7 March 2018

In defence of neoliberalism


Philip Mirowski’s essay “Neoliberalism: The Movement That Dare Not Speak Its Name” is representative of a whole genre of Left-wing anti-“neoliberal” writing, which uses the term as a catch-all term to describe all the modern world’s ills. Despite having, until recently, few self-identified supporters, neoliberalism is blamed for the housing crisis, the Russian mafia, an epidemic of loneliness, the EU, literally all of our problems, Hillary Clinton and Donald Trump. But read it for yourself – it’s nearly impossible to follow his point.

Few critics of neoliberalism would pass what economist Bryan Caplan calls an Ideological Turing Test. Would Philip Mirowski, George Monbiot or Paul Mason be able to pass as neoliberal if they tried? I doubt it.

But neoliberalism is not just a Corbynista insult to be aimed at anyone to the right of Mao. It is a serious political philosophy, distinct from libertarianism, classical liberalism, and social democracy. Milton Friedman’s short 1951 essay “Neo-liberalism and its prospects” is perhaps its best statement.

Neoliberals, unlike classical liberals or libertarians, see the preservation of a competitive order, and not mere laissez-faire, as their primary goal. To that end, the state’s role is to allow the price system to operate effectively by preserving monetary stability and eliminating public and private barriers to free enterprise.

In the limited neoliberal state, the government would continue to help the unemployed, low-paid, and disabled. But unlike social democrats or socialists, neoliberals prefer solutions that keep interference with the market at a minimum. Friedman puts it like this: “There is justification for subsidizing people because they are poor, whether they are farmers or city-dwellers, young or old. There is no justification for subsidizing farmers as farmers rather than because they are poor.” In the ideal neoliberal state there is no room for rent control, minimum wages, housing benefit, or food stamps. In its place is a simple cash payment to the poor.

As the world embraced deregulation, privatisation and free trade, neoliberalism has come under attack from both Left and Right. Leftists complain that neoliberals promote inequality. Communitarians object to the neoliberal tendency constantly to create new markets, be it in the right to pollute, human kidneys, or tickets to a sold-out Hamilton show. They believe it creates an uncaring selfish society. On the Right, they argue that neoliberals’ dogmatic commitment to open migration and free trade sows the seeds of its own demise. I’ll address each objection in turn.

The Leftist charge that neoliberals celebrate inequality is mistaken. Instead neoliberals recognise there’s a trade-off between equality and efficiency. High marginal taxes discourage investment and risk-taking. Caps on executive pay misallocate talent across sectors and nations. Neoliberals do not oppose Left-wing policies because they would reduce inequality; rather they oppose them because they impede the ability of the market to generate prosperity for all. But often impeding the market process itself creates inequality. Restrictive planning rules are responsible for the recent increase in wealth inequality, implicit “too big to fail” subsidies for risk-taking exacerbate income inequality, and strict licensing laws protect high-paid professionals at the expense of the general public.

Communitarians object that not only does neoliberalism entail inequality, but it destroys social solidarity by expanding markets to every sphere of life. Michael Sandel argues that markets should have moral limits. Some things simply shouldn’t be sold. Ticket touts, commercial surrogates, and carbon credits are accused of crowding out altruistic motives and corrupting social relations. Instead of respecting each other as fellow citizens, markets encourage us to think of each other as an opportunity to exploit for profit.

As Deirdre McCloskey argues in her biting review of Sandel’s What Money Can’t Buy, communitarians raise all manner of intuitive counter-examples to certain markets but they struggle to explain why. We can all see that paying students to get good grades or charging spouses for housework is undesirable, however communitarians struggle to generate a principle that also explains why using financial incentives to reduce pollution is wrong, why individuals should not be free to sell on their front-row Hamilton tickets to the highest bidder, or why nations shouldn’t auction off work visas to the highest bidder.

The communitarian’s bogeyman is Gary Becker, the nobel-prize winning economist who applied rational choice theory to marriage, crime, and discrimination. But as Tyler Cowen points out, economic theory tends to militate towards egalitarian and civil libertarian solutions. The price system is valuable because it takes into account each individual’s subjective preferences. You may object that in today’s unequal society some preferences count more than others, but the less fortunate would surely be worse off if they were prevented from making mutually beneficial trades. And even if that objection were true, the solution would be more cash transfers, rather than rewarding the poor with an equal access to underpriced theatre tickets.

While the Left worry neoliberals are too comfortable with inequality, the Right argues that neoliberalism’s egalitarian commitment to cosmopolitanism risks undermining the market institutions they cherish. They fear that open borders undermine community cohesion. As Theresa May put it: “When immigration is too high, when the pace of change is too fast, it’s impossible to build a cohesive society.” Worse still, by failing to address the public fears about immigration, neoliberals are opening the door for populist firebrands such as Trump and Le Pen.

I disagree. Deregulated labour markets tend to be the most successful at integrating newcomers. Sam Bowman calls this the progressive’s immigration dilemma. Rigid workplace protections make it harder for labour markets to adapt to an inflow of migrants and generous welfare benefits make immigration a zero-sum game in places like France. Worse still, the workplace is where integration happens; by increasing the cost of hiring new workers with minimum wages and making it harder to fire bad workers, fewer employers will be willing to take a chance by employing a new arrival.

Perhaps neoliberalism’s biggest challenge is to remain electorally viable. The case for the market economy is far from intuitive. In a sense the best it can offer is payment by results; lower taxes and faster growth. But in recent years, the cost of the state has grown and wages have stagnated. The best bet for free markets is to jumpstart growth. There is no silver bullet but a policy agenda to boost productivity by letting firms write-off investment in new machinery and equipment immediately, scrapping archaic planning rules, and replacing stamp duty with less cumbersome property taxes would be a good start.

Sam Dumitriu is Head of Research at the Adam Smith Institute.