Tag: neoliberalism

Recap of ‘The Rise of Neo-Liberalism and the Decline of Freedom’

In her book fellow YSI member Birsen Filip makes an important and timely contribution by telling the story of neoliberalism and its dramatic rise over the past four decades. She traces its impact on our contemporary way of living, thinking, and being and in so doing demonstrates its elevation to a near law of nature that permeates nearly every aspect of our society. Many of us will be familiar with many aspects she touches upon, but it is galvanizing to see how deeply neo-liberal thinking has penetrated and reshaped our way of being. 

Birsen starts by expounding the pillar upon which neo-liberal thinking rests: negative freedom (chapters 2 and 3). Friedrich Hayek and Friedman developed the idea of negative freedom by defining it as ‘freedom from coercion’ – the liberty to consume, produce and exchange voluntarily –  which stands in contrast to positive freedom (i.e. improving individual self-determination by investing in individuals, communities, environments by the government). It purports that economic freedom in the marketplace (‘freedom to choose’) is a precondition for political and civic freedom (‘right to assembly, freedom of speech, freedom of religion’ etc). A threat or coercion on economic freedom would mean an infringement on political freedom as well. This expresses itself in the primacy of the marketplace, free individual choice, free fluctuation of prices and not allowing the government or any central entity to infringe on this economic freedom for an apparent collective good (freedom from coercion). 

How this concept of freedom limits the scope of government is treated in chapter 4. Chapter 5 treats the rise of transnational corporations which have been able to take advantage of an ever-increasing scope of the market. In chapters 6 and 7 we vividly see the effect of mass consumption culture on the environment. How private interest stands over public interest in innovation policies is described in chapter 8. Chapter 9 and 10 illustrate the decline of unions and organized labor and the rise of inequality, and chapter 11 the decline of moral and ethical values.  In chapter 12, Birsen returns to the realm of ideas to show how neo-liberal thinking has become entrenched with the academy. 

At the core of the book’s message, Birsen demonstrates a disastrous paradox: the supposed freedom which neo-liberalism promotes is indeed a trap. What Birsen describes is a vortex in which more and more spheres of our lives become caught in. ‘Freedom from’ indeed is not indeed liberating. On the contrary, it is contributing to the decline of freedom; it imprisons and destroys our capacity for imagining alternative pathways and collective action and in doing so it destroys our ability as individuals and societies to confront our problems. We can all sense the writing on that wall, namely the steady decline and destruction of societies and our environment, and yes, of individual freedom. 

What the book offers is how deeply neo-liberal ideas have taken hold of our thinking and penetrated how we perceive ourselves as individuals, how we relate with others. Moreso, it offers a glimpse of how we are eroding our social fabric and destroying our environment by extending the sphere of the market to nearly anything and exploiting the resources of our environment. More deeply it also sheds light on the current malaise and inability to address our global challenges since neo-liberal thinking discounts the ability of collective action (state and unions). 

Birsen offers a hopeful plea that recognizing these entrappings which we all intuitively sense may help lead to a change in mindset and an affirmation vision of our global society and the environment in which we live: Positive freedom.

Birsen Filip holds a Ph.D. in philosophy and master’s degrees in economics and philosophy. She has published numerous articles and chapters on a range of topics, including political philosophy, geopolitics, and the history of economic thought, with a focus on the Austrian School of Economics and the German Historical School of Economics. 

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Jay Pocklington is the Manager of the Institute for New Economic Thinking’s Young Scholars Initiative (YSI). He received B.Sc. and M.Sc degrees in economics from Freie Universität Berlin.

Ending the Econocracy: The Need for Pluralism in Economics

To understand why economics students around the globe are calling for Rethinking Economics, the book The Econocracy is a thoughtful and accessible place to start. An econocracy, as defined by authors Joe Earle, Cahal Moran, and Zach Ward-Perkins is “a society in which political goals are defined in terms of their effect on the economy, which is believed to be a distinct system with its own logic that requires experts to manage it.” Their work carefully explains why our current system is an econocracy and discusses possible ways to change that. Based on my own experiences so far, I can’t help but agree with them. 

