In Defense of Neoliberalism: There is a reason why many economists tend to believe in markets.
March 5, 2019
With Responses From
Mar 5, 2019
4 Min read time
There is a reason why economists tend to believe in markets.
This forum—along with new responses—is featured in Boston Review’s forthcoming Summer 2019 issue Economics After Neoliberalism.
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Since complaints about the domination of market fundamentalism seem to greatly outnumber pro-fundamentalist manifestos, Naidu, Rodrik, and Zucman may have trouble finding debate partners who will defend ideological, fundamentalist, fetishist neoliberalism. As a personal favor to the authors, whom I like and respect, I will volunteer to be at least a neoliberal—I hope to be excused from the other labels.
Naidu and his co-authors have done a valuable service with their initiative; the policy debate should be expanded because there is danger in neglecting inequality. And yes, there are some government interventions that would improve equality while not destroying the benefits of markets. But there are dangers also in the other direction. Rejecting markets too much, I will argue, can hurt material well-being, individual rights, and the fight against xenophobia.
Market exchanges among individuals can often result in mutual gains—a positive-sum game.
There is, quite simply, too much straw-manning going on in this debate. Market fetishism implies laissez faire with no role for government, while market criticism gets unfairly associated with the North Korean approach to inequality. Both sides talk only about the danger in one direction and not the other. It would be far more useful for both sides to identify just how far they would stop short of either extreme on the North Korea–laissez faire continuum.
Naidu and his co-authors likely agree that there are numerous examples of disaster when extreme policies inhibit market functioning. By 1982, for example, Ghana had lost its historic domination of the world cocoa market after centralized control meant that Ghanaian cocoa exporters only received 6 percent of the world price of cocoa. With so little incentive to produce, there were not many cocoa exporters left. Moreover, those who tried to smuggle their product out of the country in order to find better prices faced the death penalty. This was but one example of draconian controls of markets in Ghana that are associated with a steep decline in living standards in the decades after independence in 1957. After a drought in 1983 made things even worse, economic reforms to liberalize markets finally began—reforms that have been associated with healthy positive growth.
This is a familiar story—indeed, one that gets to the heart of why many economists tend to believe in markets. In the 1980s and 1990s, in Latin America and Africa, extreme policies on inflation, interest rate controls, foreign exchange controls, artificial exchange rates, and international trade used to be common—and growth was poor. Now, extreme anti-market policies have mostly disappeared, which is correlated with growth recoveries in both Latin America and Africa. (A big exception is Venezuela, where severe price controls have led to starvation.) Even more famously, the movement from a planned economy towards markets in China (though hardly ending up at laissez faire) is associated with rapid growth and a historic decline in poverty.
Yet this happy news—in Latin America, Africa, and China—could be reversed if reactions against markets go too far. Nor are rich countries immune from harmful policies—just consider a no-deal Brexit, which is expected to cut Britain’s exports and Gross Domestic Product. I am not accusing Naidu and his co-authors of supporting extremes (straw man alert!), but I do think their initiative could be improved by not casting markets, writ large, as toxic.
Evidence cannot resolve political conflicts about values; you need to decide where to go before estimating the most effective way to get there.
Indeed, as Naidu and his co-authors make clear, their real enemy is inequality, and they see fighting it as a moral value. That value is common, but it is not the only one. Some voters also value personal rights and self-determination, while disliking coercion and dictation by others. In Naidu and co-authors’ telling, ideology in economics is bad because it means rigging evidence. I agree, but such biases could conceivably happen from either conservative or progressive ideologies. Moreover, ideological differences need some respect if they are just competing sets of values. Neither side of the markets and inequality debate can impose their values on others.
Naidu and his co-authors also make a passing mention of nativism—how they “were horrified by the illiberal, nativist turn in our politics.” This turn, however, was not caused by markets. Indeed, it was the economists who emphasized markets that first gave us the useful insight that the world is not only zero-sum conflict between ethnic groups, nations, or classes. Market exchanges among individuals can often result in mutual gains, a positive-sum game. There are some losers from trade, yes, but there will be many more if Donald Trump completely rejects the positive-sum games with his trade wars and travel bans. In terms of the continuum, voters in the United States and Europe are not convinced these days about gains from trade, but they are not voting for redistributionist solutions either.
Lastly, Naidu and his co-authors stress and applaud economists’ “recent empirical bent.” I think they mean empirics that address causality, usually with natural or researcher-induced experiments in which one group randomly gets a policy intervention and the other group does not. But such evidence does not cover the effects of national choices of market or non-market systems, where such random experiments are usually not available or feasible. Evidence cannot resolve political conflicts about values; you need to decide where to go before estimating the most effective way to get there.
So, in conclusion, kudos to Naidu, Rodrik, and Zucman for enhancing the debate about markets and inequality. They could enhance the debate even more by emphasizing that inequality is not the only danger in an increasingly dangerous world.
Editors’ Note: This forum is part of Boston Review's special project Democracy’s Promise.
March 05, 2019
4 Min read time