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Neoliberalism: The new economic common sense?

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Published: Mon, 08 May 2017

Neoliberalism Economic Marxist

Is neoliberalism the new economic common sense?

Sheikh, A., (2005), 41.

The foundations of neoliberalism derive from what Stilwell (2006) considers as “an intriguing blend of technical analysis and ideology” (148) which is characterised by a number of prominent features. In contrast to Marxist economics that suggest the role of capitalism is relatively limited, neoclassical views of the economy tend to be optimistic about the role that capitalism has to play in it, and are especially concerned about notions of competition, the individual, and the business.

While Marxist economics is concerned about the study of historical processes, neoclassical theory uses a deductive methodology when approaching a problem; Marxist theory focuses on the class system, neoclassical theory concentrates on the individual; significantly, Marxist economics defines capitalism as something characterised by conflict. Contrarily, neoclassical economists suggest that markets lead to harmony.

Naturally, the ideological potentiality of a system which supports the free market to the extent to which neoclassicism does is likely to assert itself as a dominant ideology in a propagandistic age. Stilwell (2006) argues that the origins of the predominance of neoclassical policies derive from two things. Despite poor economic performance in the late 19th century, the dominant neoclassical views on the economy were still prevalent.

This was because of “the extension of markets” (151). Stilwell argues that “it was better to emphasise the invisible hand of the market than the iron fist of imperial domination” (151). More sceptically, the problems seemingly inherent to capitalism created dominant fears among the political and social elite that the ‘dangerous doctrines’ of Karl Marx and John Stuart Mill would be enabled by workers dissatisfied by the present system of government.

As such, the alternative doctrine of neoclassicism became the prevalent ideology of the ruling classes and was used as a means of preventing revolution or civic unrest. More cynical critics of the neoliberal experiment suggest that the same embodiment of pro-business, pro-capitalist ideology is occurring with orthodox theory in the present time.

As well as providing a useful tool for establishing dominant control over dangerous Marxist ideology, neoclassical economists also tend to flatter their consumers with notions of individual freedom of choice. Central to neoclassical theory is their belief in consumer rationality. Indeed, while Marxism focuses on investigating the class system, neoclassical theory offers a series of equally problematic appraisals of the consumer.

The individual consumer, it is argued, acts rationally based on the information that is given to him or her. This, in theory, regulates the market because, by and large, demand meets supply as a result of the rational consumer’s purchase. Of course, problems emerge when one begins to look at the specificities of consumer choice: what is rationality? Neoclassical economists use a process of utility maximisation in an attempt to cut through these difficulties. Stilwell (2006) suggests that “Consumers have varying personalities and preferences, but they are assumed to pursue a uniform objective: the greatest utility (or satisfaction) that is attainable with their disposable income” (158).

This, in theory, serves to balance the market and maximise wealth. It also tends toward the common sense notion that individual actors in a market and their consumption decisions are based upon their own autonomous consumption decisions. It is assumed by neoclassical economists that actors operate in a rational manner, albeit one where the pursuit of individual happiness or satisfaction is the main goal. Stilwell (2006) comments that “we see and hear commercials, but we generally prefer to feel ourselves sufficiently selective, critical, and maybe just downright cynical about them” to have our personal autonomy compromised (157).

As such, the notion of consumer rationality tends to assert itself as common sense because it is innately flattering to the ego of the consumer. As the influential orthodox economist Paul Samuelson suggests, “the consumer is, so to speak, the king… each is a voter who uses his money as votes to get the things done he wants done” (1964, 56). Naturally, by contrast to the grisly and disempowering struggle of the class system inherent to Marxist ideology, the notion that the primacy of the individual consumer is valid serves as an important ideological tool.

The relationship between customer and business is an elegant one in neoclassical economics. In the deregulatory climate favoured by neoclassical economists, businesses must constantly strive for economic efficiency in order to retain a competitive edge over the rest of the market. Because the market is deregulated, there are theoretically no limits to another firm entering the market and competing with your company and selling at a lower price than yourself.

