Neoliberalism or neoliberal model is an economic and political doctrine that defends the absolute free market without any State intervention in its operation. It is an evolution of the classical liberalism of the 18th and 19th centuries, although it claims that the regulations are even smaller than those proposed by authors such as Adam Smith.
The Great Depression of 1929 caused liberalism to lose prestige. The Keynesian policies used to overcome this crisis forced the state to intervene in the economy, while still advocating free trade. Furthermore, the fear that communist ideas would spread led Western countries to create welfare states with state social measures.
The paradigm shift began in the 1960s and 1970s. A generation of economists reshaped liberal theory to completely eliminate state participation in the economy. One of the first places where its principles were implemented was in Chile, during the Pinochet dictatorship.
Neoliberalism was established as the prevailing economic system in the early 1980s. The evaluation of its results varies greatly depending on the ideology of the experts. On the one hand, it is noted that the economy improves significantly, but on the other hand, it is noted that it only benefits a few and causes a large increase in inequality.
Origin, establishment and history
Neoliberalism shares some of the economic and social doctrines of the so-called classical liberalism of the 19th century. However, important differences can also be found.
The origin of the term neoliberalism dates back to the 30s of the 20th century, in a context in which the consequences of the crisis of the 29th were still perceptible. Liberalism had been pointed out as one of the culprits of the Great Depression and some European authors tried to develop an economic theory that would correct some of its shortcomings.
The author of the term neoliberalism was Alexander Rüstow, in 1938. However, its definition at the time was very different from the current one. At the time, Rüstow and other scholars sought a third system between classical liberalism and socialism.
In this way, neoliberalism had to be translated into the implementation of a system of free enterprise and trade, but with a strong state that controlled excesses.
Mont Pelerin Society
The change in the concept of neoliberalism took place in the 1940s, with the publication of The Road to Servfdom , by Friedrich Von Hayek. Seven years later, Hayek himself convened a meeting in Switzerland, in which other thinkers such as Karl Pepper and Von Mises participated.
The result of this meeting was the foundation of the Mont Pelerin Society. This was established with the aim of developing a new theory within liberalism that advocated the elimination of any state interference.
The context in which the reformulation of neoliberalism took place was the post-European war, after the Second World War. The vast majority of countries on the continent created the so-called welfare state, with the intention of improving the standard of living of their citizens and providing them with a series of basic services.
Education, healthcare, or a pension system were implemented across most of the West, without the disasters Hayek had predicted in his work. For this reason, the ideas of neoliberalism were not taken into account for a long time, beyond some academic centers.
Decades of the 60’s and 70’s
Experts say that the first country to implement neoliberal ideas was West Germany in 1966. Despite some success in helping to rebuild the country, the experience did not last long.
Neoliberalism reappeared in 1974 in Chile. After the coup that brought Augusto Pinochet to power, the country was going through a serious economic crisis. To overcome it, the new government sought help from the so-called Chicago School, a group of economists led by Milton Friedman.
The measures implemented in Chile fully followed neoliberal ideas. Public companies were privatized and the private sector gained primacy.
Margaret Thatcher and Ronald Reagan
The pursuit of neoliberal policies by Margaret Thatcher, British Prime Minister, and Ronald Reagan, President of the United States, was essential for neoliberalism to spread across the planet.
Thatcher came to power in 1979 and Reagan in 1980. From their positions in government, they exerted great control over the policies of the IMF and the World Bank, which helped them to impose a series of structural reforms in the rest of the countries. In this sense, one of the first countries affected was Mexico.
The general consequence was an increase in wealth accumulation by elites in industrialized countries. In addition, speculative versus productive economies increased.
Thatcher’s policies in Britain focused, first, on disempowering unions, especially miners. The prime minister privatized a large number of public companies and deregulated many economic activities. The results were the deindustrialization of the country, the improvement of macroeconomic indicators and the increase in inequality.
