Most social problems experienced in modern society have been caused by the unregulated freedom given to its subjects, resulting in social issues such as corruption, economic instability, unemployment, poor governance, as well as non-adherence to the set law and order. This can further be blamed on how society has succeeded in bending the set governance structures in order to fit its social requirements.
This notion of unregulated freedom can be traced to the concept of neoliberalism. However, an initial mystery facing anyone who wants to study neoliberal ideology in more detail is that there does not seem to be anyone who has written about neoliberalism from a sympathetic or even neutral point of view. Although initially coined to signal the ideological distance from classical liberalism, economists and other intellectuals associated with neoliberalism stopped using the term by the late 1950s. Practically everyone who writes about neoliberalism does so as part of a critique of the ideology. As a result, the term neoliberalism has become a rather nebulous concept, and usage has tended to vary quite considerably over time, and in accordance with varying regional experiences, especially since scholars have abandoned the term as a result of its negative connotations. In the context of this literature, this paper seeks to explore the obscurity of this neoliberal ideology and analyze the political and economic effects in today’s society resulting from the transition from classical liberalism to neoliberalism. This will be addressed by critically evaluating how neoliberalism has created an economic disparity in modern society through its role in the political and economic aspects of the countries it has coalesced with.
Classical and Modern Liberalism
One frequently encountered distinction goes between classical and modern types of liberalism. Classical liberalism is associated with earlier liberals such as Adam Smith, who advocated the belief that the state ought to be minimal, which means that practically everything except law enforcement should be left to the free dealings of its citizens, and the organizations they freely choose to establish and take part in. Thus, the sole purpose of the minimal state is to uphold the most fundamental aspects of the public order. Some of these earlier liberals, such as Locke, even consider the state to be a freely established association between individuals, where its members have a justified cause for rebellion if the state seizes more power than what has been originally ceded to it by its citizens. Classical liberalism has thus much common ground with economic liberalism, which is basically the belief that states ought to abstain from intervening in the economy, and instead leave as much as possible up to individuals participating in free and self-regulating markets. Thus, it is often the case that classical liberals are, with their tendency to favor laissez-faire economic policies, portrayed as leading proponents of neoliberalism.
Modern liberalism is characterized by the equity of opportunity, presence of a facilitating state, positive freedom, developmental individualism and qualified welfare. Specifically, Modern liberalism features a greater inclination to allow the government to participate actively in the economy (enabling state). This implies that under this predisposition, the state can engage in activities aimed at explicitly regulating the marketplace, provide critical goods and services to all citizens and subsequently, redistribute wealth and power to generate a society considered as being more equitable or decent (equality of opportunity). In essence, modern liberalism is an elaborate reconsideration of liberalism, particularly in relation to the economic policies conventionally linked to it. Modern liberalism argues against the laissez-faire economic policies promoted by economic liberalism mainly because the claim that these policies result in increased freedom and real democracy is fallacious and erroneous. Instead, modern liberals such as John Stuart Mill, Benjamin Constant, John Dewey, John Rawls and William Beveridge contend that the only way that liberal objectives and goals can be actualized is if the state is allowed to play a greater role in the economy. Modern Liberalists believe in the power of the enabling state that creates the necessary conditions where individuals choose advancement and progress (positive freedom).
Transition from Economic Liberalism to Neoliberalism
For approximately thirty-five years after the world war, economic liberalism was used to determine and explain economic activity. Economic liberalism underlines the ideology that governments should abstain from intervening in the economy, and instead such roles should be left for the business and the market to self-regulate. Primarily, economic liberalism states that the government must desist from acting as an intermediary in the economy, and rather permit individuals to take part in unrestricted and self- regulating markets (developmental individualism and qualified welfare). Shortly after, economic liberalism was overtaken by Keynesianism, which remained the dominant economic theory between 1945 and 1970. During this time, this school of thought relied strongly on the Keynesianism ideology fronted by John Maynard Keynes, who advocated for total employment through the intervention of the state, in order to facilitate the growth of capitalism. However, towards the end of the 1970s, the Keynesian economic paradigm experienced a significant rejection and scholars began moving towards neo-liberalism. This shift was attributed to the economic and social dislocations witnessed following the OPEC price shocks and the Vietnam wars. However, the most significant precipitator of this paradigm shift was the scholarly disagreement within Keynesianism and its inability to generate public comprehension of the economy that could sufficiently compete with the free market rhetoric proposed by neoliberals. Notably, neo-liberals attacked Keynes postulation on full employment arguing that economic policy should adopt strategies that actualized the notion of wage flexibility, instead of enforcing full employment.
