Babies in the Neoliberal Bathwater
Many critics would argue that the impact of neoliberalism has become so negative that reform is inadequate, and that the entire approach of a market-driven economy must be replaced with a state-run one, or the invention of some other unspecified system. It is important to achieve some balance. Neoliberal rejection of regulation has certainly intensified problems of environmental damage and climate change; but the environmental record of industrial activities under state socialism was even worse. The disregard for the lives of the poor demonstrated around the Grenfell Tower disaster was perpetrated by representatives of London’s neoliberal financial elite; but contempt for ordinary people is standard practice among powerful groups of every kind. We also need to reflect on the positive contributions that the neoliberal approach has made. These can be summarised as: the discipline of price and calculation; helping us appreciate the limitations of democratic government; facilitating trade and reducing barriers to it; and facilitating links among people.
The discipline of price and calculation
Nearly everything we do has a cost, even if it is only what economists call ‘opportunity cost’ - the fact that doing one thing excludes doing certain other things. If I decide to spend money on a new coat, I need to consider not only the money value of the coat, but the things that I shall not be able to buy because I bought the coat. It is important that we do not regard actions as costless, particularly when calling for governments to spend money. While neoliberals are extreme in maintaining that governments’ use of money will always, virtually by definition, be inferior to uses of it in the private market, it is entirely reasonable that government’s spending choices are scrutinised and subject to open debate.
It is similarly important that, once it is agreed that there should be some government spending, it should be spent efficiently. Neoliberals claim that, because public services are not subject to competitive pressure, they are unlikely to be as concerned as private firms to ensure that they keep costs as low as possible. This is a serious argument. Although they have been unsuccessful in getting rid of public services and have been responsible for the anti-market forms of privatisation and sub-contracting that have often disfigured public service delivery, neoliberals have been responsible for many measures to ensure that public services resolve this problem, thereby often contributing to improvements in them and making them less vulnerable to neoliberals’ own criticisms. Under a system known as new public management, public services have been submitted to performance measurement and needs to achieve targets, similar to those confronting firms facing pressures in the market. This has had some bad distorting effects, as when schools teach children only how to get high scores in targeted tests rather than impart knowledge to them. On the other hand, it has had some beneficial effects in making managers and professionals in these services consider what their objectives are, and be aware of a need to provide value for money.
A neoliberal approach also involves encouraging private individuals to think about the value of money and therefore about investing rather than spending. For example, in 2005 the British Labour government introduced Child Trust Funds, with the aim of introducing the ideas of savings and investment in financial markets among children. The government allocated £250 to every child born on or after 1 September 2002, with an additional £250 to children in low-income families. The money had to be kept in tax-free interest-earning savings schemes until the child reached 18 years, when various options were available. The child’s family could contribute further funds. The objective was to encourage poorer families to become involved in investment, and the government planned to include financial planning in school curricula. The idea has clear neoliberal inspiration, encouraging young citizens to become involved in market risk management and to see themselves as market actors. But it was not pure neoliberalism, because it involved an initial egalitarian investment by the government. In 2011 the incoming Conservative-Liberal Democrat government improved the purity of the neoliberalism by abolishing the government subsidy.
The limitations of democratic government
Neoliberalism has also had a salutary impact on the tendency of politicians and public alike, especially but not only those on the socialist and social democratic left, to expect too much from government and its claims to democratic legitimacy. For example, a major neoliberal reform has been to have central banks made independent of government. This has been strongly criticised from the left on the grounds that it limits the ability of politicians to choose how high they will allow both inflation and public debt to rise. But this assumes a model of politics in which governments always serve the public interest. But politicians’ strongest interest is in being re-elected. Allowing public debt to rise in order simultaneously to increase public spending on popular projects and keep taxes low is a perfect example of how they might achieve this, while inflicting long-term damage on the economy. The independence of central banks is designed to prevent precisely this kind of behaviour. Central bank independence is not a denial of democracy, but a protection of the public from its political manipulation.
Below we shall find good reason to criticise neoliberalism for being unable to cope with long-term issues. But, sadly, the same is also true of the democracy of representative government. Just as we need public policy to protect us from neoliberalism’s deficiencies, some neoliberal institutions can also protect us from excessive expectations of how far governments can manipulate economic variables – and whether, when they do, they always act in our interest.