Thatcher managed to impose the idea that there was no possible alternative to neoliberalism, which she called TINA (there is no alternative).
Ronald Reagan, in turn, also developed a neoliberal economic policy. Among his measures, the most important were the reduction of taxes and financial deregulation. However, the fiscal deficit did not stop growing.
Gift
The term neoliberalism has acquired a negative connotation in recent decades. In addition, the practice demonstrated the difficulty of applying all its ideas and the existence of adverse results for the majority of the population.
For this reason, most governments chose to promote broad market freedom, but without eliminating state intervention in correcting excesses and deficiencies.
Many experts blamed neoliberal policies for the outbreak of the last major economic crisis, between 2007 and 2008. The deregulation of finance, the commitment to the speculative economy and the tendency to provoke bubbles, all characteristics of neoliberalism, are some of the reasons for the aforementioned accusation. .
Features of neoliberalism
Although the definition of the term has changed over time and today there are several currents, some general characteristics of neoliberalism that all its followers share can be enumerated.
Free market
The first characteristic of neoliberalism is its defense of the free market. Its followers argue that it is the best way to allocate resources.
Neoliberals argue that prices should not be regulated at all, but should be set according to supply and demand. The lack of State intervention must occur in the national and international markets, which is why they are against the establishment of import tariffs.
Privatization
For neoliberal economists, the private sector is the only one that should be present in the economy. This involves the privatization of all public enterprises, including healthcare, banking and basic services (electricity, gas or water). There is even a current that defends the privatization of education.
Opponents of this ideology point out that there must always be some sectors in the hands of the State. Furthermore, full privatization causes capital to be concentrated in an elite and leads to higher prices for services. The richest will have access to healthcare or education much better than the rest of the population.
deregulation
According to this doctrine, governments should not establish any type of regulation that affects economic activities. For them, complete freedom of trade increases investment.
This deregulation includes the almost total reduction of taxes, in addition to other measures that can interfere with supply and demand.
Critics, in turn, maintain that the lack of regulation causes a total lack of protection for workers.
tax reduction
As noted above, neoliberalism advocates that taxes on economic activities be as low as possible.
The main consequence is the reduction of State resources and, therefore, the social programs decrease. Neoliberals, however, do not consider this a problem, as they argue that public spending is minimal.
individual responsibility
The philosophy on which neoliberalism is based maintains legal equality among all individuals. Beyond the law, neoliberals hold that each person has different skills, which should be rewarded differently according to their productivity.
In this way, neoliberals attribute all responsibility to the individual. In the event that good health care cannot be obtained, for example, it will be blamed on their poor income-generating skills, without the state having to do anything to provide it.
Consequences
The identification between neoliberalism and a sector of the political right makes the analysis of the consequences often depend on the ideological orientation of each specialist.
Reduction of workers’ rights
The extreme economic liberalization that this doctrine seeks brings with it much greater wage flexibility. This usually means that wages are lower, public employment is reduced, and unemployment protection measures are reduced. Workers lose a good part of their rights in case of possible dismissal.
Public health elimination
Health is generally one of the sectors that neoliberals seek to privatize. According to his ideas, the private sector manages all health services better, in addition to the fact that privatization saves money in the state budget.
On the negative side, privatization of healthcare leaves many citizens unprotected who cannot afford private care.
Global expansion of trade
Neoliberalism is closely linked to globalization in recent decades. Different international organizations have tried to eliminate tariffs to boost international trade.
This expansion of trade enabled many workers in developing countries to improve their living conditions. Many industries have moved their factories to lower-wage countries, leading to rising unemployment in certain areas of developed countries.
Growth of the financial economy versus the productive economy
Although it is not only due to the implantation of neoliberalism, experts claim that there has been a large increase in the financial economy compared to the productive one.
It is economic growth that is not based on the production of products, but on the sale and purchase of complex financial products. One of the triggers of the last crisis was precisely one of these products: subprime mortgages.
