J. Bradford DeLong
>>Date: Thurs, 13 May 1999 12:47:54 +0200
>>Subject: Fwd: Principles of Neoliberalism
>>>Date: Wed, 5 May 1999 09:31:13 -0700
>>>Subject: Fwd: Principles of Neoliberalism
>>>>Date: Wed, 28 Apr 1999 18:30:06 +0000
>>>>Subject: Fwd: Principles of Neoliberalism
>>>>>Date: Mon, 29 Mar 1999 12:06:42 -0400
>>>>>Subject: Principles of Neoliberalism
>>>>>REQUEST FOR COMMENTS, CONTRIBUTIONS, AND
>>>>>Comments, contributions, criticisms, suggestions,
and other reactions welcome and encouraged. Send them to the
originator: email@example.com. This is a work-in-progress,
and will in due course be replaced by later versions and eventually
by superior political philosophies and policy programs.
>>>>>Please distribute this document as widely
>>>>>PRINCIPLES OF NEOLIBERALISM
>>>>>Neoliberalism is many things. It is:
>>>>> --a counsel of despair with respect to the
>>>>> of social democracy today (outside of the
>>>>> economy's industrial core).
>>>>> --a counsel of hope with respect to the
prospects for rapid
>>>>> market-generated economic development outside
>>>>> global economy's industrial core--if governments
>>>>> market-conforming policies.
>>>>> --a bet that improvements in transportation
>>>>> the shrinking world--"globalization"--gives
>>>>> an extraordinary opportunity to rapidly
>>>>> global inequality by incorporating more
>>>>> people and more and more more regions into
>>>>> global economy.
>>>>> --the only live utopian program in the world
>>>>>A counsel of despair...
>>>>>After World War II in Latin America, and
at the achievement of independence elsewhere outside the global
economy's core, there were high hopes that social democracy (or
something further to the left) could be successfully instituted.
And there were high hopes that such social democratic or socialist
regimes would enable peoples living outside the core to cut a
generation or more off of what had been a lengthy, bloody, and
cruel three- or four-generation process of industrialization
and democratization in northwest Europe and its settler colonies.
>>>>>Social democratic or socialist governments
would from the beginning establish strong redistributive social
insurance states to severely reduce the income and wealth inequalities
that had been characteristic of Bismarckian Germany or the Gilded
Age United States. They would put into place the physical infrastructure
to reduce infant mortality and disease that the aristocracies
and bourgeoisies of northwest Europe had not thought profitable.
They would spend money like water on education.
>>>>>Moreover, they would use Keynesian policies
to make sure that growth was free of the recessions and depressions
that characterized industrialization in the industrial core.
They would carefully manage their connections with the global
economy--choosing the level of the real exchange rate, controlling
imports so that imported goods were those of high social utility,
preventing artificial drives for export success from raising
the prices of necessities to the people, and establishing national
independence from imperial capital.
>>>>>They would nationalize at least the monopolistic
commanding heights of the economy (if social democratic) or nationalize
far more of the economy (if socialist) in order to take full
advantage of the massive economies of scale in industry, and
to make sure that investments in capacity and productivity that
made sense from the social point of view were made--as they would
not be if large-scale industry remained private, and if it proved
difficult for the private monopolists to make a profit off of
such investments. And all these economic decisions would be made
by democratically-elected governments responsible to an electorate
that had learned by exercising power what the trade-offs were
and how to choose the best path forward that led by the quickest
way to utopia.
>>>>>By the end of the 1970s, however, it was
clear to all except blindered ideologues that something had gone
very wrong with social democracy at the periphery. (And that
even more had gone wrong with really-existing socialism at the
>>>>>Stable political democracy proved far more
to be the exception than the rule. Authoritarian rule by traditional
elites, dictatorship by impatient army officers, and charismatic
populist politicians ruling by virtue of carefully-prepared and
carefully-staged plebiscites were much more common than were
stable parliamentary or separation-of-powers democracies. Those
aspects of social insurance that were installed seemed to do
more to redistribute income from (poor) rural peasants to (richer)
urban workers and (rich) urban civil servants than to moderate
income and wealth inequalities. With some exceptions (many of
them among really-existing-socialist countries) high government
spending on education and on physical infrastructure seemed to
produced less in the way of actual education or infrastructure--and
more in the way of sweetheart contracts to the Minister of Regional
Development's nephew's cement factory--than one would have hoped.