Additionally, the theory of consumer rationality suggests that consumers do not attach themselves to your product at all, and simply move to the more competitive product. Of course, the simplicity of this argument acts as a system within which more elaborate theories of orthodoxy can be constructed. However, it clearly becomes apparent that a deregulated economy would prove to be extremely unlikely to generate the best deal for consumers; indeed, the continual focus upon the consumer makes the theory read like an advertisement for itself, a little like the marketing material it serves to promote.

Stilwell (2006) comments that “capitalist businesses may use their power over economic resources to suppress socially beneficial technical innovations, to limit the freedom of entry of new firms, to reduce or otherwise eliminate market competition, or to influence government policy to serve their interest at the expense of other community concerns” (174). While the idealised behavioural model of the business and consumer as atomised units creates an elegant theory about the relationship of individual actors, in reality the system of interrelations is considerably more diffuse and interdependent; businesses often act in a hostile manner towards one another which reduces consumer choice.

Businesses also mislead consumers into making the wrong decisions. Consumers make decisions they believe to be rational, but later prove to be irrational and harmful to their overall well-being. Neoclassical economics is, in effect, built upon a very simplistic and elegant method of consumer to business interrelations where the customer is king and competition is perfect.

In practice, however, the aggressive behaviour of states forces legislative boundaries to be enacted that work against this notion of perfect competition. However, despite these failures, neoclassical theories have continued to dominate economic policy in the past twenty years.

Neoclassicism can be seen to have been established as a common sense economic policy for a number of reasons. Firstly, the increased interdependence and connectivity between markets required a system of deregulated economic theory that echoed that sentiment. Similarly to the scenario in the 19th century, neoclassicism is a means of upholding a belief in global capitalism in the face of increased difficulties regarding the seemingly inherent injustices prevalent to the free trade system.

Similarly, the economic collapse of a number of developing countries in the 1980s was “interpreted as being directly caused by interventionist trade policies” (Deraniyagala 2005, 101), in which a simple prescription could be offered involving deregulation and privatisation of state-owned assets that proved seductive for a number of powerful political figures at the time. Indeed, the prevalent common sense view among governmental bodies remains simple: that “trade liberalisation by lowering tariffs and non-tariff barriers should be the focus of trade policy” (Deraniyagala 2005, 99).

The assumptions about the importance of deregulation and capitalism are rarely questioned by policy makers and, despite revisions to the general treaties that determine international policy, the prevalent trend in US politics in particular is that free trade facilitates growth, reduces social inequality and decreases instances of civil unrest, and that problems encountered by nation-states are due to a lack of institutional reform and the drag that government, state-ownership and union members encumber a free market with.

In addition, especially in US policy, the rise of neoclassical theory in the past twenty years has cemented the common sense notion widespread in the collective mind of the nation that individualism, prosperity, and the individual pursuit of happiness are more important than governmental collective efforts to help the needy and address problems through collective action.

Neoeliberalism is centred upon the notion of governmental failure, which derives in part from notions of social Darwinism; the notion inherent to neoclassical theories centred around government failure are the notions that “governments, however well intentioned, stand in the way of such drives for personal advancement in a free society.

Worse, they tend to be parasitic and/or corrupt” (203). Naturally, these theories advance and exploit a common distrust over shadowy, authoritarian governments in favour of individualism: like the concept that the consumer is king, these theories are firmly rooted in the notion that government institutions are bureaucratic, cumbersome, and corrupt, and merely serve to get in the way of the operation of the free market and the individual actor’s choice.

The erosion of collective identity has compounded this notion. Indeed, in a particularly reductionist view of neoclassical theory, some theorists of government failure even suggest that “politicians and bureaucrats” should be seen “as subspecies of Homo economicus”, namely, that they too operate as “self-interested individuals whose actions are calculated responses to vote-maximising processes” (203). However, instead of allowing the market (which, according to neoliberal theory, acts ‘democratically’) to act in its own democratic manner, governments intrude upon this natural policy by simply enacting policies that “satisfy the demands (and secure the votes) of sectional interest groups, systematically violating the broader national interest” (203).

