Neoliberalism

In the centuries-old debate on how to organize an economy, neoliberalism is the ideology that advocates giving preference to market forces over state intervention in most areas of economic activity. Neoliberals believe that Adam Smith's classic, liberal economic dictum—that supply and demand forces are better left unencumbered—can be fruitfully adapted to contemporary realities. More than having just a blind faith in markets and private property, neoliberals in the early twenty-first century share a profound distrust of economic intervention by the state, which they regard as neither omniscient nor free of political bias and thus ill-suited to decide on its own the proper allocation of resources in a society. For neoliberals, the most serious economic problems of the present time—inflation and unsustainable macroeconomic environments, lack of competitiveness, clientelistic and inefficient public spending, poverty, and corruption—result from misguided state interventions that distort market incentives.

Neoliberalism in economics should not be confused with "liberalism" in U.S. politics, which is an ideology in favor of using state regulation to advance socially progressive agendas and lessen inequalities. In economics, neoliberalism stands instead for reducing government influence especially in the areas of price controls, trade restrictions, and productive activities. For neoliberals, government cannot be trusted as a truly public-minded regulator because it is too easily captured by self-serving political forces, such as biased ruling parties, trade unions, rent-seeking lobbyists, and unaccountable bureaucrats. Neoliberals do accept some state intervention (e.g., to stabilize the monetary supply, fund social programs and infrastructure, enforce property rights), but they prefer to leave most economic decisions to producers and consumers.

Between the 1930s and 1970s, neoliberals were considered extreme, and their influence in policy circles was secondary to that of rival ideologies such as Keynesianism, protectionism, populism, socialism, and even Marxism. But as countries that embraced these rival ideologies began to experience crippling economic crises in the 1970s and 1980s, neoliberals began to gain ascendancy, first in Chile (under Augusto Pinochet) and then in the United Kingdom (under Margaret Thatcher), and the United States (under Ronald Reagan). In 1974 and 1976, respectively, two leading proponents of neoliberalism, Friedrich von Hayek and Milton Friedman, won Nobel prizes in economics, further boosting the renaissance of these ideas. In the 1980s former socialists leaders in advanced democracies began to embrace neoliberal policies (Felipe González in Spain, Bob Hawke in Australia). By the early 1990s, neoliberals dominated policy circles in most Latin American, former Soviet, and Asian nations, as well as in leading international financial institutions such as the International Monetary Fund and the World Bank.

Neoliberals advocate confronting economic malaises with a package of reforms that includes, among other policies, tight fiscal discipline (through expenditure and debt reduction) and tax simplification, avoidance of currency overvaluation, privatization, trade and capital account liberalization, and deregulation. This set of reforms came to be known in the early 1990s as the Washington Consensus.

In the first decade of the twenty-first century, neoliberal policies again became a matter of acrimonious debate. Critics contend that neoliberalism has deprived vulnerable economic sectors and social groups of protection against the negative impacts of globalization and failed to deliver economic growth robust enough to alleviate poverty and inequality. Neoliberals retort that economic growth under neo-liberal guidelines is qualitatively better than other forms of growth because it is more sustainable and has fewer distortions (e.g., inflation, nebulous regulations) that disproportionately harm the poor. Adherents insist that most observed shortcomings are due to spotty policy implementation, rather than to flaws in neoliberal policy prescriptions themselves.

See alsoChicago Boys; Economic Development.

BIBLIOGRAPHY

Kuczynski, Pedro-Pablo, and John Williamson. After the Washington Consensus: Restarting Growth and Reform in Latin America. Washington, DC: Peterson Institute for International Economics, 2003.

Von Hayek, Friedrich. The Road to Serfdom. Chicago: Chicago University Press, 1994.

Williamson, Wolf, Martin. Why Globalization Works. New Haven, CT: Yale University Press, 2005.

Yergin, Daniel, and Joseph Sanislaw. The Commanding Heights: The Battle for the World Economy. New York: Free Press, 2001.

                                       Javier Corrales