Facilitating trade and reducing barriers
When governments play a dominant role in deciding what goods and services their citizens produce and purchase, they are tempted to protect domestic producers from foreign competition, particularly by imposing tariffs and various rules to limit imports. This ensures stable employment, free from outside competition, for those producers. A particularly strong argument for protection is what is known as the ‘infant industries’ case. This assumes that a government or some firms in a country want to develop an activity in which others are already dominant. Only if the domestic industry is sheltered from competition for a period will it stand a chance of becoming efficient enough in the longer run to compete. A further reason for protection occurs when competing countries are making goods and services far more cheaply because they are exploiting labour or allowing industries to damage the environment. If low costs are always the key to competitiveness, there will be a constant ‘race to the bottom’ of low standards, unless countries with high labour and environmental standards can protect themselves.
The neoliberal critique enables us to see some weaknesses in these arguments. First, how can it be guaranteed that protection will be used only for the purposes stated? When will a government decide that an infant industry has had enough protection and should now be exposed to competition? How can one distinguish between labour being exploited and labour being cheaper simply because it is more efficient? Once protectionist arrangements have been set up, close relations usually develop between government and the leading firms in the industries concerned. The latter will rarely propose the removal of protection, and will use their good contacts with government to maintain it. Consumers then face prices higher than necessary, and the industries have little incentive to innovate, as their domestic markets are protected from external competitors. When such industries are finally forced to give up protection, and consumers are free to choose goods and services on the open market, their cost, efficiency and innovation disadvantages lead to crisis and probable collapse. Major examples of this process occurred following the collapse of the Soviet Union and its associated regimes in central and eastern Europe. A central problem with protection is that there is rarely a neutral arbiter who can determine when a genuine case for protection no longer applies; while there are plenty of special interests able to insist that it should continue. This does not dispose of the genuine arguments around infant industries and races to the bottom; but advocates of protection on social grounds need to avoid being naïve about the political realities of governments and corporations exploiting them. Free trade enables firms and national economies to specialise in what they do best, keeps everyone under competitive pressure to improve, and enables poor countries to join in the world economy, gradually pulling their people out of poverty – something from which they are excluded if rich countries protect their industries from competition.
Facilitating links among people
Closely linked to debates over free trade are those around national, racial and similar boundaries. Neoliberals do not care about the quality of human relationships in themselves, as these are externalities to the market. However, one consequence of the triumph of neoliberal over statist approaches to economic questions has been to open borders, facilitating the movement of people, ideas and cultural practices.
With the partial exception of the EU, state action usually means actions by nation states. Left to themselves, these define an insider population and protect and enhance national characteristics, either in isolation from or sometimes in hostility to those of other nations. Periods of particularly strong national economic protectionism have also been those of powerful nationalism, occasionally overlapping into open conflict. A major example was the period between the First and Second World Wars. The only internationalism that flourishes in periods of strong national rivalry is imperialism, as in the decades running up to the First World War when the states of Europe, led by the British, colonised other regions of the world. There was as a result considerable cultural interchange, but always on terms of the domination of many different peoples by those of one core nation. The tensions set up by this situation exploded in the late 19th and 20th centuries in demands for national liberation, which in turn unleashed its own nationalisms.
Neoliberal economic strategies weaken the hold of the state, and therefore reduce divisions among people and restrictions on their movements that are imposed by states. Many citizens support these divisions, because they share the suspicions about people from other places that centuries of nationalism have encouraged; but others appreciate the opportunities for extending their lives that neoliberal internationalism brings. This does not mean that neoliberals cannot be nationalists; they might draw the line at free markets in goods and services, but discourage exchanges among people themselves. But there are tensions in such an approach, as it is difficult in practice to maintain such distinctions. Markets do not acknowledge differences of nationality, race or gender, so market neoliberalism is difficult to fit into a nationalist mould. Similar points apply to corporate neoliberalism. Many transnational corporations do not respect national differences in their own practices. They recruit staff at all levels internationally, producing mixed work teams.
This transcendence of national differences and facilitation of cross-national mixing of people by neoliberalism is an externality. I have here regarded it as a positive one, but readers with a strong belief in national identity and separateness may well prefer to locate this theme in the previous section of this discussion, as something that is ‘wrong’ with neoliberalism, a negative externality. Assessment depends on the reader’s point of view.
Conclusion: Neoliberalism’s virtues
Neoliberalism has no monopoly over these valuable aspects of its legacy. Neoclassical economic theory (which is an analytical technique, not a political doctrine) can teach us about opportunity costs and the value of efficient allocation of funds. Much political theory warns us against over-estimating democracy’s capacity to equate the interests of governments and governed. Free trade was practised rigorously by the Nordic countries during their long decades of political dominance by social democracy. Liberals, social democrats and moderate conservatives have all encouraged the free movement of people. However, neoliberal dominance has been the spur to the spread of each of them around many parts of the world in recent years. And there is a risk that some of them would be undermined in the course of any general rollback of neoliberalism’s achievements.