In its most basic sense, neoliberalism is based on the conviction that the only legal purpose of the government is to safeguard the rights of the individual, primarily their commercial and freedom rights alongside private property rights (Vayanos and Wooley). In other words, the state should limit its interference in most areas of economic activity since the only way of structuring the exchange of goods and services is through free market systems. Further, neoliberals contend that free markets and free trade enable the manifestation of the creative potential and entrepreneurial spirit of individuals that only occurs in the presence of spontaneity of the human society. By facilitating creativity and innovation, neoliberals believe that free trade and markets will result in increased individual liberty and well-being and ultimately lead to a more equitable and efficient allocation of resources. Specifically, neoliberals are of the perception that the market should be left to operate freely, and individuals should be allowed to freely make choices. This is a representation of democracy in the political circles. As such, the practical execution of neoliberal policies leads to a shift of power from both political to economic practices, from the government and its agencies and delivering it to the market and individuals, and on the other hand, from the legislature and executive arms of the government to the judiciary (Thorsen and Lie).
Consequently, “neoliberalism”, which is a hybrid of both the monetarism and related theories, has conquered macroeconomic policy-making, and this can be attributed to its less severe state interventions on the economic matters, and heightened emphasis on economic policy stability rather than focusing on full employment and the alleviation of abject poverty objectives as advocated by Keynesianism. The existence of a self-regulating market is a significant assumption of classical liberalism, and equally a key presumption among neoliberals. Accordingly, it is agreed that efficient allocation of resources is the major purpose of an economic system and that the best method of allocating such resources is through market mechanisms, as proposed by the neoliberal economic theories (Thorsen and Lie). Indeed, under neoliberalism, steps of government intervention in the economy are undesirable, because they are perceived to cause imbalances in the market and, hence, reduce economic efficiency. Relying on the set context above; it is, therefore, clear that neoliberalism is a loosely demarcated set of political ideologies that most obviously include the persuasion that the only authentic purpose any government is to safeguard individuals, their property, business and associated freedom. Thus, from this conviction, it is a widely held belief that governments should participate minimally in regulating the economy. This conviction usually generates, in turn, in a belief that the state’s influence should be minimal and that any contravention by government agencies beyond legitimate purpose is deemed unacceptable.
The Beginning of Neoliberalism
One of the first governments in the world to explicitly borrow from neoliberal ideas was the military government of General Augusto Pinochet in Chile, who went as far as to invite Friedman and his disciples to visit the country to offer advice (Prebish). The Chicago Boys, as these advisers came to be known, focused their attention on battling inflation, regulation, and protectionism. Between the 1930s and 1970s, neoliberals were considered extreme and irrelevant, and their influence in policy circles in Latin America was secondary to that of rival ideologies such as Keynesianism, protectionism, populism, socialism, and even Marxism. During this time, policy in Latin America’s largest economies (Mexico and most of South America) was characterized by inward-oriented statism or import-substitution industrialization (ISI).
Based on dependency theory, which posited that there is a long-term decline in the value of commodity exports relative to manufactures, and the structuralist theory, which posited that local demand was insufficient to boost manufacturing, ISI was predicated on the idea that by restricting trade, offering subsidies to local manufacturers, and protecting labor, states could promote home-grown industries (Stallings 113). Typical ISI policies included high tariffs, expansion in the number and scope of state-owned enterprises, especially in utilities, subsidized credits to local industry, buy-national laws, price controls, labor codes that protected laborers from petty firing, and regulation of competition to protect nascent industries. In multiple cases, these ISI policies contravened market economics.
