Neoliberalism: What It Is, With Examples and Pros and Cons

Neoliberalism Definition

Investopedia / Sydney Saporito

What Is Neoliberalism?

Neoliberalism is a policy model that encompasses both politics and economics. It favors private enterprise and seeks to transfer the control of economic factors from the government to the private sector.

Many neoliberal policies concern the efficient functioning of free market capitalism and focus on limiting government spending, government regulation, and public ownership.

Neoliberalism is often associated with the leadership of Margaret Thatcher, the prime minister of the U.K. from 1979 to 1990 (and leader of the Conservative Party from 1975 to 1990) and Ronald Reagan, the 40th president of the U.S. from 1981 to 1989.

More recently, neoliberalism has been associated with policies of austerity and attempts to cut government spending on social programs.

Key Takeaways

  • The policies of neoliberalism typically support fiscal austerity, deregulation, free trade, privatization, and a reduction in government spending.
  • Neoliberalism is often associated with the economic policies of Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States.
  • There are many criticisms of neoliberalism, including its potential danger to democracy, workers’ rights, and sovereign nations’ right to self-determination.
  • It's also been accused of giving corporations too much power and worsening economic inequality.
  • However, neoliberal initiatives concerning free trade, industry deregulation, income tax and capital gains tax cuts all had bipartisan support.
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Neoliberalism

Understanding Neoliberalism

Neoliberalism is a political and economic philosophy that emphasizes free trade, deregulation, globalization, and a reduction in government spending. It's related to laissez-faire economics, a school of thought that prescribes a minimal amount of government interference in the economic issues of individuals and society.

Laissez-faire economics proposes that continued economic growth will lead to technological innovation, expansion of the free market, and limited state interference.

Additionally, neoliberalism is sometimes confused with libertarianism. However, neoliberals typically advocate for more government intervention in the economy and society than libertarianism. For example, while neoliberals usually favor progressive taxation, libertarians often eschew this stance in favor of schemes like a flat tax rate for all taxpayers.

In addition, neoliberals often do not oppose measures such as bailouts of major industries, which are anathema to libertarians.

While neoliberal policies may be considered conservative and contrary to the political beliefs of many, it should be noted that various U.S. neoliberal initiatives such as free trade agreements, the deregulation of the transportation, utilities, and banking industries, and cuts in the top income tax rate and the capital gains tax all had bipartisan support.

Characteristics of Neoliberalism

Neoliberalism involves the belief that greater economic freedom leads to greater economic and social progress for individuals. It supports:

  • Free enterprise, competition, deregulation, and the importance of individual responsibility
  • Opposition to the expansion of government power, state welfare, inflation
  • Minimizing government control of industry and boosting private sector ownership of business and property
  • Free market capitalism and the efficient allocation of resources
  • Globalization rather than heavily regulated markets and protectionism
  • A reduction in government spending and lower taxes
  • Less government control over economic activity to enhance the efficient functioning of the economy
  • An increase in the impact by the private sector on the economy
  • A reduction in union power and greater flexibility in employment
  • Government intervention when it's needed to help implement, sustain, and protect free market activities

President Jimmy Carter's deregulation of the airline industry in 1978 is an example of a neoliberal policy in action. The Airline Deregulation Act removed government control over fares, routes, and who could enter the market.

Liberalism vs. Neoliberalism

At its core, liberalism is a broad political philosophy. It holds liberty to a high standard and defines all social, economic, and political aspects of society, including the role of government.

Neoliberalism is essentially an economic ideology. The policies of neoliberalism are more narrowly focused and are primarily concerned with markets and the policies and measures that influence the economy.

Criticism of Neoliberalism

There are many criticisms of neoliberalism.

Misguided Free Market Approach to Public Services

One common criticism of neoliberalism is that advocating for a free market approach in areas such as health and education is misguided because these services are public services. Public services are not subject to the same profit motivation as other industries.

More importantly, adopting a free market approach in the areas of health and education can lead to an increase in inequality and the underfunding of resources (health and education) that are necessary for the long-term health and viability of an economy.

Monopolies

The adoption of neoliberal policies in the Western world has run concurrent with a rise in inequality in both wealth and income. While skilled workers may be in a position to command higher wages, low-skilled workers are more likely to see stagnant wages.

Policies associated with neoliberalism tend to encourage the presence of monopolies, which increase the profits of corporations at the expense of benefits to consumers.

Increased Financial Instability

Contrary to what proponents of neoliberalism typically claim, capital deregulation has not necessarily helped economic development. Rather, capital deregulation has led to an increase in financial instability including economic events that, at times, have sent shockwaves around the world.

In fact, an International Monetary Fund (IMF) report into neoliberalism reveals that an increase in capital flows has been a factor in the increased risk of adverse economic cycles.

Inequality

Neoliberal policies have been proven to increase inequality. This inequality can hinder the long-term growth prospects of an economy. On one end of the spectrum, those who earn a low income have limited spending power. At the same time, those who become richer have a higher propensity to save.

In the latter scenario, wealth doesn't trickle down in the way that proponents of neoliberalism claim that it will.

Globalization

Finally, neoliberalism's emphasis on economic efficiency has encouraged globalization, which opponents see as depriving sovereign nations of the right to self-determination.

Neoliberalism's naysayers also claim that its call to replace government-owned corporations with private ones can reduce efficiency. While privatization may increase productivity, they assert, the improvement may not be sustainable because of the world’s limited geographical space.

In addition, those opposed to neoliberalism add that it is anti-democratic, can lead to exploitation and social injustice, and may criminalize poverty.

What Is Neoliberalism in Simple Terms?

It's an economic model or philosophy that emphasizes that, in a free society, greater economic and social progress can be made when government regulation is minimized, government spending and taxes are reduced, and the government doesn't have strict control over the economy. Neoliberalism does not oppose all government intervention. However, it does wish to see it limited to only when it's necessary to support free markets and free enterprise.

What Are the Effects of Neoliberalism?

Some effects might be freer markets, access to more products and services to meet consumer demand, greater revenue and higher profits. Price reductions due to greater competition can also be an effect. Savings can result from a more efficient allocation of resources. The better organization of workforces and ability to hire needed talent for specific jobs can result from neoliberal policies, as well. Others might point out some of the negative effects believed to be associated with neoliberalism. These could include economic inequality, the growth of monopolies, a lack of job security, the loss of jobs due to outsourcing, and an increasing indifference to the needs and well-being of individuals.

What Is an Example of Neoliberalism?

The North American Free Trade Agreement (NAFTA) is one example. By this agreement, Canada, Mexico, and the U.S. agreed to remove all trade restrictions between their countries to open up trade and increase the economic benefits for each.

Article Sources
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  1. Reason. "The Neoliberal Revolution."

  2. International Monetary Fund. "Neoliberalism: Oversold?"