by Pranab Bardhan
My last column was about populism. One group populists invariably dislike are the ‘liberals’—the despised L-word in American politics. Some of the same people are often despised also by the Left all over the world as ‘neo-liberals’. It is not always easy to know who the latter are, as the word is used in different senses by different critics. Of course, keeping the term ill-defined and coarse serves the critics, as larger targets always make shooting practice easier.
Does ‘neo-liberalism’ stand for market fundamentalism? Except for some cranks, there are not that many of strict market fundamentalists in intellectual circles or among political leaders. If Milton Friedman and Friedrich Hayek are considered the economist high-priests of neo-liberalism, it is important to remember that Friedman advocated a substantial negative income tax for the poor and Hayek talked about a basic ‘floor income’ for everybody undergirding his version of the liberal economy. In politics neither Margaret Thatcher nor Ronald Reagan could (or even really attempted to) get rid of a significant welfare state and social security.
Sometimes my leftist friends dislike neo-liberalism because it is pro-capitalist. But they are often friendly with Keynesians. After all Keynes, while showing the limitations of market mechanism in solving the problem of mass unemployment, was essentially pro-capitalist in his role as savior of capitalism, and openly dismissive (unduly so) of Marx. “The Class War”, he once wrote, “will find me on the side of the educated bourgeoisie”. Keynes was not neo-liberal, was he?
Matters are made even more complicated by many public policy thinkers who are pro-market, but not necessarily pro-business. This tradition actually goes back to Adam Smith. There are many passages in the Wealth of Nations that can be interpreted as being in favor of free markets but definitely against prone-to-collude business magnates.
Then there is a large number of economists who think that the market mechanism needs to be substantially modified and curbed when it generates spillover effects (for example, negative ones in the form of environmental degradation); and while they generally support capitalism as a possibly flawed production system but better than the oft-suggested alternatives to capitalism which have so far not turned out to be viable on a large enough scale or for a long enough period, they want to reduce the harshness, inequity, and instability of capitalism through government-sponsored social-protective and redistributive transfers and macro-stabilization measures. Are these people neo-liberal, as they support markets and capitalism to a large extent?
Giving up for now on the elusive definition of neo-liberalism, it is probably correct to say that most critics of neo-liberalism associate it with a range of public policies of liberalization (including domestic and global integration), deregulation and privatization. We’ll comment on the positive as well as negative aspects of these policies.
One unifying element in the belief system of liberals, neo or not, is that of faith in the positive effects of competition, both political and economic, in opposition to concentrated power, and this is the thread that will run through our discussion in this article. Political competition relates significantly to effective electoral competition and associated political contests between parties or groups on competing ideas and policies in and out of legislative chambers of deliberation. In contrast, both in Leninist systems of party rule (as, say in today’s China) and in Gandhian ideology the emphasis is on consensus, and the necessary adversarial relation between the ruling party and the opposition in liberal systems is looked down upon as divisive or worse. Consensus in Leninist parties (“democratic centralism”), or in traditional village councils of Gandhian vision, or even inside a family (usually patriarchal) is, of course, not without its authoritarian features.
Competition and adversarial relations between political groups actually make detection of mistakes or abuse of power by leaders, and hence their correction, somewhat easier. On the other hand, competition can sometimes degenerate into a ‘race to the bottom’ (as, for example in the competitive pandering of the electorate in many democracies particularly before elections). This is apart from the various paradoxes in political science associated with the aggregate outcomes of individual voting.
We’ll spend a bit more time on economic competition, because that may be the salient feature of so-called neo-liberal policies. These policies essentially are meant to ensure more competition among domestic firms and between domestic and foreign firms with the opening of international trade and investment. Deregulation aimed at reducing various government-imposed barriers to entry and exit is also supposed to increase economic competition.
The easiest way to understand the advantages of such economic competition is to look at cases, some of them in the recent past of many developing and state-socialist countries, when competition was blocked. In the regimes of government dispensed permits, licenses and controls some firms acquired effective quasi-monopoly rights which led to high prices and shoddy quality. Restrictions on global competition blocking imports and foreign investment led to denied access to better-quality foreign and new inputs and technology. Over the last four decades Chinese state socialists, unlike their counterparts in the erstwhile Soviet Union, caught on to this fast and rode the chariot of globalization in launching massive programs of labor-intensive industrialization, technology upgrading and poverty reduction. In both trade and foreign investment policy China has been more ‘neo-liberal’ than, say, India.
But the Chinese case (like the earlier successful cases of Japan, South Korea and Taiwan) also showed that selective liberalization with active guiding and helping role of an effective state in industrial policy was the key. Just increasing economic competition (as tried in some Latin American and African cases) was nowhere near enough. But market competition did play a significant role even in the state-guided cases. There is plenty of evidence now to show that market discipline (in East Asia mostly coming from the open export markets) makes the all-important difference between cases where industrial policy tends to succeed compared to cases where it fails.
