Wednesday, November 20, 2013

Neoliberalism, neoclassical economics and the return of vulgar economics

The term Neoliberalism has been used with increasing frequency over the last few decades. But is often a confusing term, also used interchangeably with neoclassical economics by some authors (in fact if you look at the graph below you can see that as the use of neoliberalism increased, the use of neoclassical went down). I'm not necessarily against the use of the term, but I do think that semantic clarity is needed if the term is to be used with any propriety. I discussed some of these issues in my review of Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics, by Stedman Jones here.
As I noted before, in my exchange with Noah Smith, the term neoclassical is a bit of a misnomer. The term presupposes a continuity between the old classical political economy authors of the surplus approach -- the authors from Petty to Marx, including Quesnay, Smith and Ricardo, that assumed that real wages (distribution) were exogenously given -- and marginalists (the neoclassical ones), which assumed that real wages (equilibrium ones in the long run) are determined by supply and demand (endogenously) like any other price.

In that sense, Smith (Ricardo was a radical and his classification is more complicated, and Marx was a critical revolutionary socialist) was a liberal in the sense of wanting Laissez-Faire, but his theoretical framework was very different from neoclassical authors like Friedman, a modern champion of free markets. In other words, the policy stance in favor of non-intervention and freedom of markets is a poor guide for the underlying theoretical framework or the political views of the author.

The liberalism of the classical authors was based on the notion that the rising bourgeoisie had a revolutionary role (something noted by Marx in his Communist Manifesto), and was a reaction against Mercantilism and the remnants of the Ancien Régime. Neoliberalism, in contrast, should be seen as the resurgence of a free market ideology, after the onsloghut on neoclassical economics by the Keynesian Revolution. It was the ideology of the anti-New Deal, anti-Keynesian conservatives, which was finally victorious in the 1970s, when the marginalist ideas had already proven to be either incoherent or/and irrelevant by the capital debates.

In other words, while the old liberalism was a progressive ideology at the service of the nascent capitalist system radical transformation of the structure of production and the social relations associated with it, the modern resurgence of neoliberalism is a conservative ideology at the service of the maintenance of the status quo. It is fundamentally what I referred before as the return of vulgar economics.

PS: Note that many neoclassical economists are not neoliberals in the sense of radical defenders of the free market ideology. In fact, the majority, the so-called New Keynesians, are willing to accept significant amounts of government intervention to deal with market failures, even if by the 1990s they had accepted much of the more radical stuff (think of Larry Summers, which last week quite correctly noted that more government spending is needed to get us out of the recession, but back in the 1990s believed in expansionary fiscal contractions and financial deregulation. On the latter no word).


  1. Probably Neo-libertarian would be more accurate. The outcomes of Neoliberalism - rising inequality, debt slavery, and the concentration of power and wealth in the elite - are hardly consistent with liberal values.

    In a similar vein the Conservatives are not conservative but pursuing radical policies of reform, particularly in the social sphere. And their reforms are also more consistent with libertarian values than conservative values. Though I agree that they are trying to preserve the status quo financially, austerity is a pretty radical response to the crisis that most people agree only prolonged it.

    Asked what his first task would be if he was given power, Confucius apparently answered "the rectification of names".

  2. It should be underlined that the term neoliberalism is a creation of the German ordoliberal school, during the Walter Lippman Colloquium in 1938. They were for a "new" liberalism, more "constructivist" in the hayekian sense, where State would build the markets and the competition by law and by "societal" interventions: they wanted an "economic constitution", protecting private property, limiting fiscal deficit and fiscal policy, an independant central bank and some forms of charity or limited redistributions. As you can see, EU has important ordoliberal roots. Therefore, the term neoliberalism is problematic because it includes very different types of neoliberalism : ordoliberalism, French neoliberalism (Rueff, Allais etc...), monetarism, supply-side economics and sometimes ultraliberalism (libertarianism). But for this last school, it should be also noted that Hayek and Mises complaint against "neoliberalism" (in the ordoliberalism sense) and during the Walter Lippmann colloquium, they considered themselves as classical liberals, in line with Adam Smith (even if as you said, neoclassicals, using marginalist method, have very few in common with classical political economy), and not neoliberals.

  3. While I share most of what was said here, I believe a couple of points require some qualification.

    For one, in "The Invention of Capitalism", Michael Perelman makes a fairly decent case that Adam Smith's Laissez-Faire may have been much more limited than one can gather from reading "Wealth of Nations". In particular, apparently Smith had little problem with government intervention, provided it was directed to increase labour supply/diminish subsistence agriculture:

    "While energetically promoting their laissez-faire ideology, they [i.e. Smith and other classical economists] championed time and time again policies that flew in the face of their laissez faire principles, especially their analysis of the role of small-scale, rural producers. As we will see, the underlying development strategy of the
    classical political economists was consistent with a crude proto-Marxian model of primitive accumulation, which concluded that nonmarket forces might be required to speed up the process of capitalist assimilation in the countryside." (Introduction)

    It is indeed this that makes Smith's views progressive in their historical context: they promoted the ascension of the bourgeoisie.

  4. Lars Syll also has a post on neoliberalism/neoclassical economics:


On Argentine debt restructuring proposal (in Spanish)

Short interview for an Argentinean radio show, in Spanish.