“Neo liberalism has been thoroughly discredited, but where do we go from here?”
The following essay will seek to show how neoliberalism has been discredited with particular focus on the United States, where the impact of neoliberalism has been “felt most purely.1” The Global Financial Crisis, GFC, will be used as the main example of how neoliberalism and it’s mantra of the market has been discredited. However it will also be the purpose of this essay to outline the broader political and social order that neoliberalism encompasses, making the reader aware that neoliberalism extends far beyond the field of economics. Further to this alternatives to a neoliberal world will be detailed.
Neoliberalism is commonly known to be an economic practise/theory that seeks to minimize the role of government, based on the central tenet that the private sector is more efficient than the public and thus should have greater control of the economy. In this context neoliberalism is understood to be “the repudiation of Keynesian2” economics, which gradually found ascendancy in the economic/political landscape post World War II and was to become to dominant force not only in the United States, but also in the “Anglosphere1,” (Australia, Britain and New Zealand) after the stagflation and oil crisis of the 1970’s. Neoliberal policies were claimed to be an extension of Adam Smith’s Wealth of Nations and advocated by a group of influential thinkers led by Friedrich Hayek and Milton Friedman through the Mont Pelerin Society, formed in 1947, to keep the liberal ideal alive in an era where communism was seen to be on one side of the iron curtain and Keynesian economic policy on the other.
Neoliberalism’s reach though extends far beyond that of just economics, though the two are heavily entwined. Neoliberalism extends deep into the politics of countries, its effects taking potentially disastrous courses for nations, citizens as well as natural environments. Wendy Brown’s informative piece of work “Neoliberalism and the End of Liberal Democracy,2” sets out the following characteristics as being a part of neoliberal political rationality.
1) The politics of countries, as well as the dimensions of all contemporary existence are “submitted to an economic rationality.2”All decisions made, are made according to the profitability of them. In the case of health care, “setting health care up as a private good for sale rather than a public good paid for with tax dollars.3” Market rationale is imposed on all decisions made, across all spheres of life.
2) “The market is the organizing and regulative principle of the state and society.2” In contrast to laissez faire, essentially allowing industry to be free from state intervention, Brown states that through neoliberalism the state “openly responds to the needs of the market,2” and is legitimized by the success of these measures through economic activity and economic growth. The cost and benefit of all decisions becomes the “measure of all state practices,2” and state actions, including warfare bringing a new light, as Brown states, to Paul Bremer’s declaration that Iraq “was open for business,2” post Saddam Hussein’s fall from power.
3) The individual is responsible for themselves and moral responsibility is equated with rational action, through a cost/benefit/consequence analysis, the individual is held responsible for all their own decisions, no matter the personal constraints on one’s life, eg: lack of education, poverty, limited social welfare. Rational economic action by the individual “replaces express state rule or provision.2”
The impact then of neoliberalism on the political and social order of the modern world is far reaching. As can be seen by the above, neoliberalism is not just a “bundle of economic policies with inadvertent political and social consequences,2” it is with this in mind that the GFC, focussed on the US, should be understood, combined with the characteristics detailed above.
The GFC has its roots in the burst of the tech bubble of the 1990’s. With the stock market in deep decline in 2000 and the United States going into recession in 2001, the Federal Reserve led by Alan Green sharply lowered interest rates to limit the economic damage. The market being the “organizing and regulative principle of the state and society.2” With lower interest rates, mortgage payments became cheaper and the demand for houses began to rise, with millions of current homeowners also taking “advantage of the rate drop to refinance their existing mortgages.4” As demand increased the quality of mortgages went down and subprime loans were created for people with weakened credit histories who had what were deemed to be reduced repayment capacities5. In 2006 the rate of defaults and delinquencies on loans began to rise, but the speed of lending did not. To hedge against risk, banks and other investors across the country “devised a plethora of complex financial instruments to slice up and resell the mortgage-backed securities,4” but it did not work.
