Has economic freedom been oversold? That was the question asked (and ultimately answered) in a new paper by the research arm of the International Monetary Fund (IMF). The agency is the international “central bank to central banks” which swoops in and provides cash to bail out entire nations – for a price, of course. That price has always been a little bit of austerity for the government and de-regulation all around.
The guiding philosophy goes by a handle which may seem off to many in the United States – Neoliberalism. It was a response to the failure of classical Liberalism, or reduction of state power in favor of free markets, which failed in the last Depression. This depression seems to have been about as kind to the general concept for many of the same reasons.
As always it’s worth talking about in the sense that we are again confronted with the possibility that “everything the experts know is wrong” – a feeling certainly stirred up elections throughout the developed world lately.
The paper, by three staffers in the IMF’s Research Department, is entitled, “Neoliberalism: Oversold?” It examines the guiding principles which the IMF itself has always used to steer nations that find themselves in need of a handout. They are:
- Markets work best when they are opened up, and
- Governments need to be restricted in their role in the economy.
The use of the term “liberal” to describe this philosophy dates back to the 1800s, when a rising industrial and mercantile class needed more freedom from imperial rule to implement their designs. It worked wonders for freedom as we all came to know it, but ran into its own problems. The failure of this general line of thought in the 1930s created “neoliberalism”, an attempt to define a limited role for government in central banking that wasn’t imperial, but commercial in nature. The best article on the topic is strangely found in wikipedia and is worth at least a good skimming.
In the United States we might call it “libertarianism” or “supply side economics”. The terms are relatively unimportant.
The problems with this philosophy were outlined in detail by the IMF researchers. Neoliberalism appears to inherently reduce the stability of the system by opening things up too much and it also increases income inequality. The reason it does this is summarized as “business cycles”, namely that free markets go through long periods where they funciton well and long periods where they function terribly – the rich do well enough through both, the poor only half the time.
Readers of Barataria will recognize several long-running themes touched ever so lightly by this paper. While it represents a tiny earthquake in international finance it misses the chance to summarize the problems of neoliberalism succinctly – the lack of durability and the lack of resiliency.
The paper doesn’t call for socialism as we might understand it, but it suggests that there is a role for central planning without ever describing it. Again, they missed the opportunity to state that free markets, while desirable, are social constructions that have to be created and nurtured rather than simply waiting for them to spring and thrive on their own.
They also decry the effects of austerity during economic downturns without resorting to the wisdom of Solomon – To every thing there is a season, and a time for every purpose under heaven (Ecclesiastes 3:1).
In short, this IMF paper is fairly high-power support for everything that Barataria has been saying for the last nine years, summarized in “People’s Economics”.
Does that mean that we’re right about everything? Let’s not go that far, but it’s gratifying to know that people in high places are starting to turn on to the limits of free markets as a concept. If only they were willing to take the next step and come to an understanding of the IMF teams who get their hands dirty trying to save nations which have run into trouble. It’s when you are making things happen that the academic stuff gets really interesting, after all.
In the meantime, the paper is relatively short and worth a read. It’s also worth asking ourselves, “If everything really is broken, what comes next?” because as we all know a lot of people aren’t waiting to find out what tomorrow may bring – they’re just going to go forward with something new no matter what.
As good as this admission by the IMF is, it had better be only the start.
Note: The IMF is not the Impossible Mission Force from the 1960s TV series. That had a much catchier theme song and did much cooler stuff. Plus, it had Martin Landau and Barbara Bain.
Reblogged this on KCJones.
I looked the IMF paper over and you’re right it does sound like you. If it starts with business cycles and that is seen as a major revelation I can’t see what is new here. Am I missing something or is that what this is all about?
Short answer: yes.
Long answer – it’s completely revolutionary because most modern economics starts with the assumption that the desire of policy is to produce smooth, steady growth. If you accept that this is not natural, or even possible, everything has to change. Further, it implies that the correct policy at any given moment is not dictated by ideology but by situational analysis – which is to say that a good economic policy is more like being an auto mechanic than an academic. You can see how this would rub a lot of people with fancy degrees the wrong way.
There is no “one way”. Reagan’s emphasis on supply-side was the right thing to do in 1980 but it’s exactly the wrong thing right now. And even when it was the right thing I can make the case that they oversold it then, too.
No one in academia or in central banks likes this way of thinking, but it seems to be quite reasonable. The reason I emphasize this Depression is that it does require a completely new understanding of economic policy that is neither Neoliberal nor Socialist.
You say “the lack of durability and the lack of resiliency.” Bullshit. What about the millions/billions of people impoverished, or further impoverished, by “austerity” measures imposed by the IMF and similar ilk in favor of the global owning classes? mega moral lapses are required to see things your way.
Not really. This article is getting at one of the roots of income inequality, which is business cycles. A steady economy produces less inequality than one that goes up and down all the time. The very wealthy can make money at both ends, the poor suffer in the downturns terribly. Debt cycles have a lot to do with trying to survive the downturns.
So I’m sorry that I didn’t make that clear in the article, but we’re talking about one of the things that the IMF researchers and I agree on, which is that business cycles are a big part of the problem. We’re actually both concerned with income inequality and as for austerity I thought I addressed that directly as a big load of crap.
What is important here is that IMF researchers are challenging the IMF methodology, which includes austerity. I’ve long supported this position and I am glad they have come around to this thinking.
Also, I want to make it clear here – this is about perspective more than anything else. It only touches on the problems and does nothing to provide solutions. Simply noting that business cycles are real, that income inequality accelerates in downturns, and that different policies are required during those times is pretty big for the IMF itself to admit. As I concluded, and others here are saying, it’s far from enough. But it’s a start.
You say academic, I say ivory tower. If this is the IMF coming back down to earth thats great but I see them as being pretty high up in the tower still.
Fair enough. As I said in the end, it’s a start, but only that.
Having them admit they don’t know what they are talking about is a good start.
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