Perspectives on Geopolitics, History, and Political Economy

Neoliberal Political Economy: Regressive Economics on a Global Scale

Global Geopolitics & Political Economy

 Activists during a protest against the proposed Trans-Pacific Partnership (TPP) agreement in Kuala Lumpur, Malaysia 19 July 2013. The protest is against the proposed Trans-Pacific Partnership (TPP) agreement under negotiation by the US, Australia, New Zealand, Chile, Peru, Brunei, Singapore, Vietnam, Canada, Mexico, Malaysia and Japan. EPA/AZHAR RAHIM

Activists during a protest against the proposed Trans-Pacific Partnership (TPP) agreement in Kuala Lumpur, Malaysia 19 July 2013. The protest is against the proposed Trans-Pacific Partnership (TPP) agreement under negotiation by the US, Australia, New Zealand, Chile, Peru, Brunei, Singapore, Vietnam, Canada, Mexico, Malaysia and Japan. EPA/AZHAR RAHIM

By Alan F. Fogelquist, Ph.D

This essay discusses some of the main characteristics of today’s neoliberal political and economic order. Other terms exist to describe the same general set of institutions and policy prescriptions, but neoliberalism is a convenient expression for designating them in one word that is now widely used and understood.

Neoliberalism is now used as a generic term to characterize an economic ideology that favors unrestricted “free” markets, “free trade”, macro-economic stability, and a set of related economic policies. Neoliberal ideology favors unrestricted freedom of private corporations to pursue profit, the privatization of public enterprises and services, and the elimination or reduction of public or government control, regulation, and guidance of economic activity. Neoliberal policy prescriptions give priority to the prevention and control of inflation over economic growth and employment. In some versions of neoliberalism, there are also prescriptions for tax reductions for corporations and upper income groups under the assumption extra income retained after tax reduction will be reinvested in productive capacity. The ideology also calls for free trade and the elimination of tariffs or government support of domestic manufacturing. The ideology assumes that unregulated markets will correct themselves and produce optimal outcomes for society as a whole.

Over the decades neoliberal ideology has evolved and received a variety of labels ranging from monetarism in the 1980s to the Washington Consensus in later years. Despite some changes and refinement, the policy prescriptions have remained much the same in terms of their regressive effects on distribution of income and wealth and also their contribution to financialization of the economy and the decline of the manufacturing industry in many countries. Rightwing politicians have culled political slogans from popularized works of neoliberal economists or political ideologues like Milton Friedman and his successors. In advanced developed economies, the introduction of neoliberal institutions and policies began in the 1980s under the governments of Ronald Reagan in the United States and Margaret Thatcher in the UK In subsequent years neoliberal policy came to dominate much of the economic landscape of the capitalist world and in one form or another was adopted by major political parties and governments in many countries. In the United States both Republican and Democratic governments adopted key elements of neoliberal thinking including free trade dogmas. The notable exception to neoliberal capitalism in recent decades has been in the rapidly developing economies of Asia that rejected some of the core doctrines and practices of neoliberalism as practiced in the United States and much of Europe and Latin America.

The neoliberal economic order produces institutionalized inequality – unequal power, unequal advantage, and unequal exchange. Those without power are forced to exchange their labor and expertise for less than the real value of their product or contribution. While any economic transaction has the potential for unequal or unfair exchange, the current system of rewards is completely in favor of those with political and economic bargaining power and against those who depend on wages and salaries for their work, either physical or mental. The neoliberal order is one where institutionalized inequality and perverse incentives prevent technological advances from reaching their full potential to improve the human condition. Instead tiny minorities reap most of the benefits while the majority of the world’s inhabitants receive marginal benefits or are left out. Neoliberal ideology based on fallacious assumptions presented as science is used to justify regressive economic policy and race-to-the bottom competition based on lower wages and special state favors to monopolistic or speculative “enterprises.” In the Orwellian language of neoliberalism speculation is confused with productive investment. Speculation becomes coterminous with investment.

The vast expansion of the global market economy to include countries with enormous populations of desperately poor workers and farmers has created an enormous downward pressure on employment and wages in countries that had achieved higher incomes and economic security for the wage and salary workers after decades of economic development and social struggles. Globalization following the inclusion of China, India, and Russia in the world market economy has created race-to-the bottom competition and increased levels of exploitation. It has contributed to the imbalance between wage income paid to workers directly engaged in production and the performance of services on the one hand and income in the form of profits or executive and upper managerial salaries that accrues to the economically powerful on the other hand.

Also intensifying inequality has been the change in policy regime starting in the early 1980s when neoliberal monetarist macroeconomic policy replaced more expansionary policies of the early post war compact between labor and capital. Also accentuating inequality were measures to break labor unions and increase the power of employers to step up the level of exploitation of workers and employees.