One glaringly obvious downside of competition is that in the usual absence of level playing fields and with unequal initial endowments, some will win, often unfairly, and others will lose. The way out is not to block competition, but to try to correct for initial handicaps, for information failures (which, for example, deny essential credit to small firms with low collaterals), and in the case of inequality of outcomes, help building safety nets and generous assistance schemes for those who lose out. The Scandinavian countries have been among the most successful in combining market competition (including openness to globalization) with generous social insurance and labor market support (like re-training). Again the effectiveness of the Scandinavian state was an essential ingredient of success. Asking an ineffective and corrupt state to meddle with competition can make things much worse.
There are, of course, numerous cases of socially costly failures of market competition where state and other social actors have to intervene. An obvious example is the case of environmental degradation; another is the case when one entrepreneur cannot profitably expand operations unless others do the same (what economists call ‘coordination failure’); and yet another is when unregulated financial markets result in excessive risk-taking and systemic failure. There are also cases of dire macro-economic crises in developing countries brought on by full exposure to footloose international capital flows—the case of what Dani Rodrik has called hyper-globalization. To be fair, many so-called neo-liberals who support free trade are not opposed to some restrictions on capital flows—“sand in the wheels” of runaway financial capitalism(even the IMF now has provided some grudging support to such restrictions).
What about the large inequalities all over the world that the so-called neo-liberal policies are supposed to have fostered? If liberals believe in competition on level playing fields, they should be opposed to a great deal of inequality of opportunity. Besides, the empirical evidence on how much of increased inequality is due to market competition (like globalization) and how much due to advances in labor-saving technology and automation is not always clear, though both are likely to have some role. To the extent increasing concentration of corporate market power is responsible for increasing inequality (particularly through its effect in depressing wages and labor share of income), the liberal advocate of economic competition should be opposed to this to be consistent with their article of faith (as in the case of the pro-market but not necessarily pro-business liberals we have referred to before).
Similarly, liberals should be opposed to the regulatory capture in financial markets by the financial oligarchy or the rampant crony capitalism of many countries, just as in the political arena they should be opposed to the formidable barriers to political competition in the form of corporate lobbying and large contributions to campaign finance. So the liberal position, if consistently followed, should not be subject to Left strictures on these points. There is also a bit of an ironical twist in the position of those critics who advocate state intervention to supplant neo-liberal policies on grounds of such inequality and oligarchic tendencies, as if the state is above being captured by the same vested interests.
Liberals, as supporters of political democracy, should also in principle be generally supportive of proposals for economic democracy within the firm—-for example, for significant worker representation in company governing boards, which at the moment mostly are answerable only to managers and share-holders. The evidence from German works councils on the positive effects of worker representation on productivity, particularly when the firm has profit-sharing and collective bargaining arrangements, suggests that this may not be always against the interests of corporate profits.
In the arena of political economy, however, the so-called neo-liberals (inspired by ideas propagated by economists belonging to the Chicago and Virginia Schools in the US) often castigate trade unions as rent-seeking ‘special interests’. They suggest that trade unions by organizing workers for collective bargaining (aimed at rent-sharing with the owners) in some sense interfere with the operation of untrammeled competition in the labor market. But in the real world of massive power of concentrated capital unorganized workers face such a grotesque asymmetry of power that organizing them into unions is often a relatively small step toward achieving some kind of countervailing power, and hence toward a bit of leveling of the playing field which a sincere liberal should not much object to. In any case in much of the world today unions have their backs to the wall. While corporate concentration is increasing, the influence of labor organizations in work sites is shrinking fast—examples are many all around the world, from the successful strike-breaking “right-to-work” movement pushed by employers in the American Rust Belt, to large numbers of “contract laborers” without benefits working side by side with regular workers in factories in India.
Another political-economy issue arises when liberals are criticized both by populists and by the Left for being too focused on procedural aspects of democracy and its imperfect representative institutions, and less on its direct participatory aspects. In particular, liberals are often found to be too comfortable with the dominance in policy-making of unelected technocrats insulated from the participatory processes. But on many complex issues of regulatory, monetary or financial policy one needs evidence- or knowledge-based governance and some insulation from day-to-day political pressures. Otherwise we are likely to be at the mercy of ignorant but arrogant antics of demagogues (like Trump’s mercantilist trade wars to get jobs for American workers or Modi’s demonetization stunt in India to fight corruption).
One other aspect of competition we should pay attention to is its dynamic aspect. Uncompetitive oligarchic economies are usually also less innovative. In the long run innovations and productivity growth sustain high standards of living. But there is a trade-off between static and dynamic competition here, as a temporary suspension of competition—in the form of patents and copyrights which allow the innovator to get monopoly profits that are supposed to compensate for the initial research and development costs incurred in producing the innovation—is called for, which is supported by many liberal economists. The World Trade Organization (WTO), for example, enforces a 20-year patent monopoly. Others consider these costs too high (kept high in WTO negotiations by expensive corporate lawyers hired by multinationals), with an adverse effect particularly in discouraging future innovations, as the latter depend on access to earlier innovations in advancing the frontier. In the US the patent system is now quite broken, with patent standards declining, and in some areas new products or processes (for example in software or business methods) are difficult to define precisely, giving rise to a minefield of litigations and a whole army of rapacious ‘patent trolls’ which particularly harm small innovating firms. One should keep in mind other, possibly less costly, ways of encouraging innovations, other than private patents (like a pre-announced prize for a particular research direction, research grants, the state buying the patent and putting it in the public domain, helping development of open-source technology and open-access science journals, etc.).