The Econocracy argues that the current definition of economics is limited to a narrow, neoclassical viewpoint. Institutions of higher education have accepted and helped reinforce this tendency, at the expense of the discipline. The neoclassical approach to economics requires an understanding of complex mathematical models, which leaves many citizens feeling unable to engage with it at all. However, they should not be intimidated by those who do possess the necessary quantitative skills. While today’s economic experts hold prestigious positions, their understanding of math is often greater than their understanding of the economy. As the 2008 recession demonstrated, the majority of current experts didn’t get things right. This shows “the perils of leaving economics to the experts.”

The authors’ critique of economics curricula at colleges and universities necessarily extends to a critique of the higher learning system where these curricula are taught. Interestingly enough, they argue neoclassical arguments have helped shape this system to become what it is today. “Human capital” theory has its roots in neoclassical utility maximization. One of the first exercises in standard econometrics classes is to calculate the “returns to education,” which shows that incomes are higher for those who have completed college degrees.

These type of theories are problematic because they frame education as a “financial investment” which encourages students to give “the minimum effort and engagement necessary to get a satisfactory grade.” Such a mentality “undermines many of the core principles of a liberal education.” The authors look through history at the UK’s higher education system, and show how rising tuition costs financed by personal loans also has its roots in neoclassical thinking. This type of change is symbolic of the econocracy’s influence throughout all spheres of civil life.

While studying at UC Berkeley and Bard College, I met many students who thought and acted this way. As long as you put in a minimal effort, there was little chance of failing or being expelled. Second and third chances were given out often. Teachers did not give a lot of room to think critically about what you were learning, and worksheets and one-size-fits-all curricula were the norm. Nearly every class I had was in a lecture/tutorial format, and nowhere was the socratic method used for teaching. Still, there were some great professors and fellow students who shined the light in the right direction for me. I finished school feeling like I missed out on something, but I’m glad I have my entire life to continue learning.

The Econocracy does more than offer a critique—it also puts forth a new direction, albeit one that might be tough to achieve. For the authors, reform should start with the education system. They pose it’s necessary to shift away from “a passive student body—whose only input into their education is a tick-box feedback form—to an “active student co-production of education.” Debate and dialogue should be encouraged.

 A shift needs to happen within economics curricula too. The authors recommend economics departments teach with a pluralist approach, which would place post-Keynesian, classical, Marxist, feminist, Austrian, historical, ecological, and other perspectives front and center next to neoclassical economics. This way, students would be able to see neoclassical views as one of many ways to look at things. They would recognize that scholars have debated alternative points of view for decades, often on the fringes of the institutions they call home.

As Joan Robinson quipped in Marx, Marshall and Keynes: “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.” It doesn’t have to be this way. The Econocracy offers a different vision for economics. One where it is not only for the experts but for everyone.  They want to “democratise economics because [they] believe at its core economics should be a public discussion about how to organise society.” That’s something we should all get behind.

At The Minskys, we too hope to help advance a jargon free view of the economy that everyone feels empowered to engage with. Economics can’t just be left to the experts, because “the economy” affects us all.

Be sure to grab your own copy of The Econocracy, read it, and comment down below with your thoughts.

A Sinking Ship

Eight years ago, the world economy was shaken by the worst financial crisis since the depression of 1929. Despite the trillions of dollars spent on bailouts and on governments’ attempts to stimulate the economy through monetary policies, the world has not yet fully recovered, and several developing countries are facing their bitterest share just now. Still, many refrain from acknowledging the necessity of governments to engage in a different – and more effective – policy to boost economic activity and employment: fiscal expansions. Nevertheless, the burden is getting so heavy that even the more skeptical are turning to reason.

A recent text written by three important economists at the IMF, titled Neoliberalism: Oversold? has drawn a lot of attention in the past days. Perhaps the most impressive matter that should be highlighted about the text is in its very title: the use of the word neoliberalism, so far mostly used by critics of this agenda that gained strength in the 1980s and generally associated with a sort of “conspiracy theory”. Besides that, the findings of the text should come as no big surprise to non-mainstream economists: instead of economic growth, neoliberalism has brought financial instability and increasing inequality.

