What exactly is neo-liberalism?

In the first installment of a three-part series, the author finds that contrary to usual murky references to neo-liberalism, it is better to find a unifying thread in its variants

My last column (Populism in less developed countries is somewhat different, August 12) was about populism. One group populists invariably dislike are the ‘liberals’ — the despised L-word in American politics. Some of the same people are often despised also by the Left all over the world as ‘neo-liberals’. It is not always easy to know who the latter are, as the word is used in different senses by different critics. Of course, keeping the term ill-defined and coarse serves the critics, as larger targets always make shooting practice easier.

Does ‘neo-liberalism’ stand for market fundamentalism? Except for some cranks, there are not that many of strict market fundamentalists in intellectual circles or among political leaders. If Milton Friedman and Friedrich Hayek are considered the economist high-priests of neo-liberalism, it is important to remember that Friedman advocated a substantial negative income tax for the poor and Hayek talked about a basic ‘floor income’ for everybody undergirding his version of the liberal economy. In politics, neither Margaret Thatcher nor Ronald Reagan could (or even really attempted to) get rid of a significant welfare state and social security. 

Sometimes my leftist friends dislike neo-liberalism because it is pro-capitalist. But they are often friendly with Keynesians. After all Keynes, while showing the limitations of market mechanism in solving the problem of mass unemployment, was essentially pro-capitalist in his role as saviour of capitalism, and openly dismissive (unduly so) of Marx. “The Class War”, he once wrote, “will find me on the side of the educated bourgeoisie”. Keynes was not neo-liberal, was he? 

Illustration by Binay Sinha

Matters are made even more complicated by many public policy thinkers who are pro-market, but not necessarily pro-business. This tradition actually goes back to Adam Smith. There are many passages in the Wealth of Nations that can be interpreted as being in favour of free markets but definitely against prone-to-collude business magnates.

Then there is a large number of economists who think that the market mechanism needs to be substantially modified and curbed when it generates spillover effects (for example, negative ones in the form of environmental degradation); and while they generally support capitalism as a possibly flawed production system but better than the oft-suggested alternatives to capitalism which have so far not turned out to be viable on a large enough scale or for a long enough period, they want to reduce  the harshness, inequity, and instability of capitalism through government-sponsored social-protective and redistributive transfers and macro-stabilisation measures. Are these people neo-liberal, as they support markets and capitalism to a large extent? 

Giving up for now on the elusive definition of neo-liberalism, it is probably correct to say that most critics of neo-liberalism associate it with a range of public policies of liberalisation (including domestic and global integration), deregulation and privatisation. We’ll comment on the positive as well as negative aspects of these policies. 

One unifying element in the belief system of liberals, neo or not, is that of faith in the positive effects of competition, both political and economic, in opposition to concentrated power, and this is the thread that will run through our discussion in this article. Political competition relates significantly to effective electoral competition and associated political contests between parties or groups on competing ideas and policies in and out of legislative chambers of deliberation. In contrast, both in Leninist systems of party rule (as, say in today’s China) and in Gandhian ideology the emphasis is on consensus, and the necessary adversarial relation between the ruling party and the opposition in liberal systems is looked down upon as divisive or worse. Consensus in Leninist parties (“democratic centralism”), or in traditional village councils of Gandhian vision, or even inside a family (usually patriarchal) is, of course, not without its authoritarian features. 

Competition and adversarial relations between political groups actually make detection of mistakes or abuse of power by leaders, and hence their correction, somewhat easier. On the other hand, competition can sometimes degenerate into a ‘race to the bottom’ (as, for example, in the competitive pandering of the electorate in many democracies particularly before elections). This is apart from the various paradoxes in political science associated with the aggregate outcomes of individual voting. 

We’ll spend a bit more time on economic competition, because that may be the salient feature of so-called neo-liberal policies. These policies essentially are meant to ensure more competition among domestic firms and between domestic and foreign firms with the opening of international trade and investment. Deregulation aimed at reducing various government-imposed barriers to entry and exit is also supposed to increase economic competition. 

The easiest way to understand the advantages of such economic competition is to look at cases, some of them in the recent past of many developing and state-socialist countries, when competition was blocked. In the regimes of government dispensed permits, licences and controls some firms acquired effective quasi-monopoly rights which led to high prices and shoddy quality. Restrictions on global competition blocking imports and foreign investment led to denied access to better-quality foreign and new inputs and technology. Over the last four decades Chinese state socialists, unlike their counterparts in the erstwhile Soviet Union, caught on to this fast and rode the chariot of globalisation in launching massive programs of labour-intensive industriali ation, technology upgrading and poverty reduction. In both trade and foreign investment policy, China has been more ‘neo-liberal’ than, say, India. 

But the Chinese case (like the earlier successful cases of Japan, South Korea and Taiwan) also showed that selective liberalisation with active guiding and helping role of an effective state in industrial policy was the key. Just increasing economic competition (as tried in some Latin American and African cases) was nowhere near enough. But market competition did play a significant role even in the state-guided cases. There is plenty of evidence now to show that market discipline (in East Asia mostly coming from the open export markets) makes the all-important difference between cases where industrial policy tends to succeed compared to cases where it fails. 

The article was first published in the international blog 3 Quarks Daily. (Tomorrow: Pros and cons of neo-liberal competition)

The author is Professor of Graduate School at University of California, Berkeley. His most recent books are Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India, Globalisation, Democracy and Corruption: An Indian Perspective, and Smriti-kandyuan (a quasi-memoir in Bengali)