, which has resulted in increased costs and thus it has become unaffordable for about 40% of the population. The profitable healthcare for young and middle-aged people is in the private sector while the healthcare of the elderly resides in the social sector. Similarly, the inefficiency is reflected in the housing sector, as thousands of foreclosed housed around the American nation remain empty; there is a large amount of individuals who do not have proper access to housing facilities. Hence this depicts that the neoliberalism’s key principles have drastically failed in actuality (Torbat, 2008). Neoliberalism faces great opposition from many critics of contemporary times, as quoted in the following: “Neo-liberal ideologues dream of un-fettered competition, un-fettered greed and un-fettered riches all flowing from unfettered markets, granting authority to corporate property rights and capital over human rights and environmental protections. Or, put another way, neo-liberalism functions as an ideological cover for the promotion of capitalist interests.” (Spannos, 2006, 1) The above statement depicts how neoliberalism is loathed by people. Though there was a slight positive factor attached to the concept as well, when the interest rates and inflation fell under neoliberalism, which was a positive move for the economy, however this was at the major expense of rising unemployment, cutback on social welfare programs, decreased infrastructural and developmental expenses, increased inequality and income disparity, and deteriorated standard of living for a multitude of individuals in the economy. Similarly, the setbacks have been in the form of inefficiency, as mentioned earlier as well, this inefficiency is also reflected as the market fails to account for externalities present and thus does not operate at the socially optimal level of consumption and production. In the political scenario, the important aspects of neoliberalism began to fade away as the Bush administration came to office. The time of importing cheap raw material was gone, major chunk of which was oil from Middle East, and thus the U.S. trade deficits began to deteriorate, neoliberalism could no longer be pursued through regular market rule and therefore the Bush administrations took the support of the military rule to open third world economies as markets for the U.S. This attempt was coupled with the September 11 crisis, and it served as a pretext for the U.S. conservatives to occupy the oilfields of the Persian Gulf and the Central Asian regions. Concealed behind the slogan of ‘mass destruction weapons’ and the so-called ‘war on terror’, the invasions began, starting of with Afghanistan in 2001, the motive behind the war was hidden at that time, but is a major and ongoing debate till date (The Debate, 2011). All this was an attempt to acquire oilfields in order to quench the oil thirst of the U.S. with free crude oil, but the plan backfired, and furthermore the strong oil demand from the Indian and Chinese economy hiked the prices, resulting in a weakening American dollar. This led to the disenchantment of the U.S. people from the Bush administration and they leaned towards the Democratic Party in the following congress elections. The newly elected representatives acted contrary to the hopes of the majority of the people, and instead of halting the war they called out for a troop surge, the continuation of the war led to public debt, which continued to grow while the results were not achieved (Torbat, 2008). CONCLUSION In light of the entire study, it can be rightly concluded that neoliberalism is a concept that might appear to be good and feasible on paper and theory, but in practical reality it is doomed to fail after some time of application, which was 3 decades before it hit setback in 2008, the immediate cause being the global financial crisis. It was witnessed that economic neoliberalism suffered many problems and was therefore not a workable economic system. The economic policies under neoliberalism caused major trade deficits, healthcare services inefficiency, and high income disparity, and thus to avoid further downturn in the economy it is necessary to increase government intervention, which marks the end of neoliberalism. Under neoliberalism, the free trade system leaves the fate of many nations at the disposal of the market forces, which do not account for the externalities and tend to ignore the social optimality level of production and consumption, this result in market failure which could only be rectified by timely government intervention. The promised key principles of the neoliberal policies are not achievable in real life, and are therefore only attractive on paper, its policies were adapted by many a political leaders however all of them suffered major setbacks. Deterioration of economic conditions is a gradual process and is not met overnight; hence a period of 30 years was spent to prove that neoliberalism is not only in a major crisis today, but that it has failed dramatically. References Altvater. E (2009) ‘Postneoliberalism or postcapitalism? The failure of neoliberalism in the financial market crises’. Development Dialogue, 51, 73-87 Brand. U and Sekler. N (2009) ‘Postneoliberalism : catch-all word or valuable analytical and political concept? – Aims of a beginning debate’. Development Dialogue, 51, 5-14 Eggertsson. G B (2011) Liquidity Trap. Accessed January 31st 2011 from Hughes. L P (1999) The Crash and Early Depression. Accessed January 31st 2011 from Spannos. C (2006) ‘Canada22: Envisioning Post-Neoliberalism’. Z-Net: The Spirit of Resistance Lives. Accessed January 31st 2011 from Steger. M B and Roy. R K (2010) Neoliberalism: A very short introduction- 1st Edition. United States of America. Oxford University Press The Debate (2011) IS OIL OR BIG BUSINESS AN UNDISCLOSED MOTIVE FOR THE WAR ON IRAQ?. Accessed January 31st 2011 from Torbat. A E (2008) Global Financial Meltdown and the Demise of Neoliberalism. Accessed January 31st 2011 from Read More