12 October 2016

Why the Adam Smith Institute has embraced neoliberalism


Everybody hates neoliberalism. The term has become a term of abuse, mostly by those who consider themselves anti-neoliberals. Critics also allege that the world is currently run under neoliberalism. In George Monbiot’s words, it is “the ideology at the root of all our problems“. But the world is in a pretty good state, and since the introduction of neoliberalism, it has been getting a lot better.

Most people, though, would avoid describing themselves as neoliberals. Those seen as the movement’s key intellectual founders, Friedrich Hayek and Milton Friedman, did not use the term. Even those accused of carrying neoliberalism out around the world are not too sure about it. The International Monetary Fund recently published a paper called “Neoliberalism: Oversold?” (overall, their judgement was a little more sanguine than that sounds). Save for the president of the Adam Smith Institute, Madsen Pirie, there were years when almost no one would call themselves neoliberal.

It’s not surprising. Most descriptions of neoliberalism are negative. Opponents of free markets accuse adherents of ideologically opposing any and every government regulation, and caricature them as leaving children to die in the street and so on. But they also describe the modern world as neoliberal. Well, which is it? In the modern world, even “deregulated” industries, such as finance, are very heavily regulated in practice. Even in the most free-market countries the state spends 40-50 per cent of GDP, does extensive redistribution and funds a safety net for the poor. In their haste to condemn neoliberalism with sufficient zeal, the naysayers leave themselves in a contradiction.

Neoliberalism can be a useful term. There was a big change in political and economic thinking in the 1970s and 1980s and a concomitant shift in policies, around the world. New arguments and new evidence led governments to cut taxes, especially income and capital taxes, denationalise state industries, and liberalise financial, labour market, and product market regulation. This sometimes involved murderous political repression, but was mostly voted in through liberal democracy, prominently in the UK and USA. It also affected China and India, where an end to close state control of the economy has created untold wealth and lifted hundreds of millions out of poverty.

The government did not impose the ASI’s full agenda, but a neoliberal set of assumptions is now embedded right in the centre of policy discourse. When asked her greatest achievement, Margaret Thatcher was said to have answered “New Labour”. It was a logical answer, because Tony Blair and Gordon Brown’s party only tinkered at the edge of her settlement. Ed Miliband’s proposals centred around reforming, improving, or humanising capitalism, not its abolition.

Thatcher, Reagan, and Deng Xiaoping certainly didn’t impose libertarianism. In the UK, the term “libertarianism” often involves excessive purity. So if, like us, you propose replacing state schools with a state-funded voucher system, or suggest that the Bank of England should mimic the monetary policy of the free market, or argue for a rationalised “negative income tax” instead of the current benefits system, you are likely to be called unlibertarian. Even ideological opponents will tell you that, as a libertarian, you must believe certain things and you are not allowed to believe others.

That’s fine. Neoliberals are not libertarian, their principles are not rights but based on utilitarian pragmatism—the greatest good for the greatest number. Libertarians believe in markets because they respect property rights; neoliberals like them because they think they allocate resources efficiently. Libertarians also oppose high taxes because they infringe on property rights; neoliberals oppose them because they think they reduce investment, productivity and welfare in the long run. Above all, neoliberals believe in their policy proposals only because the best evidence and arguments point in that direction. When the facts change, they change their mind.

Neoliberalism can be a pragmatic approach to policy which judges, based on a huge wealth of evidence, that markets are almost always the best ways to allocate resources. Even when they must be trammeled, these trammels should be limited. And where pure markets are not likely to be introduced, we can often improve things with limited market mechanisms. But just because markets are efficient, does not mean they are fair: people are born with different talents and face different opportunities. Since a pound is worth more to a pauper than a prince, redistribution can be justified – but we should do it in the least distortionary ways possible.

With this in mind, the ASI’s neoliberal policy agenda would include:

  • Legalising drugs to take the revenues generated away from gangsters
  • Restricting the Bank of England to a single policy instrument – quantitative easing – and tying it to a rules-based policy (to stabilise the path of total nominal spending)
  • Replacing state schools with a voucher system
  • Involving more private providers in the healthcare system, while the state still pays
  • Replacing the welfare state with a single payment that tapers away as you earn income
  • Scrapping capital gains tax, corporation tax, stamp duty, and all other levies that penalise savings and investment, making the difference up through taxes on consumption
  • Liberalising the planning system to allow more housebuilding around existing infrastructure
  • Higher congestion charges and a system closer to market pricing of road use

The fall of socialism and the return of market-driven policies has lifted hundreds of millions out of poverty across the world. In the West, we are repopulating our cities, and creating the wealth that allows for beautiful things. Free marketeers often deny responsibility for the system we live under because it is not their ideal setup – but they shouldn’t. They should take the credit, and do so ostentatiously, by embracing the insult, as Whigs and suffragettes did before them. Which is why, as of yesterday, the ASI officially calls itself neoliberal.

Ben Southwood is Head of Research at the Adam Smith Institute.