In June 2007 two hedge funds that had invested heavily in the subprime market owned by Bear Stearns collapsed and as the year progressed more banks were to find out “that securities they thought were safe were tainted with what came to be called toxic mortgages.4” Over the next year, as the credit crisis began to take hold a wave of sales, seizures and failures of banks, insurance and investment companies was to occur. Most notably the failure of Lehman Brothers6 the sale of Merrill Lynch to the Bank of America7, the take over of Fannie Mac and Freddie Mae “government-sponsored entities that were linchpins of the housing market,4” by the Federal Reserve and the $85 billion Federal bailout out and take over of the insurance company the American International Group.
The fact that so many banks and investment companies in the US financial system were affected by the credit crisis, forced the Federal Reserve on September 18 to propose a $700 Billion proposal that would let the government purchase so called toxic assets from the nations biggest banks in “a move aimed at shoring up balance sheets and restoring confidence within the financial system.4” A fact that was to anger many Americans, but was pleaded by President Bush to be passed through Congress. Measures taken in the United States were not enough to fend off a global crisis though. Banks in England and Europe had invested themselves heavily in mortgage-backed securities offered by Wall Street and losses from these investments and the effect of the same “tightening credit spiral being felt on Wall Street began to put a growing number of European institutions in danger.4”
Polls were to show that Barack Obama’s victory on the November 4 Presidential election was partly due to voters thinking that he would run the economy better than Senator John McCain, but by late November stock markets were to fall to their lowest level in a decade, and when December came economists were to formally state that the US was in a recession and had been so for the past year, a fact that US retailers were keenly aware of, the 2008 holiday season being one of the worst in the past thirty years as consumers cut back spending.
This then is a very condensed introduction to the GFC; describing how it came about, what the effects of it were and how it was responded to. It is now important to show how the GFC relates to neoliberalism in the US and how the GFC is evidence of neoliberalism in the US being discredited.
Firstly if Brown’s characteristics of neoliberalism are to be used to discredit neoliberalism, then neoliberalism can be said to be hypocritical. In essence the GFC was created by the financial markets of the US and if the same logic of cost/benefit/consequence for the rational individual is applied to that of the financial markets, then the financial markets should be held responsible for the actions and decisions they made preceding and during the credit crisis which lead to the GFC. This to a large degree has not happened yet. It is true that some companies were allowed to fail during the crisis and even that Goldman Sachs has had a court case filed against it by the securities commission of recent9. But these should be considered as isolated incidents rather than the norm. As yet little to no regulation has been passed so that future events such as the GFC do not occur again and with Republican opposition strong in Congress, regulation of the financial sector seems as if it will not happen soon. We still live in a time when the market is seen to be “the organizing and regulative principle of the state and society,” and though filled with rhetoric of regulation the state “openly responds to the needs of the market.” The market and specifically the companies who were responsible for the crisis considered “too big to fail.9”
As has been stated neoliberalism grew as a response to Keynesian economics, which had gained ascendancy since World War II. But if Keynesian economic measures, through financial bailouts, were used to bail out the financial markets during the financial crisis how then can neoliberalism and Keynesian economic action be reconciled? Is this not a case of neoliberal policy contradicting itself? If neoliberalism were strictly an economic theory then this would be the case, but if Brown’s characteristics of neoliberalism are to be used, Keynesian economic policies can be reconciled with neoliberalism very comfortably with the state openly responding to the need of the market, pumping money into market when needed. When proposing the $700 Billion deal to Congress and the American people President Bush argued that the bail out package “was simply a continuation of the American system of free enterprise, which "rests on the conviction that the federal government should interfere in the market place only when necessary".10”
If then this is the case that neoliberalism and Keynesian economic action can be reconciled, how then can neoliberalism be discredited? Once again it is the hypocritical nature of neoliberalism that discredits itself. What is good for the goose is not good for the gander. As Ha-Joon Chang states “The unfortunate thing, however, is that American pragmatism does not extend beyond its borders. In a version of "don't try this at home", Americans tell other people that they should all adopt the free-market, free-trade model. However big their financial crises are, other countries are told that they should let the markets correct themselves.10”
To give an example; during the GFC, the case for financial bailouts in the US was perfectly valid. However during the 1997 Asian Financial crisis during Indonesia was forced by the IMF to close sixteen of its banks and raise interest rates to 80% and at the same time South Korea had to shut down close to a quarter of its financial institutions and raise interest rates to 30%10. Chang goes onto state that it would “help the world even more if the US accepted that all countries, and not just itself, have the right to use a pragmatic mix of the market and state intervention according to their own "necessities", as Mr Bush put it so succinctly.10”
Perhaps though neoliberalism would make no apology for this hypocrisy, it being a system put in place to maintain a political/social order, on a national and global level. It depends, in neoliberal parlance, on the individual’s cost/benefit/analysis of neoliberalism.
