End of Neo-Liberalism?

Joseph Stiglitz has an excellent article on the demise of Neo-Liberalism (this is liberalism in the classic sense which means free and unregulated markets -- in US domestic politics it's aligned with conservatism, although it has little to do with true conservative values). He points out the flaws of moving towards a global economic platform free of any control loops (amplified by a lack of domestic controls in the world's largest economy).

The world has not been kind to neo-liberalism, that grab-bag of ideas based on the fundamentalist notion that markets are self-correcting, allocate resources efficiently, and serve the public interest well. It was this market fundamentalism that underlay Thatcherism, Reaganomics, and the so-called “Washington Consensus” in favor of privatization, liberalization, and independent central banks focusing single-mindedly on inflation.

For a quarter-century, there has been a contest among developing countries, and the losers are clear: countries that pursued neo-liberal policies not only lost the growth sweepstakes; when they did grow, the benefits accrued disproportionately to those at the top....

Today, there is a mismatch between social and private returns. Unless they are closely aligned, the market system cannot work well.

Neo-liberal market fundamentalism was always a political doctrine serving certain interests. It was never supported by economic theory. Nor, it should now be clear, is it supported by historical experience. Learning this lesson may be the silver lining in the cloud now hanging over the global economy.

Yves, over at Naked Capitalism, adds:

Nobel Prize winning economist Joseph Stiglitz tells us that neo-liberalism, witch is a catch phrase for policies that favor domestic deregulation and dismantling trade barriers internationally, has failed.

The problem that Stiglitz fails to acknowledge is that despite the questionable record of these practices, they still hold considerable sway in the media and in the popular imagination. Twenty-five years of repetition have created an almost Pavlovian reflex that equates "free markets" with "good" Willem Buiter might call it "cognitive capture." I think of it as closer to brainwashing. And the romantic appeal of the neo-liberal model has impeded moving beyond it.

This is what is called a false information cascade. It's a situation where everyone punts decision making on a certain topic in favor of earlier decision makers. So, despite the accumulation of evidence to the contrary, people will continue to cling to the "accepted" decision. When an information cascade collapses, it is usually sudden, and the results can be fierce (see Roubani's essay on the collapse of Bretton Woods 2).

Comments

[zenpundit]

Hi John

"market fundamentalism" is often a phrase employed by those who have great conidence in state directed planning to intervene in markets without incurring costs, obvious as well as unintentional ones.

This is of course, impossible - all transactions come with costs that have to be empirically evaluated. The free market cannot efficiently cover every kind of transaction, this is true and to seldom acknowledged. However, market failure is the exception and state-autarkic economies have failure, or at least degraded efficiency and rates of innovation, as a rule.

I'm about to crack some Stiglitz this summer, so I'm not saying he himself has that view but his usage gives aid and comfort to those who still imagine that a small elite have enough information to wisely and consistently micromanage economic decisions on national or global scales ( which an serve rentier interests as ably as politically timed de-reg can). They don't -the best that can be hoped for is a resiliency state where economic platforms have both durability and flexibility of and relative transparency

[interstar]

C'mon zenpundit! "aid and comfort"? What? To the Commies under the beds?

Surely you can do better than that. :-)

[John Robb]

That's the last war. The new war is about something else entirely.