Spread of Neoliberalism in Latin America
A series of developments at the level of ideas and world politics coalesced in the 1970s and 1980s to propel neoliberal ideas to gain ground in Latin America. First, the field of development was revolutionized in the 1970s by advances in theories of state capturing and bargaining. Scholars were able to prove empirically that states become captured easily by producers’ groups, organized constituencies, or both. For either electoral or self-serving reasons, states were shown to use regulation to cater for pressure groups, ultimately converting them into the main drivers of economic policies. Anne Krueger, in particular, showed how rent-granting, once it starts, becomes hard to contain, encouraging most other groups to jockey for influence and eventually overwhelming states with pressures (Krueger 291-303). Once a state embarks on the path of protectionism, it induces non-winners to seek equal forms of protection, leading to a rising spiral of rent-seeking and rent-granting. In Latin America, the 1980s also saw the rise of technopols—a new class of U.S.-trained Latin American economists who became disenchanted with statism, often after having been strong statists themselves. These technopols returned home to pursue careers within parties, state agencies, or think-tanks, from where they became national advocates for pro-market ideas (Love 3).
Neoliberalism was further boosted by the collapse of most Latin American economies following the onset of the debt crisis in 1982. Latin America entered a process of contraction, high inflation or hyperinflation, capital flight, exchange rate instability, and underinvestment that lasted the entire decade and in some cases into the early 1990s. Because Latin America was the only region to have implemented ISI the deepest, the collapse of its economy proved to many that the model was misguided to begin with. For neoliberals, these outcomes (statism and economic collapse in the 1980s) were causally connected. Furthermore, the command economies of communist nations were also collapsing (the Soviet bloc) or changing in the direction of market reforms with positive results (China), further boosting the global trend away from statist economics (Stallings).
More important, a series of successful cases, or “victorious globalizers,” as noted by Jeffrey Frieden, made it into the radar screen, and the initial interpretation of these cases seemed to validate key tenets of neoliberalism. Moreover, in Latin America, the divergent experience of Chile and Peru in the 1980s proved decisive. Each nation attempted to deal with the debt crisis using different approaches—Chile was borrowing explicitly from neoliberals while Peru was implementing a more statist approach. By the late 1980s, the Chilean model seemed buoyant while Peru plunged deeper into a crisis. Many scholars concluded that neoliberal reforms could turn things around if implemented to the fullest as in Chile (rather than haphazardly as the military juntas of Brazil and Argentina did) (Prebish).
Effects of Neoliberalism in Institutions
Essentially, the effect of neoliberalism has been propagated globally by seemingly neutral organizations such as the IMF and the World Bank. The two organizations were instituted with the aim of regulating the flow of capital around the world; however, they ultimately end up advancing the interests of selected transnational corporations and western countries. A good example is the fact that voting within these institutions is determined by the amount of capital a particular country contributes as well as the political clout wielded by a specific country. Essentially, neoliberalism policies advanced through these institutions such as the Structural Adjustment Programs have served to concentrate power in the auspices of a small minority, giving them new opportunities to exploit natural resources and workers in underdeveloped regions of the world (Babb and Kentikelenis).
Effects of Neoliberalism in the US
In the US, the election of Ronald Reagan in 1980 saw the official adoption of the neoliberal economic policy. The effect of the implementation of these policies within America is the privatization, deregulation of financial markets, the decline of social protection institutions, attenuation of government, weakening of labor market protections, and labor unions, reduction of top tax rates, and the relinquishment of full employment objectives (Aguirre Jr. and Baker). For instance, in the beginning of 1980. The U.S government altered national policies on taxation of all corporates profit and in capital income. The statutory corporate taxes reduced from 45% in 1981 to 34 % in 1998 to create a more effective privatized economy (Swank). The outcomes of these changes include an increased and exacerbated income inequality; escalating poverty rates, reduced rates of productivity growth, wage stagnation and longer working hours. The deregulation of financial markets has fostered the rise of large-scale corruption scandals such as Enron and the recent collapse of the real estate / mortgage market (as a result of increased individual debt) that led to the global financial crisis of 2007-2008 (Bandelj, Shorette, and Sowers).