Increased profit and upper managerial and executive income beyond increases in labor productivity have repeatedly produced a chronic imbalance between effective demand or purchasing power and the supply of goods and services even in times of economic expansion. This has resulted in a growing accumulation of income at the top with no productive outlet for investment. The existence of large pools of capital without profitable outlets for productive investment fuels speculation. These pools of capital are funneled into financial institutions that clamor for deregulation in order to have a free hand to engage in high-risk asset speculation driving up the price of tangible and intangible assets and distorting the structure of the economy. The collapse of asset prices fueled by speculation has led to repeated financial panics and economic crises. Following neoliberal policy prescriptions, step-by-step deregulation of financial institutions in the 1980s and 1990s accelerated the growth of the private financial sector at the expense of manufacturing and public services. The growth of the financialized speculative sector fueled by excess profits, higher managerial income, and increased exploitation of an underpaid labor force also increased the capacity of large corporations and wealthy individuals to use their financial power to gain political power. The same corporations and individuals were able to influence politics through domination of the mass media, intensified lobbying efforts, funding of electoral campaigns, funding of policy institutes, and ideological influence over business and economic education in universities. All of these activities contributed to the growing dominance of plutocratic capitalism over policy discussion and to the promotion of policies that serve the interests of tiny wealthy minorities rather than the general public.

After decades of testing neoliberal ideology as the dominant paradigm it is now possible to see its deep flaws and inhuman consequences. Austerity economics prescribed by neoliberal politicians and economists, especially during a crisis or recession produces massive unemployment and downward pressure on the wages and salaries. These policies intensify and prolong recessions. Free trade dogma has led to a decline in manufacturing and the transfer of factories and jobs to low wage countries placing additional downward pressure on wages and loss of employment in many middle income and developed countries without proportional benefits to workers and ordinary people in poor countries. Outsourcing of information technology and jobs to lower wage countries now threatens the economic security even in the technologically advanced sectors of developed economies. In the meantime factory workers in countries that have gained jobs from this zero-sum activity are severely exploited and live under inhuman conditions while the multinational elites profit from the transfer. Everywhere it is the multinational capitalists and elites in the emerging economic giants like China and India that receive the benefits of uncontrolled globalization. In short, neoliberal policies have resulted in a massive transfer of income and wealth upwards and contributed to global imbalances and instability.

Unless there as a fundamental change in ideology, these trends will certainly continue and there will be major crises that inflict enormous but preventable human casualties. Highly volatile and imperfect markets characterized by unequal power, an unequal advantage, crony capitalism, reckless casino finance, environmental wreckage, and plutocratic domination of government and the media will continue their unsustainable course creating mass misery, and periodic crises.

Choice of economic policy usually involves tradeoffs between goals that may be in partial conflict such as low inflation versus high employment or cheap manufactured goods versus jobs and decent wages, but most tradeoffs benefit some groups more than others. The best tradeoffs are those that benefit the majority of the people, those engaged directly in the creation of useful goods or performance of needed services for the general population. The best tradeoffs are those that serve the public good rather than the good of tiny minorities. The real choice in economic policy boils down to who gets what and fair versus unfair exchange.

Neoliberalism is not the only analytical framework available. There are real and feasible alternatives to neoliberalism that can lead to better living conditions and better economic outcomes for the majority of the world’s inhabitants. There have always been alternative frameworks for economic and political analysis and successful examples of alternative economic practices that have led to better outcomes. Examples of successful economic policies outside the framework of neoliberalism can be found in many countries and forms ranging from government policies to promote the development of domestic manufacturing in East Asia and Brazil to social democratic support for health care, education, vocational training and pensions for the elderly in Scandinavia, Germany, and France. Argentina offers lessons for overcoming financial crises aggravated by neoliberal austerity and some examples of worker owned enterprises. The Mondragon industrial cooperative in Spain shows that plutocratic ownership of industry is not the only alternative. Many countries and regions have successful experiments in public support for green development and efforts to preserve the environment.

No set of policies is perfect, but some serve the needs of the many and human well being much better than others. From the beginning, there have been social scientists, economists and observers of economic and political life who have challenged what proved to be flawed assumptions and claims of the neoliberals. The reason for the power and influence of neoliberalism lies largely in the tremendous economic, political, and media power of the minorities that have benefited from its prescriptions. In future essays we will go into more detail in our analysis of the dynamics of neoliberalism, alternative frameworks, and the experience of various regions and countries around the world.

© Copyright 2012 Alan F. Fogelquist, Ph.D. All rights reserved.

This article should not be republished or redistributed without the permission of the original author or copyright holder.

Alan F. Fogelquist is an economic historian and analyst of geopolitical and economic issues. He is editor of the Global Geopolitics & Political Economy and Real Political Economy websites.