Naturally, widespread distrust in the actions of the government are exploited in this instance to create a notion that governments only act in a similar manner to corporations, thus cementing the notion that governments have no role to play in determining sociological or institutional policy. Additionally, it could be argued that such a theory exploits the residual fears and the hatred levelled by individuals towards others who are seen to be getting a fairer deal from the government than others: certainly, with respect to the detrimental impacts of the neoliberalist agenda on the welfare state and other forms of social provision, this appears to be the case.

In addition, the notion of governmental failure is dependent upon ignoring or undermining what government actually does do: “It is quite bizarre,” Stilwell (2006) comments, “to apply market economic reasoning to the sphere of politics, the very existence of which reflects the inadequacies of the market as a means of providing for all our societal needs” (204).

The structural simplicity of the neoliberal argument may also contribute to its general prevalence as an “orthodox” theory. Winters et al. (2002, 10) suggest that the economics profession may be as affected by notions on common sense portrayals of simple economic actors as the rest of us: they suggest that “the attraction of simple generalisations has seduced much of the profession into taking their results seriously”.

Because of the historical bias and complexity of Marxist solutions, coupled with the admission in Keynesian economic theory that capitalism is necessarily flawed and requires large government bodies to regulate the economy and act as lender-of-last-resort in times of need, the simplicity of the idealised models portrayed in neoliberalist theories serves to provide an easily attributable theory in which an idealised state of perfect capitalism can be striven for but never attained.

Overall, orthodox theory which is based on the notion that capitalism is the ideal form of democracy and the least worst form of conducting economic policy has been cemented into the rubric of economic trade for a number of discernible reasons. Firstly, the neoliberal agenda has become intertwined with the notion of globalisation; as such, the assumption that capitalism is relatively flawed will have serious impacts upon the government institutions that have been set up to facilitate trade and growth among nations.

Secondly, it could easily be suggested that the neoliberal agenda has proven to be particularly friendly to big business and powerful political and economic elites who benefit substantially from the inequality it creates. Thirdly, the neoliberal theory is deceptively simple, systemic and easily applied to nations, albeit with mixed results. Contrary to the belief that sovereign states operate independently of one-another, the prime focus of the neoliberal agenda, namely the opening up of markets in order to facilitate competition, has served to cement the theory among policy-makers looking for an easy policy to enact.

Fourthly, the notion is popular with consumers who, despite the drawbacks of the theory, are likely to feel empowered by notions that they are central to the mechanics of capitalism. Finally, the neoliberal agenda represents a prevalent trend in American economics; it is historically cemented in notions of individualism and the “pursuit of happiness”, and therefore enjoys a great deal of popularity among those who distrust the actions of the state.

Overall, while the flaws of the neoliberal agenda have been apparent, the prescience of it can be put down to cultural, social, theoretical and economic factors that all serve to cement the theory into a traditional orthodoxy of economic thought.

The absence of legitimacy among alternative views of the economy, along with its connection to global capitalism lends the theoretical school a great degree of weight, while its inherent simplicity facilitates its ease of application in an evermore complex economic climate.

Bibliography

Deraniyagala, S. (2005). “Neoliberalism in International Trade: Sound Economics or a Question of Faith?” in Saad-Filho, A. & Johnston, D., eds. (2005). Neoliberalism: A Critical Reader. London: Pluto Press.

Laurie, N. & Bondi, L. (2005). Working the Spaces of Neoliberalism. Oxford: Blackwell Publishing.

Saad-Filho, A. & Johnston, D., eds. (2005). Neoliberalism: A Critical Reader. London: Pluto Press.

Samuelson, P. (1964). Economics: An Introductory Analysis, 6th ed., New York: McGraw Hill.

Sheikh, A. (2005). “The Economic Mythology of Neoliberalism”, in Saad-Filho, A. & Johnston, D., eds. (2005). Neoliberalism: A Critical Reader. London: Pluto Press.

Stilwell, F. (2006). Political Economy: The Contest of Economic Ideas. 2nd ed., Oxford: Oxford University Press.

Winters, A., McCulloch, N. & McKay, A. (2002). Trade Liberalisation and Poverty: The Empirical Evidence, University Of Nottingham, CREDIT Research Paper 02/22.


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