>>>>>The nationalized commanding heights of the
economy turned out more often than not to become employment bureaus
for the politically well-connected: under Juan Peron in Argentina
the number of employees of the (newly nationalized) Argentinian
railroad system close to tripled, while the number of trains
and the volume of goods carried fell. It seemed that while the
state was superior as an instrument of social evolution, it was
not very good as a bank, or as a stock exchange, or as a nursery
for inefficient enterprises.
>>>>>Too-great a reliance on Keynesian policies
of demand stimulation turned out to generate high- and hyper-inflation,
with the recessions that came with the crash of the monetary
system proving arguably larger than the booms-and-busts Keynesian
policies were supposed to avoid. Import restrictions turned out
to limit imports not to those of social utility, but to those
profitable to the import companies owned by the son-in-law of
the Vice Minister of Finance--and to the Vice Minister himself.
High real exchange rates turned out to do less to amplify the
purchasing power of the country abroad than to artificially shrink
exports, and to divert employment and investment away from sectors
of comparative advantage.
>>>>>There were exceptions: places outside the
core where the social-democratic program was a stunning success.
India managed to hang on to political democracy (albeit with
disappointing economic growth). East Asia managed to limit corruption
and maximize investment in infrastructure and export capacity,
achieving the fastest economic growth rates ever seen in world
history (albeit with disappointingly slow progress toward political
democracy, and civilian blood on the hands of the military in
massacres ranging from the thousands (in South Korea) to the
tens of thousands (in Taiwan) to the hundreds of thousands (in
Indonesia). In Brazil rapid growth in measured GDP was associated
with the most hideous income distribution ever seen. Southern
Europe alone managed to "converge" to the industrial
core of northwest Europe, its ex-settler colonies, and Japan.
>>>>>It seemed that the key was political democracy.
With stable political democracy--in France, in Italy, even in
Spain after the fall of Franco--social democracy could work and
achieve great successes. Without political democracy it seemed
that the chances of success were low (unless somehow the poorly-understood
foundations of East Asia's low corruption could be duplicated).
And it also seemed that the prospects for achieving stable political
democracy on the periphery were rather low. After all, France
experienced its first democratic revolution until 1789, yet depending
on who you talk to it was not until 1871 or 1958 or 1981 that
France truly achieved stable democracy.
>>>>>Hence neoliberalism as a counsel of despair.
As Marx wrote, the executive branchy of the modern state is nothing
but a committee for managing the affairs of the ruling class--meaning,
among other things, that a democratically-elected legislative
branch turns the state into something better. But the prospects
for stable political democracy in the periphery are slim. And
thus the government becomes the tool of the ruling class--a ruling
class that may be made up of army officers, or landlords, or
urban elites, or those who profit as middlemen from the traditional
channels of trade and exchange--who are not terribly interested
in the success of social democracy or in rapid broad-based economic
>>>>>Hence the policy advice of neoliberalism
as a counsel of despair: get the state's nose out of the economy
as much as possible. When the state is neither an instrument
of positive redistribution nor an instrument of growth-boosting
investment, its interventions in the economy are likely to go
strongly awry. And to the extent that a reduction in the economic
role of an elite-controlled state can be required as a price
for rapid incorporation of an area into the global economy, such
a reduction *should* be required.
>>>>>A counsel of hope...
>>>>>Yet neoliberalism is not just a counsel of
despair, it is a counsel of hope. The hope is that the prospects
for rapid market-generated economic development outside the global
economy's industrial core are very bright.
>>>>>The prospects for rapid market-generated
economic development are very bright for three reasons. First,
the productivity gap between the periphery and the industrial
core has never been larger. Second, governments now have a large
number of positive examples to copy (as well as negative examples
to avoid) in planning market-conforming development strategies.
Third, investors in the industrial core now have the confidence
and the resources to materially assist in peripheral development.