The dynamic nature of competition in challenging incumbent firms is also being dampened, when today’s giant firms with deep pockets often buy up the new start-ups with an innovative product and thus pre-empt potential competition. In any case these firms often enjoy the inherent advantages from big data feedback loops and network effects that are increasingly important in the technological field. There are also certain steady incremental innovations which arise in the process of production itself in the large firms (the Japanese call this kaizen). All together the relation between competition and innovations is getting more complex.
Another aspect of the so-called neo-liberal policies involves privatization. Here also the empirical evidence is mixed. First of all, turning a public monopoly into a private monopoly does not serve the cause either of efficiency or of liberalism.
Secondly, the general argument is that large public firms are often too big to fail and the near-certainty that they will be politically bailed out makes them lazy, inefficient and corrupt. But there are also too-big-to-fail private firms, and we know that supposedly efficient financial markets where the threat of takeovers is to discipline the bad-performing private firms often do not work so efficiently. In any case this disciplining is often carried out by shark-like but extremely myopic private-equity firms, who do not have the firm’s long-term health in mind. Privatization advocates often overlook that management matters more than ownership in efficiency, and the performance incentives and internal organization problems in managing large, necessarily bureaucratic, firms are similar between public and private firms.
Thirdly, large public utilities (say, in electricity or water or telecommunications) need to be carefully regulated, whether they are private or public. The problems of regulation in both, particularly with respect to pricing and quality of service, are quite complex, and the evidence on improvement with privatization is mixed.
Fourth, in many essential public services (say education or health) the arguments for public funding are much stronger than actual public provisioning of those services. People have thought about different ways of contracting out the actual provisioning to private or non-profit agencies. One problem of contracting out is that some elements of the desired quality of those services cannot be fully spelled out in the contracts (economists call this the problem of incomplete contracting). How do you make sure that the private contractor imparts certain civic qualities you may want through public education (or features like social integration that a society may value), or how to ensure a certain quality of humane treatment of prisoners in a private prison system?
Fifth, while the political manipulation of the running of public sector enterprises is a severe problem afflicting their efficiency in too many cases, the same problem can vitiate the privatization process as well (with sales to, or asset-stripping by, crony oligarchs, as we have seen in Russia, with disastrous effects on its economy and polity).
The privatization zealots also under-appreciate the indispensable role of long-term public investment in encouraging private investment–in building infrastructure, in carrying out basic research and extension, and in initiating or pump-priming some risky forms of innovations (as the history of technological progress in computers, pharmaceuticals, or energy even in the US amply illustrates).
All this suggests that market competition serves some important functions but they need to be regulated carefully, and the question often is about the capacity of the state to carry out such careful regulation, along with necessary promotion of public investment and welfare policies, and about the accountability processes that make the state answerable to the public.
An alternative to both the state and the market is the community, and there are many efficiency as well as equity reasons for turning to relatively small community organizations for both governance and production and distribution. But, like market and government failures, there are also many ‘community failures’. I shall try to write a future column on this important issue.
Finally, there are the problems of alienation and ‘immorality’ involved in market processes that liberal economists often overlook. The problem of alienation, however, more often depends on the scale and nature of work organization and social interaction than on the market as such. This has remained largely unresolved in large firms both capitalist and state-socialist.
The immorality issue involved in the marketability of all kinds of goods or services has been vigorously debated between philosophers and economists. Without getting into that intricate debate here, my own belief is that tradability of certain things (like kidneys or votes, or what used to be part of local commons) can fundamentally impair the soft tissue of social relations and moral sensibility, no matter what it does for efficiency. There is also the general morale issue of the spirit of relentless competition eroding the intrinsic motivation of cooperation and social norms that are inherent or latent in most humans.
A deeper conflict in the conception of the individual may also be at stake in the general liberal advocacy of the market principle. In his recent book, On Human Nature (2017), the conservative philosopher Roger Scruton distinguishes between the liberal individual, self-possessed in her autonomous decisions, consent, contract, and trade, and the conservative individual who endows meaning to her life mainly through her identity in relation to a community with established traditions. If there is anything to this distinction the liberal needs to be careful in propagating her faith and exaggerating its supposedly universal applicability.
In this article we have thus tried to suggest the various positive aspects of liberalism particularly in its application of the principle of competition to the polity and the economy, without ignoring its severe pitfalls and ambiguities. So the neo-liberals, whoever they are, should be proud of their ideas sometimes (as in their fight against any form of concentration of power), and hesitant and skeptical at other times, and, of course, thoughtful and careful in their assertions at all times.