Neo-liberalism or Socialism – what promotes economic growth & freedom?

(From 21/12/2014 Sunday Island)

By R.M.B Senanayake

Many people in our country refer to neo-liberalism but don’t seem to have a clear conception of what is meant by it. Is it the same as capitalism? What about State capitalism which is supposed to prevail in China although some economists disagree since the bulk of the Chinese GDP is produced by private enterprises and not the State owned enterprises. Be that as it may, what exactly is neo-liberalism? The World Economics Association in their August 2014 Newsletter referred to neo-liberalism.

I will draw from it and seek to explain what neo-liberalism is as understood by economists. Is it the same as the policy of laissez faire which argues that the State should not interfere in the running of the economy?  Another point of view is that neo-liberalism is the same as mainstream economics. It is unfortunate that so many passing out of our State universities embrace Marxist socialism or democratic socialism without studying modern economics. The former has collapsed in the former Communist countries and now remain only in North Korea where the people are starving while the government is building nuclear weapons. 

The failed socialist experiments in the former Communist countries never came close to matching the productivity, wealth and rising living standards generate by the capitalist economies with their freedom - both political and economic. Why then are our intellectuals still fascinated by socialism? Capitalism has raised not only the living standards of the better-off but also of the poor, although socialists keep on harping about the inequality of incomes. They keep saying that the only beneficiaries of capitalism are the rich. But in fact it is the poor who gain most from capitalism. My own parents were poor but because of capitalism and a free society I was able to rise up in the social hierarchy. In addition to improving living standards capitalism allows for freedom – freedom from tyranny. It allows those who are enterprising and hard working to move up the social ladder. Then capitalism provides the personal freedom which promotes innovation and allows the spread of ideas and information. Next it allows moral freedom where people who don’t want to eat meat or take alcohol can practice their virtues. Socialism   negates most of these values.

Neo-liberalism has several dimensions.

First, it is a set of ideas about how the economy and society more generally should operate. This is based on economic principles which start off from the premise that people pursue their self interest in engaging in the economic activities in society. Is that good or bad? It eschews moral judgments on the issue but points out that human nature cannot be changed by any social engineering attempts. It is based on the human nature as it is. Marxists believe that human beings must be changed so that they desire the collective good of society rather than their individual benefits.  Neo-liberals say it is a utopian vision and the attempts to do so by Stalin and Mao Tse Tung involved the killing of millions of people. Stalin killed millions of farmers (kulaks) who resisted attempts at collectivization of farming. Mao killed many people who were working with their minds rather than their hands.

But neo-liberalism also has an idea – a vision about the economy that should be organized or ought to operate.   Those who champion it point out that the information required to plan an economy centrally as for instance in a centrally planned economy is so enormous that no planning authority can do the job successfully to reflect the desires of the majority of the people and that instead it will reflect what the planners think is desirable.

 Second, neo-liberalism is a policy regime marked by the microeconomic processes of privatization, deregulation, marketisation and macroeconomic policies of inflation targeting and an end to full employment as the proper goal of states. Keynesian economics argued for full employment but neo-liberalism does not favor Keynesian prescriptions for full employment through fiscal stimuli. Third, neo-liberalism is a set of economic transformations whereby capital has been freed to move between countries as well as within regions in the same country- raising the living standards of the backward regions. So it favors free trade in goods and services as well as free movements of capital across frontiers. In this sense it is closely related if not identified with globalization- a movement which many liberals think is both desirable and inevitable. Clearly, these three dimensions of neo-liberalism are interrelated.

As a philosophy neo-liberalism has a significant overlap with mainstream economics. It takes the first principles of economic theory and applies them to the economy as an integral system. It assumes the importance of incentives to promote the desirable behavior of people. At its base neoclassical economics proposes a situation in which as individuals voluntarily exchange with one another through markets for mutual benefit. It points out that any exchange must benefit both parties to the transaction - the buyer and the seller for otherwise such transaction will not take place. It therefore queries why the state or any other institution should interfere in such transactions. State regulations, other than the provision of basic framework of rules, are cast as an outside interference in this otherwise self-regulating system. Neo-liberals have taken this idea and argue that such a free market system is not only the most efficient way of organizing the distribution of goods and services, but also the most moral, since it is the best way of preserving individual liberty. From this follows the policy proposals of privatization, marketisation and deregulation – that is, engaging private capital in the provision of public services and freeing it from constraints that prevent it from doing so efficiently.

The onset of the global economic crisis of 2007-2009 caused a setback to neo-liberal ideas. The crisis demonstrated the perils of the market dependence that has been such a key feature of neo-liberalism. It has exposed the power imbalances and inequalities at the heart of the capitalist polity and economy. And it has seen developed country state elites turn to nationalization, in order to save the capitalist system from collapse. But it was always understood that the solution was temporary and that upon recovery the nationalized enterprises would be turned over to the private owners.   

What alternative perspectives might there be?

In our country the alternative to neo-liberalism varies from the tried and failed Communist model in the Soviet Union to various other schemes. This can be achieved apart from nationalization by the direct state provision of services as well as various forms of social protection in areas such as finance, housing, education and healthcare. All these involve intervention in markets and even replacement of markets as in the original case of free education and free health care. These democratic socialist economists have many other ideas for realizing these aims. They include guaranteed minimum wage schemes, and various proposals for capturing the surpluses circulating in the financial sphere of the economy and directing those towards socially beneficial investment. They are against financial speculation and would ban or tax such activity

Marist Socialism as practiced by the former Communist States like the Soviet Union is also being touted by Communists and Marxist Socialists who while condemning the excesses of the Stalinist regime assume that Socialism does not necessarily mean such excesses- a point denied by neo-liberals who say social engineering is doomed to failure and more important such effort cause great harm to the people. The Bible refers to the experiment in common ownership of the incomes of the first Christians. Ananias and Saphira cheated about their incomes and Peter rebuked them and they died. Yes social engineering requires harsh punishment to enforce communal ownership.  The Pilgrim Fathers had brought with [them] to America from England a practice known as "farming in common". Everything produced became community property, to be allocated according to need as specified in the Mayflower Compact.

They had thought "the taking away of property and bringing in community into a commonwealth would make them happy and flourishing," Governor Bradford writes that "This community (so far as it was) was found to breed much confusion and discontent and retard much employment that would have been to their benefit and comfort." Young able-bodied men resented working for others without compensation, which they saw as an "injustice." After three winters of near-starvation, Bradford and his advisors decided set aside a plot of land for each family instead of communal farming."This had very good success," Bradford writes, "for it made all hands very industrious, so as much more corn was planted than otherwise would have been by any means says the Governor. The women now went willingly into the field, carrying their young children on their backs. Those who previously claimed they were too old or ill to work embraced the idea of private property, eventually producing enough to trade their surplus corn for furs and other commodities.

The same situation was observed in China under Deng Tsiao Peng who did away with communal ownership of agricultural land. Production increased. So the common ownership of property is not compatible with economic development. . But dedicated Marxists like Stalin and Mao Tse Tung wanted to collectivize by force and they murdered several millions of people in trying to do so.

But good ideas alone won’t be sufficient to carry forward neo-liberalism. Neo liberal ideas will need to be allied with and carried forth by strong social movements. We unfortunately lack them. And our intellectuals are still Marxists. 
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