>>>>>First, because the productivity gap between
the periphery and the industrial core has never been larger,
what Alexander Gerschenkron called the "advantages of backwardness"
are now uniquely great. In 1870 an Indian or a Chinese textile-making
entrepreneur could perhaps quadruple labor productivity by importing
the modern capital goods of the British industrial revolution.
Today any entrepreneur on the periphery has the prospect of being
able to amplify labor productivity tenfold or more by investing
in latest-generation or latest-but-on-generation capital equipment
and factory organization. The stunning multiplication of productivity
in Mexican automobile manufacture gives a clue to how quickly
productivity can be amplified--if the capital is there to do
>>>>>Second, all governments everywhere are now
aware--from the examples of northern Europe, southern Europe,
and East Asia--of those government interventions and policies
that appear to be powerful boosters of growth. They are aware
of the centrality of education (especially female secondary education)
in accelerating the demographic transition. They are aware of
the importance of making it easy for domestic producers to acquire
industrial core technology (embodied in capital goods or not).
They are aware of the importance of administrative simplicity
and transparency. They are aware of the value of the transportation
and communications infrastructure that only the government can
provide. In those areas in which the government's nose should
and must stay deeply embedded in the economy, even those states
controlled by elites that have only a limited interest in growth
and development now have many positive models to imitate.
>>>>>Third, improvements in communications and
transportation have made investors in the industrial core more
willing than ever before to consider placing their capital in
the periphery. The pre-World War I wave of international investment
was largely limited to regions in which there were lots of white
guys--guys who could play polo (never mind that polo in its original
form was a sport played by central Asian nomads using a goat
carcass as a ball)--plus the French geostrategic commitment to
Russia as an ally against the Second Reich. The U.S. benefited
enormously from Britain's willingness to lend capital to industrializing
America in the years before 1900. The inflow of capital cut a
decade or two off of the time it took the U.S. to industrialize
(and crony capitalists like Jay Gould, Colis Huntington, and
Leland Stanford took British investors to the cleaners as well).
Now that investors in the industrial core are willing to commit
their money to regions in which there are not lots of white guys,
an opportunity to speed industrialization that used to be limited
to a relatively narrow part of the non-European world is now
open to many more--if their governments undertake the steps needed
to reassure industrial-core investors, and if those who make
economic policy in the G-7 can limit the destructive effects
of the financial crises generated by the manic-depressive swings
of opinion in Manhattan, London, Frankfurt, and Tokyo.
>>>>>A bet on globalization...
>>>>>And this is where the neoliberal view of
the world is weakest: in its bet on globalization--its bet that
a tightly-integrated global economy, with large flows of capital
and goods (and, to the extent industrial core governments permit,
of labor) is a richer and faster-growing global economy. John
Maynard Keynes and Harry Dexter White would disagree with the
proposition that large flows of capital are good: they would
call them too dangerous to be risked.
>>>>>Nevertheless, neoliberals today are more
impressed with the gains from capital flows than the risks. The
quadrupling of real wages in Indonesia from 1965 to 1997 would
have been significantly lower without capital inflows which carried
technology and enabled higher domestic investment (even though
real wages in Indonesia have fallen by at least a quarter since
1997). Lowered transportation and communications costs have amplified
the gains from expanded international trade by an order of magnitude
over the past generation. And it is next to impossible to have
large international flows of goods while excluding the possibility
of large international flows of capital as well. Small changes
in the timing of payments and in the extension of trade credit
add up to large swings in the capital account.
>>>>>Thus neoliberalism is not only a bet that
increasing economic integration is a good thing--that an integrated
global economy will see much more levelling-up than levelling-down--but
that successful stabilization policy can be pursued by the G-7
on a global level. It is thus a claim about the economic environment
(that the gains from globalization are large) and about the state
capacity of the G-7 (that they can successfully carry out global-level
>>>>>The only live utopian program...
