Neoliberal Economic Models the Future of Neoliberalism Essay

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Neoliberal Economic Models

The Future of Neoliberalism

Financialization is a term that describes an economic system or process that attempts to reduce all value that is exchanged (whether tangible, intangible, future or present promises, etc.) either into a financial instrument or a derivative of a financial instrument. The original intent of financialization is to be able to reduce any work-product or service to an exchangeable financial instrument, like currency, and thus make it easier for people to trade these financial instruments.

(Griffiths & Hickson, 2009, pp. 17-9).

This thesis argues that a neoliberal model, which offers a basic blueprint to financial health and stability, is far more likely to bring about good economic results in the entire range of economic conditions across the world. Neoliberalism -- with some emendations such as a moderate amount of government regulation -- will ensure that financial and market conditions are allowed to perform in an efficient and untethered fashion that will help stabilize the financial future of the globalized economy. Before providing a basic, working definition for the neoliberal economy, it is important to bring up several points that will be developed in greater detail below. While this thesis is fundamentally supportive of neoliberal policies in general, the writer is in no way so naif as to believe that economic models can override the basic tenets of human nature such as an aversion to risking the present (even a present that is haunted by a large number of problems) for an unknown (even if potentially much brighter) future. This simply is not possible.

The first of these is that any financial and economic planning and model must acknowledge the fact that in general people are averse to risk. Thus planning cannot simply posit (or encourage) that such risk aversion be dismissed. This is impossible: Asking all economic actors to embrace high degrees of risk regardless of their position as different types of stakeholders is analogous to asking industrial processes not to be affected by gravity and friction. Rather, risk must be assessed and planned for as a sociological aspect of economic planning (Ferris, 2010).

Economists are far too likely to insist on the mathematics of financial models and rather willfully to ignore the fact that human psychology and social structures must always be incorporated in to plans for the economic future, a future that is much more likely to scare individuals and even institutions to avoiding risk. Economic stakeholders (especially when these stakeholders are individuals, even educated and sophisticated individuals) are all too likely to act like the proverbial ostrich with its head in the sand (Plant, 2009). Both risk and uncertainty (which are fundamentally related to each other while not being precisely the same) must lie at the core of the validity of the Neoliberal model, for this model depends on the real behavior of humans who can never be reduced to the rational actors of so much of economics.

No financial plan (whether on the individual, institutional, or governmental level) can succeed without acknowledging the fundamental ostrich-ness in each one of us. This thesis includes precisely such an acknowledgment. Economic modeling is not, and never should be, a (solely) mathematical exercise any more than the ways in which physical laws exist in the world can be seen to reflect the simplified world of physics problems in which friction does not exist. Certainly such a world would be easier to understand. But the world exists in its true complexities.

Neoliberal Philosophy

In the most general terms, Neoliberalism is a political/economic philosophy or orientation that has its historical roots in the 1960s, a period in social science (and policy) that rejected the privileging of functionalism's uniformism while avoiding embracing the bellicosity of social conflict models. Neoliberalism has its basis in liberal politics (as might be expected from its historical birth during the anti-war and Civil Rights era) with an emphasis on strong (although not unfettered) economic growth (Crouch, 2011). Such a match between politics and economic policy can take a number of different forms; the specific policy implications that this thesis is a proponent of are listed below, with the acknowledgement that other analyses of Neoliberalism might produce a different emphasis.

Neoliberalism's economic side received a strong push in the 1970s as inflation rose and the United States was nearly crippled economically by the rise of OPEC and gas embargoes. The fact that Neoliberalism is both an economic and a social and political model is one of the major reasons that this thesis supports it so strongly: It encompasses both of the two essential pillars of economic theory, both the purely financial and the psycho-social. As noted above, no economic theory can possibly be considered to be valid without such a dualistic approach (Pollin, 2003, pp. 36-9).

While different nations (and economists) have embraced different flavors of Neoliberalism, the most powerful and effective strain was that introduced and supported by English Prime Minister Tony Blair and U.S. President Bill Clinton. They created and supported national economic and financial policy based on the following Neoliberal principles. These key policy points are taken from a number of sources, including Steger & Roy (2010); Prasad (2006); Springer (2010); and Williamson (1990).

1. Governments should keep their own financial houses in order by not incurring significant deficits that will have to be paid off by future generations. Not only is this unfair to those future taxpayers who will find themselves encumbered by the laxity of previous generations, but high federal deficits are likely to fuel inflation. This in turn can lead to periods of stagflation or deflation. While these latter two conditions can certainly occur in a minimally regulated market, they are economic ills that are more likely to develop within the framework of an over-regulated one.

2. Public spending should be limited and directed in an extremely narrow fashion; that is, public spending should be dedicated to broad policies such as improvements in health care, education, and physical infrastructural improvements. (And thus away from personal welfare and a culture of dependence.) Not only does limiting public spending reduce federal debt, it creates a pro-growth economic environment that will produce a ripple of important and beneficial effects that will outlast any single (economic) generation. The current federal deficit in the United States budget (for example) is likely to limit the real economic growth in future decades to a considerable degree, a point that is likely to be at the center of this year's presidential election in which Neoliberal views are espoused by one party.

3. An overhaul of the tax system that in many ways resembles the tax changes currently being called for by Representative Paul Ryan (who chairs the House Budget committee). Such tax reform would focus on instituting moderate marginal tax rates because this tax structure has the greatest chance of increasing economic efficiency as well as innovation.

4. Interest rates that are entirely market determined, always this is dependent on such interest rates being positive since Neoliberal policy supporters understand the significant harm that a lack of positive interest rates can produce in an economy. This is most certainly not the current state of interest rate policy in many countries, and especially not in the United States, where the latest proclamation of the Federal Reserve's rate of interest is awaited each month as businesses and individuals scramble to determine how this non-market-based interest rate will affect them in ways that must be considered in large measure to be irrational.

This is, of course, of the greatest irony given that the motivation of the existence of the Federal Reserve is to reduce to the greatest degree possible the irrationality of the marketplace.

5. Exchange rates that are allowed to float. This is something that has been of particular devilment to the current economy as China has refused to allow its exchange rate with other nations (and in particular with the United States) to be determined by market forces. Despite significant indirect as well as direct pressure from the United States as well as other developed Western nations, the exchange rate between China and its partners has been propped up by China in ways that cause significant market distortions.

Indeed, a Neoliberal overhaul of the world economy (should such a thing be possible) would in all probability focus on normalizing Chinese exchange rates as one of its first tasks. The Chinese government itself is making some moves toward a more normalized policy of market-based exchange rates; however, its national policy on this issue is very far indeed from reflecting the kinds of market conditions that a Neoliberal policy advocates.

6. An overarching policy of trade liberalization. It should be clear how this tenet is related to the previous one. Indeed, it should be clear by this point how each of these tenets is related to each other, although some are more directly related to each other than are others.

Neoliberalism's effectiveness as an economic philosophy depends upon a concatenation of these values and policies. Implementing such reforms…[continue]

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