Unpicking the legacy of neoliberalism

 

Neoliberalism as an overarching ideology for UK government died with the Brexit referendum in 2016, just as it did in the US with Trump’s election that year. Its last hurrah in the UK was austerity, although whether squeezing the state by reducing the quality of public provision rather than the amount the state does counts as neoliberal is a good topic for discussion. But Johnson’s right wing populist government in the UK did not mean that the neoliberalism of the previous thirty odd years was completely swept away. Much remained, which is why Prime Minister Burnham can legitimately claim to want to end forty years of neoliberalism.

Robert Shrimsley asks where is a modern day Thatcher to fight what Burnham hopes to do? Most politicians on the right nowadays seem keener on fighting culture wars and immigrants, in a kind of horrific beauty contest to see who can be nastier to asylum seekers, Muslims or other minorities. Indeed you can argue, as I have done in the past, that right wing populism is the inevitable legacy of neoliberalism in practice.

However there is another reason why there is no current equivalent of Thatcher, and that is because defending neoliberalism today is too hard an ask. So many of the claims made under the banner of neoliberalism thirty years ago are questionable at best and in some cases clearly untrue.

I have argued elsewhere that neoliberalism in practice, or neoliberalism in government, is essentially about acting in the interests of business and those that run them. I prefer this definition to anything involving markets because I think it is more accurate in describing what neoliberal governments do. Of course neoliberal politicians and neoliberal advocates more generally extol the virtues of free markets when arguing against regulations, for example, but not when it comes to breaking up monopolies or large firms. As Ronald Coase pointed out, the firm is in many ways an alternative to the transaction costs that would be incurred by numerous markets.

It is more widely recognised that definitions of neoliberalism based around a smaller, less active state are also inadequate. Neoliberal governments actively used legislation to diminish the power of trade unions, for example, because this was in the interests of business.

The central claim of neoliberalism is that if governments supported the interests of business in general [1] then society as well as business would benefit. Businesses dislike regulations and taxes imposed on them, so the claim is that if these regulations and taxes were reduced then businesses will grow faster leading to a general increase in prosperity. It is that corporations or privately owned businesses are better at providing goods and services than the government, so where possible the government should privatise or out source such activities to the private sector. Those who run firms need strong incentives, so taxes on high incomes should be reduced.

With the advent of Thatcher and Reagan these neoliberal claims were difficult to evaluate empirically, and support tended to focus on the inadequacies of the governments they were replacing. That is no longer the case. We can directly compare the experience before and after the 1980s, and see whether the neoliberal arguments hold up.

For example we can compare rates of economic growth, or growth in living standards, before and after the early 1980s, as Michael Jacobs does here. For the UK the simple comparison suggests neoliberalism reduced growth rates, although as Michael says we cannot know what would have happened if neoliberalism had never happened. I have noted in the past that this simple comparison is likely to be unfair to neoliberalism because the pre-neoliberal years benefited from a recovery from the devastation of WWII.

What about comparisons between more or less neoliberal economies over a common time period? If you asked what the greatest economic success story of recent times has been, I think it would have to be China. A lot of that is due to China’s integration into globalisation, and its adoption of a market economy, but the Chinese economy can hardly be described as neoliberal. The Chinese state maintains far more economic control than it ever did in the pre-1980s UK, for example, but this has not appeared to inhibit its continuing growth and development. Today China is also at the forefront of innovation. [2]

A clear empirical refutation of neoliberal claims that regulations inhibit growth and should therefore be reduced is the Global Financial Crisis of 2008/9. Deregulation of the financial sectors in the US and most of Europe brought economic disaster. It is a testament to the continuing power and influence of neoliberal ideology that even today politicians on the right and centre call for a reduction in red tape as a means to promote growth, with hardly anyone noting that is what was said about the financial sector before the GFC. Nevertheless it is hard to deny that stronger financial market regulation could have either avoided the crisis or greatly reduced its impact, and that the neoliberal ideology of deregulation was at least in part responsible for letting that crisis happen.