Another negative effect if neoliberalism in U.S resulted from advocation of more freedom in marketing. This led to the establishment of some policies such as the North American Free Trade Agreement (NAFTA). This principle gave the Corporations the freedom to relocated into any nation and then sell back their products in U.S. NAFTA resulted in the loss of over 700,00 jobs among the U.S citizens as most corporations moved to Mexico. The principle also allowed employers to pay minimum wages and benefits so as to increase their profit. With this freedom in the market, the governing class, and the U.S trading partners applied the NAFTA principles to the World Trade Organization and allowed inflow of Chinese low wage supply in U.S resulting to increased job loss among the Americans (Faux).
Difference between Neoliberalism and Liberalism
Neoliberalism is a reinvention of economic liberalism that advocates for a free market and free trade. This interpretation suggests that liberalism was at one point in time an influential political ideology, but that at some point it lost some of its significance, only to revive itself in more recent times in a new form. In other words, it suggests that liberalism has undergone a process of initial growth, intermediary decline, and finally a recent rejuvenation. However, because liberalism is usually described as an ideology with a disposition towards individual liberty and democracy, with the view that state power should be exercised with caution and within constitutional limits, such as within a system based on the separation of powers as suggested by earlier liberals such as John Locke and Montesquieu, then the interpretation that neoliberalism is derived from liberalism in general cannot be acknowledged (Thorsen and Lie). This interpretation fails to recognize the fundamental values that distinguish the two ideologies and their practices (Thorsen and Lie).
The key principles of liberalism encompass not only a theory of equality and freedom but also a discipline of power—an approach of creating power and a means of controlling it. Under liberal constitutions, there is an imposition of power restrictions through its distribution among different branches of government and public officials. This order protects citizens from autocracy, as well as protecting the state itself from unpredictable, or overreaching decisions. Thus, one major insight of liberalism is that power is not subjectively exercised only on individual liberty, but also on the rule of law. Consequently, by limiting arbitrary power, citizens are confident that the set rules will be fairly applied, which increases the government’s ability to secure cooperation without the use of force. Further, such limitations on the scope of state power increase its effective use on the generation of wealth, knowledge, and other state resources. Thus, as a customary political ideology emphasizing on the beliefs of liberty and equality that has effectively helped in running governments that are democratic, liberalism has associated the rule of law and the basic purpose of keeping the government in check. Liberalism, however, seems to be a general term that leaves such important, basic political questions as with what, and with how much, the state ought to concern itself.Further, neoliberalism differs from liberalism due to its capitalism whereby it is an embodiment of the ideologies adopted by the most recent notion of capitalism (Thorsen and Lie).
Neoliberalism is commonly misunderstood as neo-conservatism since they share the same ideals regarding the environment of the state. However, the distinction between the two is related to the fact that neoconservatives are more concerned with politics while neoliberals tend to focus more on economic philosophies. Finally, neoliberalism is distinctive in its relationship to minarchism, whereby neoliberals reiterate the argument advanced by minarchists that the role of the state is restricted to simply offering protection to the citizens and not interfering in economic activity (Vayanos and Wooley).
The main aim of the current paper was to answer the question: How does neoliberalism create economic disparity in modern society? The concepts outlined in the current paper have provided an extensive understanding of what neoliberalism is and its role in the economy. In its most basic sense, neoliberalism articulates that the state should limit its interference in most areas of economic activity since the only way of structuring the exchange of goods and services is through free market systems. While the proponents of neoliberalism have extolled the advantages of free trade, free markets, consumer choice and private enterprise, neoliberalism has significantly opposite effects.
The most and common criticism of neoliberal policies is the fact that it leads to the creation of protectionist markets that are dominated by selected transnational institutions. As already seen, Neoliberalism advocates for deregulation and the elimination of state interference in the economy. Accordingly, these policies are implemented from a one-sided point of view, and in a way that only benefits the trans-national corporations that have a crucial role in policy formulation. Under neoliberalism, capital circulates freely around the world, but employees remain within their geographical borders. Neoliberalism also prompted the dismantling of the welfare state which in turn has increased wealth disparity and affected the larger population since they have to contend with reductions in healthcare and unemployment benefits.
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