There exist different, often conflicting, perspectives on the role of government in the economy. Neoliberalism is one of the most established schools of thought which explain the relationship between the state and the economy. It provides an overarching economic and political policy model, which calls for free-market competition. Although Neoliberalism supports freedom of trade and capital, its radical policies may lead to unintended negative consequences in society, including increased social inequalities, financial instability, and monopoly.
Meaning of Neoliberalism Theory
Neoliberalism is a politico-economic ideology premised on the assumption that individuals, instead of collectives, are the most suitable foundation for making effective decisions. The philosophy asserts that the role of the state ought to be rolled back by reducing its influence to establish and foster an environment where people can make decisions and select between alternatives in a free and competitive manner (Jessop, 2019). It is concerned with the economy’s primacy – intensification and expansion of the market, by pushing for increased, frequent, repeated, and formal transactions (Biebricher, 2019). Moreover, it advocates for freedom of choice and respect for private property and individual rights, as well as competition among both producers and consumers. Therefore, a liberal economy would be characterized by free trade and limited state interference.
History of Neoliberalism Theory
The roots of Neoliberalism can be traced back to classical liberalism in the 19th century. Proponents of the liberal ideology during this period advocated strongly for economic laissez-faire and the freedom of individuals against the excesses of the state (Biebricher, 2019). It is linked to Adam Smith, who is known for his strong argument that markets were being regulated by an “invisible hand” (Jessop, 2019). Smith advanced the notion of limiting state interference in the markets. This ideology has evolved dramatically into several different traditions. Neoliberals believed that poverty, inequality, discrimination, and other hindrances to liberty could be addressed only through state influence (Vlachou, 2016). Thus, modern liberal principles emerged from the social-liberal ideology, which focuses more on minimizing structural barriers to individual freedom attributed to unrestricted capitalism.
Several events experienced in the 1970s led to the emergence of Neoliberalism as a significant paradigm. They include persistent and unmanageable economic stagnation, skyrocketing public debate, unsustainable welfare regimes, and deadlock in monetary policy (Vlachou, 2016). These developments prompted economists to demand a return to the classical liberal model, leading to the rise of Neoliberalism. Milton Friedman, Friedrich von Hayek, and other liberals perceived the government as the main impediment to operating the market efficiently and reviving the growth of the economy at both national and global levels. Consequently, they focused their criticism and advocacy on what was believed to be an overextended role of the state in trade underpinned by Keynesian, socialist, and social democratic principles. Therefore, neoliberals’ principal goal is to push for less government interference by restraining its dominant role in delivering pure public goods and services (Biebricher, 2019). Overall, neoliberal policies emerged to ensure that the state provides a conducive environment that can support efficient market operation and property rights protection.
The radical neoliberal views were fervently welcomed by the major conservative political parties across Europe and America. For example, U.K. Prime Minister Margaret Thatcher led conservative officials of the British Labor Party in advocating for shared ownership of means of production in the mid-1990s. President Ronald Reagan adopted similar pragmatic policies in the early 1990s (Biebricher, 2019). Therefore, strong support from influential political leaders led to the positive reception of free-trade policies and free capital movement across international borders.
Perception of Neoliberalism in the Modern Society
Neoliberalism faces unprecedented criticism in modern society due to its radical ideas. Uncharacteristic economic eventualities witnessed across Western Europe and North America in the wake of the 21st century, particularly the financial crisis and the Great Recession, prompted this theory’s rejection. Several economic and political leaders dismissed the neoliberals’ emphasis on optimally free markets (Vlachou, 2016). Instead, some critics called for increased state control over the economy, especially the financial sector (Ostry et al., 2016). In addition to creating a business environment that encourages monopolies, neoliberal policies have also been criticized for promoting economic instability, including the massive financial crises witnessed in the last decade. A recent International Monetary Fund (IMF) report established that increased capital flows heighten the risk of negative economic cycles (Ostry et al., 2016). Additionally, neoliberal policies have been disapproved due to exacerbating inequality, especially in health and education (Vlachou, 2016). Imbalances may cause detrimental consequences on the long-term growth prospects of an economy. The opposition toward neoliberal ideas has undermined their relevance in modern society.
In conclusion, Neoliberalism emphasizes the free market as the most effective model to ensure that scarce resources are allocated and utilized efficiently to maximize the satisfaction of relatively unlimited human wants. It is defined by its strong beliefs in sustained economic growth as the mode of realizing human progress. This insistence on deregulation and limiting state interference makes it to be seen as the most perfect and efficient method of achieving goals. However, neoliberal policies raise serious concerns, especially promoting monopoly and inequality, as well as heightening financial instability due to capital deregulation.
Biebricher, T. (2019). The political theory of neoliberalism. Stanford University Press.
Jessop, B. (2019). The primacy of the economy, the primacy of the political: Critical theory of neoliberalism. In U. H. Bittlingmayer, A. Demirović, & T. Freytag (Eds.), Handbuch Kritische Theorie (pp. 893-905). Springer.
Ostry, J. D., Loungani, P., & Furceri, D. (2016). Neoliberalism: Oversold. Finance & Development, 53(2), 38-41. Web.
Vlachou, A. (Ed.). (2016). Contemporary economic theory: Radical critiques of neoliberalism. Springer.