Classical Liberalism vs. Neoliberalism

The difference between “Classical Liberalism” and “Neoliberalism” is confusing to many people; so, let’s briefly summarize these terms and some of the people and ideas associated with them.

Classical Liberalism Was Rooted in Humanism. In the field of Economics, “Classical Liberalism” typically refers to the body of socioeconomic scholarship of Adam Smith (a “classical liberal”) and his philosophical descendants. Classical liberals were focused on the adverse economic and social consequences of the pre-capitalist system of Mercantilism. They derived their insights about economic markets, geopolitics, and human nature from Enlightenment Age humanist philosophers like Thomas Hobbes, John Locke, Jean-Jacques Rousseau, and Immanuel Kant. Collectively, these social and economic philosophers developed “Social Contract Theory” and many other ideas associated with the relationship between humans, economies, and governments. Since the 18^th Century, economists following in the tradition of Adam Smith have continued to place a high priority on maximizing human health and welfare in their economic and trade theories.

Neoliberalism = New Economic Liberalism. Scholarship in the field of Economics in the U.S. since the 1980s has been substantially dominated by a narrow range of economic ideas, which can be generally classified as “neoliberal” because they represent a new (“neo”) form of “economic liberalism.” This new economic liberalism is characterized by a set of theories about how economies, corporations, governments, and global trade could theoretically operate under perfect conditions, with a strong emphasis on abstract market equilibrium theories and mathematical models. On the surface, neoliberal economic theories appear consistent with Adam Smith’s free-market ideals, but in reality, Neoliberalism substantially deviates from the classical economic Liberalism of Adam Smith and most economists prior to the 1980s.

Neoliberalism: “Stabilize. Privatize. Liberalize.”^[1] That is a famous mantra that neoliberals have often used to capture the essence of their own economic philosophy, which ironically has destabilized literally every country in which it has been wholly adopted.^[2] Implicit in this mantra are the following core principles of Neoliberalism.^[3]

• Deregulate all markets, especially financial and labor markets (based on a priori faith in the ability of bankers and corporate executives to regulate themselves).
• Dismantle domestic social stability programs (regardless of the inevitable social, political, and economic instability this creates) because personal responsibility is paramount.
• Implement corporate welfare programs and extensive WTO rules to protect banks and bondholders from their own malfeasance and negligent risk management, including bailouts and many other government interventions (while ignoring the continuous creation of moral hazards and the hypocritical contradiction of their “personal responsibility” mandate above).
• Eliminate capital controls to allow “hot money” to move rapidly between countries so that investors and corporations can exploit arbitrage opportunities in labor, tax, currency, and natural resource markets (regardless of the volatility and destabilizing impact that hot money has on all markets throughout local and global economies).
• Promote the financialization of virtually everything, including re-engineering Western manufacturing and insurance companies into quasi-banks and derivatives traders to “diversify risk” (but really to exploit the get-rich-quick scams on Wall Street because real manufacturing industries are not able to spike quarterly profits enough to guarantee their stock option bonuses, which do nothing to increase production and value for the real economy.)
• Sell all public assets to private owners (regardless of whether a country’s private markets are mature or transparent enough or sufficiently regulated to effectively manage those assets).
• Treat foreign investors exactly the same as domestic investors (ignoring the obvious reality that foreign investors do not have the same loyalty and commitment to a country’s economic and social needs as local investors).
• Insist that foreign investors should be allowed to own and control vital infrastructure assets in the energy, banking, telecommunications, water distribution, transportation, and natural resource sectors (while prohibiting foreign ownership and control of vital infrastructure and resources in their own countries).
• Reduce the negotiating power of workers, eliminate labor market protections, and embrace the arbitrary and unsubstantiated notion of a “natural rate of unemployment.” (Of course, this “natural rate” is never “natural.” In reality, the neoliberal “natural rate” is whatever rate happens to exist after all corporate welfare and government labor policies have impacted the labor market, including policies that promote offshoring, outsourcing, labor wage suppression, union-busting, labor price pressures from minimum-wage laws that suppress domestic job creation, among many other “natural” factors.)
• Promote “free trade” by forcing developing countries to eliminate trade policies that protect their economies from hostile foreign political and economic forces before they are strong enough to effectively endure such forces (while neoliberals do everything possible to protect their own economies).
• Reject all forms of Import Substitution Industrialization (ISI) in favor of strict adherence to export-led growth and the arbitrary notion of “comparative advantage” (while ignoring how this dooms developing nations to a pre-industrialized mode of production; prevents them from achieving sustainable, stable, and long-run economic development; keeps them dependent upon imported manufactured goods from industrialized nations; and keeps them subservient to the economic and political agendas of industrialized nations).
• Prevent countries from enforcing their own health and safety regulations on imported products (regardless of how corporate interest groups and conflicts of interest in exporting countries might compromise the safety of their exported products).
• Prevent countries from enforcing their own environmental regulations against foreign corporations (regardless of the environmental consequences).
• Impose a global intellectual property regime that prevents countries from developing their own intellectual property in vital public health areas such as disease management, food production, clean energy production, among many others.
• Cut taxes for top income earners (regardless of the fiscal condition of the government).
• Shrink the size of government as an end in itself (without a serious investigation into how big or small a government should be to achieve long-run economic and social stability).
• Reject any form of monetary autonomy and impose macroeconomic austerity on all countries (except their own country).

