Neoliberal Economic Models the Future of Neoliberalism

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 on a piecemeal basis is arguably even worse than not implementing them at all. Such a piecemeal introduction would allow for artificial intrusions to the marketplace in ways that could be far more damaging than current ones in that they could introduce more government interference that already exists.

Trade liberalization (which is also generally known as free trade) assumes that government at all levels (but especially the federal level) does not intentionally affect or unbalance the flow of imports and exports across its borders. This means that the government supports (or requires) neither subsidies nor tariffs.

The World Trade Organization is the primary enforcing agency of such an economic perspective in the world today and it is not coincidental that such an agency must exist on the super-national level. Nation-states are under considerable pressure to protect their own industries and are likely only to be able to resist such pressure when they have the support of such a powerful external agency to allow the economic law of comparative advantage to ensure that all economic actors can expect the highest mutual gain from the exchanges of all goods and services across borders.

Tariffs and other forms of governmental interference in the ways in which nations trade with each other are pernicious and as such as not tolerated in a Neoliberal framework. The fact that globalization has worked over the past decade to liberalize trade policies has demonstrated the value of free trade.

7. An analogous Neoliberal principle is that there must be a liberalization of capital in the process of investment across international borders. Restriction of the ways in which individuals (and corporations) are allowed to invest in other nations can be seen as another form of protectionism. In turn, both this policy and that of free trade can be seen as a form of government reluctance of economic risk.

This violates fundamental tenets of Neoliberalism. Individuals must be allowed to assess the degree of financial risk that they are willing to make without government interference. (A consequence of this is that individuals and corporations cannot expect government bail-outs when their assessment of financial risks proves to be faulty.)

8. State enterprises must be privatized to the greatest extent reasonable. This does not mean that all state enterprises can be privatized: National defense, for example, must remain the responsibility of the state. However, as many other services as is possible that are now provided by the state must be shifted to the private domain. Such a shift allows for far greater efficiency. Moreover, and this should be considered to be just as important, such a shift provides the opportunity for a large increase in the number of jobs that are available in the private sector, and this increase in the number of jobs provides an additional way in which a reasonable pace of economic growth can be created and sustained.

9. Regulation must be limited to the barest minimums. This does not mean that the government has no role in protecting its citizens: Neoliberalism is not a model that support a Hobbesian model of war of all against all. However, it does support of model of government regulation in which that regulation is limited to spheres of public safety in so far as these regulations do not interfere with the free market. Thus regulations necessary for public safety and environmental protections (and protection of the individual consumer as well) are necessary because corporations cannot be counted upon to avoid behaviors such as dumping toxins into the environment because such actions are cheaper than responsible disposal.

Another arena in which the government can rightly intervene in the free market is to provide appropriate regulation of banks and other institutions whose behavior when unregulated can cause the kind of worldwide misery that occurred in the last few years.

10. There must be the highest respect for property rights, whether these are the protection of real property rights (such as real items such as oil, which is all-too-often subject these days to modern piracy) and intellectual property rights, which are even more often violated. China, for example, would under a Neoliberal model, be highly chastised by the international community (which can provide informal but highly effective means of tariff-like policies) be highly sanctioned for its pervasive disregard of intellectual property rights. Such intellectual piracy in our information age is devastating to innovation, something that the world is well aware of.

11. Finally, but of substantial importance, markets must be financialized, which means that each economic system is allowed to accumulate as much value as possible so that all exchanges can be as profitable as possible. This includes the exchange of real goods, but focuses far more on financial instruments and their derivatives. Financialization allows for people to make rational and unregulated trades in financial instruments in ways that are fully supportive of modern economies.

Risk, Profit, and the Future

One of the greatest challenges of any society is to find a mechanism or philosophy that allows for a healthy degree of growth and this is also the central challenge faced by current proponents of Neoliberalism. A healthy rate of growth must avoid stagnation, especially the type of stagnation that has occurred during the current economic crisis that was prompted in large measure by unwise mortgage loans, an error that banks are in the middle of over-compensating for in the present as credit has shrunk to an insupportable level. The current market represents how the worst excesses (those that prompted the housing crisis) can arise when institutions ignore risk.