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Neoliberalism is a political philosophy and a political-economic movement beginning in the 1960s -- and increasingly prominent since 1980 -- that de-emphasizes or rejects modern, New Deal, or statist liberal doctrines (new liberalism), focusing instead on achieving progress and even social justice by more free-market methods, especially an emphasis on economic growth, as measured by changes in real gross domestic product. Because of close association between this philosophy and neoclassical economics, and confusion with the overloaded term "liberal", the term "neoclassical philosophy" is advocated by some.

The term neoliberalism does not mean a new version of the "liberalism" of the modern period -- that is, the new liberalism of John Dewey, Woodrow Wilson, John Maynard Keynes, Franklin Roosevelt, or the Liberal Party of Great Britain, but of "classical liberalism" as it was understood in the 19th century -- the establishment of a stable medium of exchange, and the reduction of localized rules, regulations and barriers to commerce. This philosophy justified and encouraged the "first era of globalization" which came to an end with the shocks of the First World War and the collapse of the Gold Standard (just as neoliberalism is associated with the "second era of globalization" after World War II). "Liberalism" in the classical sense is still the meaning of the word in many nations, including most of Europe and Latin America.

(Whether such an understanding of "classical liberalism" is historically accurate is subject to debate however, since the "father of liberalism", John Locke, was a committed mercantilist of the kind later criticized by Adam Smith, so that the original "classical liberalism" was something different than its 19th century variety: the doctrine of political and religious liberty did not spill over into "economic liberty". And there can be little doubt that liberalism already existed in the late 17th century, since Locke's liberal political philosophy was what the Whig Parliamentary majority used to justify the Glorious Revolution of 1688. Thus it could be argued that 19th century liberalism was itself really a form of neoliberalism, if one is to take the idea of "classical liberalism" seriously.)

The neoliberal "policy revolution" may have started with the violent ouster of the social democratic government of Salvador Allende in Chile by General Augusto Pinochet and the U.S. government. "Free market" policies, including privatization of state assets and other elements of neoliberalism, were imposed by "los Chicago Boys," Chicago school economists inspired by Milton Friedman. But the rise of neoliberalism culminated with the Reagan government in the United States and that of Margaret Thatcher in Britain, along with the fall of the Soviet Union and the fading of social democracy as alternatives to unbridled capitalism. These governments not only shifted their own countries' policies toward laissez-faire (with the major exception of Reagan's deficit-spending policies) but used their control of the major Bretton Woods institutions to impose their policies on the rest of the world. So nowadays, neoliberalism is generally seen as synonymous with the "Washington Consensus," the dominant policy view at the International Monetary Fund (IMF), the World Bank, and the U.S. Treasury Department at the end of the 20th century and the start of the 21st.

Table of contents
1 Theory vs. Practice
2 Neoliberal theory
3 External Critical Resources

Theory vs. Practice

The term is primarily used by critics of neoliberalism rather than proponents, so that most discussion and description of neoliberalism is written from a critical point of view. Supporters of concepts central to neoliberalism, such as free trade and capitalism, view many of the descriptions of neoliberalism as straw man arguments.


As described by UC-Berkeley economic historian and defender of neoliberalism Professor Bradford DeLong, this "ism" has two main tenets:

"The first is that close economic contact between the industrial core [of the capitalist world economy] and the developing periphery is the best way to accelerate the transfer of technology which is the sine qua non for making poor economies rich (hence all barriers to international trade should be eliminated as fast as possible). The second is that governments in general lack the capacity to run large industrial and commercial enterprises. Hence, [except] for core missions of income distribution, public-good infrastructure, administration of justice, and a few others, governments should shrink and privatize)."

These two principles represent parts of the " trickle-down theory," i.e., that under free-market capitalism, economic growth and technological change benefit even the poorest countries and people, even if that process is dominated by multinational corporations, rich domestic elites, and organizations such as the IMF dominated by rich countries' financiers. (Or perhaps deLong ignores the roles of these social forces.) In the tradition of laissez faire theory, the state is seen as normally incompetent and/or corrupt, though it may play a positive role with technocratic "expert" guidance, such as that offered by the I.M.F.

The concept of neoliberalism became popular among economists not only as the balance of political power changed (as discussed above), but as many decided that post-World War II national development strategies for poor countries were not having the intended effects. In particular, funding for mega-projects left poor countries with high debts but little growth to show for it. It is also a reaction to the perceived failures populist and modern liberal economic policies, such as import-substituting industrialization. Failures of the East-Asian ( Taiwanese, South Korean) policies of state-guided export-led economic growth and of the centrally-planned or "communist" economies also were interpreted as requiring neoliberal medicine. The export-led economies were criticized as involving "crony capitalism," while most of the centrally-planned countries fell apart economically and politically in late 1980s and early 1990s.

As noted, the neoliberal doctrine is linked to the so-called "Washington consensus," a set of specific policy goals designed for Latin American countries. In addition to the tenets of neoliberalism noted by Professor deLong, the Washington consensus stipulated that a country should have stable exchange rates and a government budget in balance.


