What is Neoliberalism?

Neoliberalism is a brand of economic philosophies championed by Milton Friedman at the University of Chicago, and thus was called “Chicago-school” economics, although most American economists refer to it as neoclassical economic theory.  Neoliberalism is not a word we hear very often in discussions about the economy, but this philosophy is the predominant source of our economic policies since the early 1980s.  Ronald Reagan and Margaret Thatcher, respective rulers of the U.S. and Britain during the 1980s, are typically credited with being the first leaders to implement such policies.  What we know as “Reaganomics” and “trickle-down” economics are undoubtedly the children of neoliberalism. 

 

Neoliberal theory proposes that social justice can be achieved through “trickle-down” effect; in other words, if the rich have excess capital, it will find its way to the poor through job creation or private charity.  Naomi Klein, author of The Shock Doctrine: the Rise of Disaster Capitalism, describes via interview how this is supposed to create an “elevator effect,” in which the elevator “picks up one group of passengers and takes them to the top, where they create wealth that allows the elevator to go back down and pick more people up.” 

 

The liberal aspect of the theory is in reference to the liberation, or “free-ing” of global markets.  Deregulation of financial markets, free trade, tax cuts for the rich, and small, non-intervening governments are the hallmark freedoms of which neoliberalism are in search.  It should also be said that neoliberalism needs capitalism to exist.  Neoliberalism and capitalism complement each other very nicely; the relationship is parasitic; which is the host and which is the parasite is most often less than obvious (see Timothy Mitchell's essay "Dreamland" in Evil Paradises). 

 

The neoliberal attitude that fostered the massive expansion of the global economy over the last few decades is perhaps best summed up by the term “Washington Consensus.”  The Washington Consensus is a term coined by John Williamson in response to a 1989 “consensus” by powerful Washington, D.C. - based banks, politicians, and organizations on how to “develop” Latin America.  Here is a bulleted list of financial reform brought about by the Washington Consensus in regards to how to develop Third World Latin America (cited directly from the Center for International Development at Harvard University).

·         Fiscal discipline

·         A redirection of public expenditure priorities toward fields offering both high economic returns and the potential to improve income distribution, such as primary health care, primary education, and primary infrastructure

·         Tax reform (to lower marginal rates and broaden the tax base)

·         Interest rate liberalization

·         A competitive exchange rate

·         Trade liberalization

·         Liberalization of inflows of foreign direct investment

·         Privatization

·         Deregulation (to abolish barriers to entry and exit)

·         Secure property rights

 

These policies were agreed upon, and are the underlying principles for economic development by the World Bank, The International Monetary Fund, GATT (now the WTO) members, and financial speculators worldwide.  Since this “consensus” was never really publicly acknowledged by these institutions, the Washington Consensus is an informal term.   The Washington Consensus, neoliberalism, and globalization are usually used interchangeably when referring to the massive global economic shifts in the late 1980s and 1990s in favor of economic liberalization.  The results speak for themselves, and are interpreted in many different ways.  Mumbai is perhaps the poster child for neoliberal economic reform in this period.  This website describes some of the related issues to neoliberalism and its side effects.