>>>>>Perhaps not all of the principles of neoliberalism
>>>>>Successful development in East Asia suggests
that the counsels of despair are perhaps somewhat overstated:
East Asia is an example if not of successful social democracy
at least of a successful developmental state. On the other hand,
as Lant Pritchett has observed, there is nothing worse than state-led
development led by an anti-developmental state. And pending a
better understanding of what has gone right in East Asia or much
greater success in institutionalizing political democracy, the
risks of a government turning away from the neoliberal path and
attempting to duplicate East Asian developmental states appear
very high. The belief that the opportunities for market-conforming
development are now uniquely great appears to be almost certainly
correct. But the jury is still out on whether the free-capital-flow
part of "globalization" is a good thing: the odds are
80% that the G-7 do have the state capacity to successfully manage
a world economy with large-scale capital flows, but there is
a 20% chance that they do not.
>>>>>Nevertheless, the neoliberal program is the
only live utopian program in the world today.
>>>>>Opposition to neoliberalism on the left seems
to call for a return to effective autarchy. But if there is one
lesson from economic history over the past hundred years, it
is that there has been one decade--the 1930s--when economic autarchy
was the road to relative prosperity, while there have been nine
decades in which the more open to trade a country's economic
policy, the faster has been economic growth. Opposition to neoliberalism
on the left seems to call for a return to state control of the
economy--to the pattern of Peronism or of the PRI--in the hope
that this time the state will be not the tool of elites with
little concern for development and growth but instead the faithful
servant of the interests of the masses.
>>>>>That is not very likely. The state can be
the servant of the people only if political democracy is well-established,
and not always then. To place one's chips on the maximization
of the power of a not-very-democratic and not-very-developmental
state does not seem a promising path for either democratization
or successful industrialization. It seems to embody a remarkable
unwillingness to learn from world history since the end of World
War I, and an ideological-blinded refusal to ever mark one's
beliefs to market.
>>>>>Opposition to neoliberalism on the right
seems based on a fear that neoliberalism will bring with it a
breakdown of social order: peasants will no longer fear landlords,
workers will no longer be the clients of bosses or of the leaders
of government-sponsored puppet unions, and voters will no longer
respect the views of notables.
>>>>>All the rest of us certainly hope that the
right-wing opponents of neoliberalism are correct, and that neoliberalism
this generation will begin structural transformations that will
make social democracy on the periphery possible next generation.
>Thinking of Dornbusch, he co-wrote a book with Sebastian
>_Economic Populism in Latin America_. Edwards was a student
>and one of the most prominent Chilean Chicago-boys. He now
works at UCLA
>and the Bureau of Economic Research. He (Edwards) wrote an
>article in the April '97 issue of Foreign Affairs called
>America's Underperformance" p93ff. Important because
I wouldn't call Sebastian Edwards (or Rudiger Dornbusch, or
Eliana Cardoso, or indeed Brazilian President Cardoso) "doctrinaire
neo-liberals." I do think that they (and I) believe that
neo-librealism is the best bet open to Latin American countries
It would be much better if Latin American countries could
pursue a social-democratic road to development: state-led support
of rising industries a la East Asia, a heavy dose of government
investment in infrastructure, a very strong government push for
universal education, all supported by a strongly progressive
income tax system that greatly shrank the extremes of inequality
produced by the market's distribution of income.
It would be better if Latin American countries could pursue
a *successful* brand of populism--one that transferred wealth
from creditors to debtors by a moderate rate of inflation, used
capital controls to prevent the transfer of wealth from generating
large-scale capital flight, but produced a high-pressure economy
in which employment was high, growth rapid, and profits of manufacturers
(who would reinvest them rather than transferring them abroad)
But the historical experience of Latin America since World
War II appears to teach the lesson that the sociological and
economic class bases of the Latin American state offer powerful
impediments to either successful social democracy or successful
populism--industrial policies do not accelerate but retard development,
state-owned enterprises do not enable higher investment but become
employment sinecures for the clients of the politically powerful,
progressive income tax laws raise little revenue, and attempts
at social insurance produce large budget deficits that end in
Hence neoliberalism, which is perhaps best seen as a counsel
of despair, or of near-despair. If there is little that is worse
than state-led development led by an anti-developmental state,
and if the sociological and political barriers to reform of the
state are too high to be overcome by even committed reformers,
then perhaps it is best to try to shrink the state--get rid of
state-owned enterprises in the hope that private ownership will
make them more efficient, get rid of social insurance programs
that do little or nothing to reduce inequality (and that instead
only transfer to clients of the powerful),