This is due to two main pillars of the neoliberal agenda: capital flows liberalization and government fiscal consolidation. Freedom of the capital accounts was expected to bring about a more efficient allocation of resources at an international level. Both developed and developing countries would reap benefits from it: the former by obtaining higher returns on capital investment and the latter by receiving the necessary savings to finance capital development.

The same is true for austerity policies, which would lead to a more efficient allocation of resources domestically. Two main ideas associated with fiscal consolidation are the famous “crowding-out effect,” in which government expenditure would decrease the availability of resources to the private sector thus not resulting in any real change in the economy (a mechanism adjusted by the interest rate), and the “burden of debt”, in which public indebtedness would necessarily lead to higher taxes in the future, then transferring the “burden” to pay off the debt to the future generations.

By looking into data, the IMF authors reach the conclusion that the beneficial effects of such policies “appear to have been somewhat overplayed”. Indeed, instead of stimulating economic growth, those policies have resulted in decreasing output. Capital account liberalization has been much associated with financial instability (especially in the recipient countries), and fiscal cuts with increasing unemployment. Most importantly, such policies seem to lead to increasing economic inequality, which hurts the sustainability of economic growth in the long-run.

Fiscal consolidation and free capital flows have led to the trap that the world economy is now found: a sinking ship commonly referred to as “secular stagnation”. After almost a decade has passed since the financial crisis and advanced economies still have not engaged in fiscal stimulus despite the failure of the non-orthodox monetary policies on bringing about robust growth. Instead of having that money spent into the economy, banks and other private investors were just sitting on it – apparently, not even negative interest rates managed to encourage lenders, showing the limits of monetary policy to generate growth and sustain employment.

Furthermore, in a world in which capital flows are free, high international liquidity was mostly drained by developing economies due to the high-interest rate differentials. The increase in capital flows has a direct impact both on foreign reserve accumulation and exchange rates, which can have disruptive effects for developing countries hurting foreign trade competitiveness and risking a balance of payment crisis. In a case of increasing country’s indebtedness denominated in foreign currency, a change in the perception of international lenders might lead to either capital flood or capital flight.

This deserves special attention in the current state of the world economy. The US has not yet reached the levels of inflation that it aims (despite the plan to continue the interest rate hikes), China is going through a downturn and a restructuring of its economy towards a consumer-based one, Europe is in the brink of dismantling, and Latin America is struggling both politically and economically (with Brazil as one of the protagonists). The drop in global trade and the reverse in money flows can bring about an obstacle to the ability of developing countries to obtain foreign exchange, and thus to meet their foreign debt commitments.

With decreasing global demand and a lack of willingness to make use of fiscal stimuli, the burden of the adjustment during this sluggish riptide is the employment level. In a report from January, the International Labour Organization (ILO) estimated that world unemployment is likely to reach 200.5 million in 2017, an increase of 3.4 million new jobless people within this and the next year, with the developing and emerging economies in Latin America, Asia and Africa taking the worst impact, plummeting along with commodity prices.

How can we stop the ship from sinking? A coherent global effort to generate demand and employment is needed. Governments, especially in countries with greater economic and political leverage (such as US and Germany), should engage in fiscal expansions targeting investment and employment. With investors’ animal spirits leashed, policymakers should not count on the private sector as a source of aggregate demand, and neither on exporting their way out of the crisis – as in a “beggar-thy-neighbor” type of policy. Instead, direct employment creation should be an objective of a global coordination, which then would provide the necessary aggregate demand to revive global trade, besides being a great mechanism to tackle the neoliberal trend of rising inequality.

Ideally, this should be the first step towards a more substantial change in the international financial architecture: from one that incites financial instability through chronic current account deficits/surpluses and abrupt movements of capital, towards one that nurtures and sustains stability and employment in the long-run. [For an enlightening discussion on the subject, see here].

What we shall remember is that although developing countries are being the first ones to fall into the cold waters of depression, the whole ship will sink eventually unless the proper policies are adopted – and austerity and liberalization have proven not to be useful lifebuoys.

Written by Vitor Mello
Illustration by Heske van Doornen