The Washington Consensus. Collectively, the preceding bundle of economic, labor, and trade policies represents the core doctrine of Neoliberalism. It is also often regarded as the “Washington Consensus” because senior politicians and think-tank pundits in Washington D.C. have been (in)famous for imposing this Policy Package on many countries around the world since the late-1970s.^[4] This Policy Package is imposed in the form of “Structural Adjustment Programs,” direct bilateral trade and diplomatic pressure tactics, and indirectly from the U.S. Government’s influence over the IMF, World Bank, WTO, and many other intergovernmental and nongovernmental organizations, universities, and public policy think-tanks. Today, the phrase “Structural Adjustment Program” is so reviled in the developing world that the IMF and World Bank officially changed the name to “Poverty Reduction Strategy Initiative.”

Neoliberal Capitalism Has Destroyed Global Trust in Capitalism. The mainstream neoliberal economists and their curriculum that dominates college Economics programs worldwide have turned the majority of humanity against capitalism^{[5], [6]}. That’s a tragedy in itself, but when the fruits of capitalism become so distant from the majority of the human population, it’s no surprise that the majority of humanity would perceive capitalism as hostile to their existence. It’s a mistake for successful beneficiaries of capitalism to assume that the free market alone will fix everything. Billions of humans worldwide are desperate for an alternative—a third way that is not collectivism and not a tyranny of rich against poor. They simply want a system that doesn’t institutionalize poverty and tyranny. The longer they have to wait for such a system, the greater their hostility will be toward the status quo.

Notes:

^[1] D. Rodrik. 2006. “Goodbye Washington Consensus, Hello Washington Confusion? A review of the World Bank’s economic growth in the 1990s: learning from a decade of reform.” Journal of Economic Literature, 44(4), 973–987.

^[2] Many countries have wisely taken an a la carte approach with Neoliberalism: Adopting basic free trade principles while rejecting many of the time-bombs embedded within the Neoliberal “policy package.”.

^[3] This is not a comprehensive list, but it does accurately represent the core Neoliberal policy package.

^[4] English economist John Williamson originally coined the phrase, “Washington Consensus,” citing a relatively narrower set of Neoliberal principles, but the more popular (and more sardonic) meaning has expanded to include the full set of Neoliberal principles listed here.

^[5] Ehrenfreund, M. (2016, April 26). A majority of millennials now reject capitalism, poll shows. Washington Post. https://www.washingtonpost.com/news/wonk/wp/2016/04/26/a-majority-of-millennials-now-reject-capitalism-poll-shows

^[6] YouGov / Legatum Institute Poll. (2015). What the World Thinks of Capitalism. https://social.shorthand.com/montie/3C6iES9yjf/what-the-world-thinks-of-capitalism