In conclusion then how is neoliberalism discredited? It is a subjective question. Ultimately if one believes in neoliberalism, as defined by Brown, that the state should be subjugated to business interests and that individuals are all rational beings, accountable for their own specific situations in life, then neoliberalism is not discredited at all, further to this neoliberalism could be said to be serving its purpose, towards a political social order.
If one however is to believe in a world beyond the importance of the market, and see the inherent contradiction between how individual and market responsibilities are treated neoliberalism begins to be discredited. Neoliberalism can then said to be hypocritical.
There is also an inherent hypocrisy in how countries experiencing their own financial crises have been forced to act, as opposed to the way the US chose to act during its own financial crisis, through pragmatic measures. Hypocrisy then plays a large part in the discrediting of neoliberalism. One can take this one step further and say that neoliberalism is part of a political and social order that does not take into account the equality of nations and the importance of individuals, their education, health or social welfare, but is rather a part of a hegemonic order devised to keep power in the hands of the so called powerful.
It is hard to offer an alternative to a behemoth such as neoliberalism, countless books could be written on the subject, but what does seem evident is the need to move away from a market emphasis, where market rationale is applied to all spheres of life, perhaps in some way the political and social order that neoliberalism encompasses could be slowly weakened.
Neoliberalism’s stranglehold on the state must be curbed, costs/benefit analysis should be made more holistic, in the case of healthcare the benefit of providing free health care to citizens should be seen as a benefit both in the short and long term rather than a short term cost, thinking such as this is too short term. The focus of the state should be its people and the market, not the market solely. The case of the GFC is one of market failure and greed and an indictment on American neoliberalism. The state should not be made subservient to the market, helping out only when the market needs and looking away the rest of the time. Regulation should be put in place to stop future abuses of the system occurring again. Obama’s attempts at regulation should be welcomed. Ultimately the hypocrisies of neoliberalism need to be eliminated, as well its strange hold on the current political social order of the world, towards a more democratic, holistic, socially viable state.
References
1) Manne R, 2010, Goodbye to all that, On the Failure of Neo-Liberalism & the Urgency of Change, Penguin Books.
2) Brown, W, Neo-liberalism and the End of Liberal Democracy, Theory & Event - Volume 7, Issue 1, 2003
3) McGregor, S, 2001, Neoliberalism and health care, International Journal of Consumer Studies - Special Edition on ‘Consumers and Health, 25:2, p. 84.
4) Credit Crisis – The Essentials 2010, The New York Times, viewed March 21, 2010, http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/index.html?scp=1-spot&sq=credit%20crisis&st=cse
5) Subprime Lending, Federal Deposit Insurance Corporation, viewed May 3, 2010, http://www.fdic.gov/news/news/press/2001/pr0901a.html
6) The Reckoning, The New York Times, viewed May 1, 2010, http://www.nytimes.com/2008/10/23/business/economy/23paulson.html?pagewanted=all
7) Lehman Files for Bankruptcy, Merrill Is Sold, New York Times,viewed May 1, 2010, http://www.nytimes.com/2008/09/15/business/15lehman.html?pagewanted=all
8) Fed’s $85 Billion Loan Rescues Insurer, New York Times, viewed May 5, 2010, http://www.nytimes.com/2008/09/17/business/17insure.html?pagewanted=all
9) Bipartisan pact on “too big to fail,” Reuters, viewed May 5 2010, http://www.reuters.com/article/idUSWAT01440920100504
10) The economics of hypocrisy, The Guardian, viewed May 5 2010, http://www.guardian.co.uk/commentisfree/cifamerica/2008/oct/20/economic-policy-us-bailout