Inequality
In general terms, the implementation of neoliberal measures led to an improvement in the macroeconomic data of the country in question. Thus, aspects such as deficit or productivity grew, as well as the number of employees.
However, this was accompanied by a large increase in inequality. The rich tend to improve their situation, while the workers lose purchasing power. In recent years, a new social class has emerged: those who do not exceed (or narrowly) the poverty line, despite having a full-time job.
Advantages
Higher market growth
One of the advantages of neoliberalism is that it causes great growth in the market. By removing regulations and restrictions, companies can spread their business networks across the world and reach more consumers.
Furthermore, as there is no type of price control, profits will only be determined by the demand and supply of each product.
increased competition
Competition between companies will also benefit from the application of neoliberal measures. This, in principle, should have advantages for consumers, as producers will have to strive to improve quality and prices in order to prevail over the competition.
Improving macroeconomic data
Experience in countries that have applied neoliberal recipes has shown that some economic indicators tend to improve. These are, in general, those related to the macroeconomy, such as Gross Domestic Product, fiscal balances or employment data.
However, the behavior of the microeconomy, which most affects citizens, is not so positive: wages are reduced, inequality increases and social programs that help the most disadvantaged are eliminated.
Disadvantages
social crisis
One of the most important disadvantages of neoliberalism is the risk of social crises.
These types of economic policies often end up causing bubbles that, when burst, trigger severe economic crises. Social discontent increases and, as many scholars point out, can generate significant social imbalances. One of the risks is the emergence of populist political groups that manage to come to power due to the discontent of the population.
wealth concentration
One of the most frequent accusations that critics make of neoliberalism is that it increases the concentration of wealth in a few hands. Furthermore, on many occasions, the most benefited are not related to the productive economy, but to the financial and speculative one.
The direct consequence of this concentration of wealth is the increase in inequality. In some cases, privatization of health and educational services exacerbates this problem.
Creation of monopolies
Although neoliberalism is against the formation of monopolies, the reality is that its measures favor their creation.
This, which already happened with classical liberalism, occurs because economic power is concentrated in a small group that, in order to increase their profits, ends up reaching agreements and forming monopolies.
This circumstance not only harms the population, but also small companies, unable to compete with these large conglomerates.
Environmental and rights issues
The economic power accumulated by business elites allows them to pressure governments to legislate in their favor. The main consequence is the reduction of workers’ rights, since neoliberals consider that there should be no general regulatory frameworks.
On the other hand, in recent times, concern for the environment has become more acute. The lack of regulation that neoliberalism advocates prevents any control of the damage caused to nature.
Representatives of neoliberalism their ideas
Friedrich von Hayek (1899-1992)
The Austrian economist and philosopher is considered one of the fathers of neoliberalism. His book The Road to Servfdom contains the main foundations of this current and made him the main figure of the Austrian school.
In his work, Hayek was totally against the state having any stake in the economy. For him, the market had to regulate itself. Otherwise, economic and political freedom would be threatened.
Milton Friedman (1912-2006)
Milton Friedman was an American economist who received the Nobel Prize in Economic Sciences in 1976. His main contribution was monetary theory.
According to his work, the free market is the only way to make the economy grow stably, without inflation. For the author, market forces are more efficient than any public participation.
Wilhelm Ropke (1899-1966)
This German economist and sociologist was one of the components of the Mont Pelerin Society. His influence on West German economic policy gave him great prestige.
Despite his work being framed within neoliberalism, Röpke admitted some state involvement. His theories, therefore, were used to develop the so-called social market economy, in addition to being one of the intellectuals who promoted the so-called “German miracle”.
Ludwig von Mises (1881-1973)
Von Mises was another of the most important theorists of neoliberalism during the 20th century. His theories were framed in the liberal-libertarian movement, which defended the free market. Like Hayek, he belonged to the Austrian School.
This author claimed that any government intervention in the economy was harmful. His theory indicated that if such an intervention took place, the outcome would be unnatural and would create chaos in the long run.