However, in practice, the neo-liberalism IMF, World Bank, and the U.S. Treasury has gone further in the laissez-faire direction than Professor deLong's summary would suggest. In many cases, the IMF applied exactly the same policies in each country, ignoring any specificities. Trade was opened, the flow of capital was encouraged (going both into and out of a country), while tight monetary policy and balanced government budgets were dogma. Austerity was imposed on the population, while the wealth of the countries' creditors was saved. Privatization of public resouces was the rule, even when it made no sense from an economic perspective. For example, water supplies were privatized in Bolivia and other countries, encouraging popular protests. Infrastructural investment was slighted or slashed, while efforts to avoid extreme inequality of income distribution were avoided.

In practice, neoliberalism differed from much of pure free-market policy in that it emphasized the imposition of intellectual property rights (patents, copyrights, and trademarks), encouraging monopoly rather than free market competition. Often, neoliberal reforms put blue-collar workers in rich countries in competition with those in poor countries, but privileged professionals such as medical doctors are protected from such competition.

There were also catastrophic failures. In particular, Nobel prize winner and former World Bank chief economist Joseph Stiglitz argues that the IMF is guilty of forcing neoliberal and Washington consensus policy goals on countries at times when it was not appropriate (i.e., the Asian Economic Crisis), with devastating results. The "cookie cutter" approach of applying the same policy no matter what the specificities were can be seen in this crisis, as the I.M.F. pushed for government budget cuts even though government budget deficits had nothing to do with the crisis. Neoliberalism has also been criticised by populists, social democrats, and anti-capitalists, who argue that unbridled market forces inevitably increase inequality in wealth and hence power.

In a recent book, Professor Robert Pollin summarizes the neoliberal record. Excluding the People's Republic of China, which did not follow the neoliberal lead, the era of the "developmental state" (1961-80) saw a per capita growth rate of real gross domestic product that averaged 3.2 percent per year. On the other hand, during he neoliberal era (1981-99) this growth rate fell to 0.7 percent per year, slowing both absolutely and relative to the wealthier countries of the OECD. China, which shifted from pure state planning to state-guided export promotion, saw its per capita growth rate rise from 2.5 to 8.4 percent between these periods. (See Robert Pollin, Contours of Descent, p. 131. ISBN 1-85984-673-4) Thus, according to the neoliberals' own standards, their policies can be seen as a failure. Pollin also shows the rapid increase in income inequality between these periods, especially when China is excluded from the sample.

This short entry cannot end the debate. One question is whether it is better to define neoliberalism in terms of its self-image (as Professor deLong does) or in terms of its actual practice. Either way, these critiques do not automatically indicate that neoliberalism should be dumped. It is possible, as the more militant advocates of laissez faire say, that neoliberal policies were not applied in a pure enough form. Alternatively, one might argue that if neoliberalism had not been pursued, economic events would have been even worse. Further, it is possible that neoliberalism could be reformed.

Neoliberal theory

While some use the terms neoliberal and libertarian or classical liberalism interchangeably there is a difference between the two philosophies. While both share a belief in market economics and free trade, neoliberal economics theory shares with neoliberal international relations theory (and liberal internationalism) a belief in international regimes and a degree of global governance as a means of negotiating and administering international agreements. Neoliberals believe that greater economic and political interdependence will lead to progress and a reduction of international tensions or at least divert states from utilizing military means to resolve conflict. Libertarians reject the neoliberal belief that global governance bodies or state negotiated treaty regimes that bind the individual are desirable.

Neoliberalism accepts macro-economic theory that assumes full employment and rational expectations, that is, it is a modern laissez-faire economic theory. The central question is the cost burden imposed by regulations in a the Mundell-Fleming Model. In the Mundell-Fleming Model of open exchange trade, nations may have policy autonomy -- that is regulation of internal markets -- monetary policy freedom and fiscal freedom only as trade-offs. That is, having monetary policy freedom reduces the ability to regulate the economy. The central argument is then how effective each of these mechanisms are for producing economic growth. It is generally recognized that monetary policy is better than fiscal policy which is better than regulation, but how much, and under what conditions is a matter of intense debate. During the peak popularity of the monetarist school, it was asserted that monetary policy was so much better than the other mechanisms, that it was therefore worthwhile to sacrifice, or drastically reduce, the other two components of government action, in return for greater effectiveness of monetary policy.

With the 1990's and the productivity surge, and the events where the correlation between money demand and money supply weakened, this assertion was called into question, serving as the theoretical basis for "The Third Way" and a neo-liberal economics which was not so explicitly associated with conservative policies.

Neo-Liberalism's theoretical basis, however, has been called into question with the failure of its implementation, however imperfectly, to produce the expected result of capital flowing from the industrialized core nations and out to the peripheral nations. This failure, noted by Stiglitz, Delong and Krugman, is not explained easily in theory. Instead, capital has pooled in the industrial core, as seen by the increasing investment deficit of the United States.

Prominent exponents of neo-liberal policies include former US Treasury Secretary Robert Rubin, as well as economists such as Robert Solow, Gregory Mankiw, and Robert Mundell.

See also: anti-capitalism, privatization, Keynesian economics, globalisation, Neoconservatism, Friedrich Hayek

External Critical Resources