Of course one failure of deregulation, however large, does not imply that all regulations are always beneficial. But neoliberal governments did not argue that regulations should be judged on their merits, but rather that regulations were almost always bad for growth and bad for society. The Global Financial Crisis shows that argument to be wrong. Other examples of where deregulation has had harmful effects are not hard to find.

While regulations are often essential in particular industries and markets (as economists without a political axe to grind have always understood, of course [3]), we are becoming increasingly aware that if left to itself the private sector can sacrifice the future for the present. While thoughtful neoliberals have never denied the existence of market externalities, in practice neoliberal politicians tend to downplay their existence. Climate Change has been described as the greatest market failure ever seen. Government action, particularly through promoting in various ways innovations in green energy (see [2]), has been essential to reducing carbon emissions, although we still do not know if it has been too little too late. [4] Those promoting neoliberalism have often impeded rather than helped this endeavour to save human civilisation as we know it.

The idea that private sector ownership will always produce better outcomes than social (government) control has been dealt a severe blow in the UK by developments in the water industry. It is not my area of expertise, and it may be that the true story is not as simple as it appears, but in this particular case the combination of private ownership of a natural monopoly plus external regulation has produced a crisis today on various levels. It is another example of why any serious attempt to resell neoliberalism faces a tough task.

Finally, a key part of the neoliberal revolution in both the UK and US was a substantial reduction in taxes on top incomes and also on profits. The idea was that the more business leaders and firms are given financial incentives, the more wealth they will create for society as a whole (‘trickle down economics’). Few would dispute that incentives are important, but whether they remain important to those already on very high incomes is questionable.

Instead these tax reductions seem to have had a significant incentive effect on firms and CEO behaviour in a more negative direction. When taxes had been very high, there was not much point in CEOs devoting much effort into raising their salary. When taxes fell, that was no longer the case, and since the 1980s we have seen a significant rise in CEO pre-tax salaries relative to the average wage (from around x20 in the 1970s to x130 today.) This is a result of the combination of incentives and the bargaining power of CEOs, rather than any increase in CEO productivity. In the US a reduction in top taxes may also have led to a marked rise in the share of dividends in national income.

The net effect has been to reverse the post-war trend of a declining income share for the top 1% or 0.1%. The growth figures cited above suggest that this increasing share has come at the expense of the rest of the population. The most marked impact of this increased inequality has been the involvement of some wealthy individuals in right wing politics, most notably in the US. This is one of the direct links between neoliberalism and the rise of a right wing populist plutocracy. One of the strongest arguments against neoliberalism is that it opened the door to Trump and populist plutocracy. 

None of this implies that neoliberalism has no redeeming features, or that regulation and public ownership are always optimal. What it means is that the focus is on the form of interventions that the government can make, rather than whether any intervention is necessary. It is about the type of industrial policy, rather than whether there should be an industrial policy at all. It is about the best way the public can regain control over natural monopolies, which may or may not include ownership. These will be the important debates of Burnham’s premiership.

Of course losing the intellectual argument doesn’t mean that neoliberal ideas will disappear from public debate. The right’s dominance of the media, and the fact that a minority have done extremely well out of neoliberalism, will ensure that these tropes never go away. But it does mean that the interesting debates will be elsewhere, involving how best to unpick neoliberalism’s legacy.

[1] Not the interests of some firms against the interests of other firms, which is what often happens in a right wing populist plutocracy.

[2] To take one example, China is now at the frontier in terms of solar energy production. A recent paper examines how this was achieved as a result of competing innovation subsidies between Chinese cities.

[3] I talk about why economics is essential to any intellectual critique of neoliberalism here

[4] As Mariana Mazzucato has pointed out for the US, rather than the state ‘getting in the way’ of innovation it has often been the driver of innovation.