Essay on Neoliberalism

Milton Friedman, the father of neoliberalism.

'A review of the Financial Crisis and the Shadow Banks: Neoliberalism will prevail'

i. Introduction.

In this paper I will argue that the financial crisis of 2007- present and the emergence of the shadow banking system, a parallel and unregulated system of banking, are not simply the evil doings of neoliberal deregulation espoused since the 1980s. Before considering the claims that the financial crisis and the shadow banking system are the products of a prevailing neoliberal orthodoxy and that financial crash has been to “Friedmanism what the fall of the Berlin Wall was for authoritarian communism” (Klein 2008), it is necessary to clarify a few keys issues. Firstly, this paper will consider the historical and theoretical underpinnings of neoliberalism as a modern philosophical theory of economics and the market. The paper will then attempt to paint a picture that illustrates how the financial crisis unfolded as well as shedding some light on the nature of shadow banks and the role they played in the crisis of 2007- present. It will then be appropriate to consider the claims that the crisis has sounded the death knell for neoliberalism. Finally we will consider life for neoliberalism post-crisis.

ii. Neoliberalism – a theoretical analysis.

Neoliberalism, which advocates the withdrawal of the state and “free market superiority” (Pesendorfer 2009, p.5), has extensively shaped the West’s economic policies over the last 30 years. It is as Edward Fullbrook (2005) suggests, “the ideology of our time.” Neoliberalism, so long a matter of academia, jumped from the books and into reality in the latter half of the 20th Century. Heralded as the key to reinvigorating the stumbling economies of the West, it has long since championed privatisation, deregulation and liberalisation. It was in the 1980s that neoliberalism established itself as the dominant economic prescription, responding to “high-inflation (and the) high-unemployment traumas of the 1970s developed world (which) proved impervious to, and indeed came to be seen as created by, Keynesian notions of macroeconomic ‘demand management’. (Urban)” Neoliberalism was the remedy for Keynesianism. As a result of the embedding of neoliberalism into the economic policies of the West, we have seen “the disembedded market economy” (Ataka and Gonoi 2009, p.10) become the established economic paradigm.

Those on the right cherish the efficiency of the market to self-regulate and self-correct, clinging devotedly to the notion that “neoliberalism holds that prosperity flows from market forces. (Urban)” Thorson and Lie rightly observed that neoliberalism is, “basically, the belief that states ought to abstain from intervening in the economy, and instead leave as much as possible up to individuals participating in free and self-regulating markets.” David Harvey (2005, p.2) notes that supporters of
neoliberalism maintain that the maximum reach of the state should be as guarantor of “the quality and integrity of money. It must also set up those military, defence, police and legal structures and functions required to secure private property rights.”

The roots of modern day neoliberal thinking can be traced back to the classical liberal ideas of the father of modern day capitalism, Adam Smith, “the great spokesman of laissez-faire and the minimalist state. (Walter, 1994)” It was Smith who trumpeted for limited government and who championed the ability of the rational self-interested homo economicus to prosper in an environment of unrestrained competition. The revival of classical liberalism however by a number of prominent economists saw the birth of neo-classical liberalism or neoliberalism in the late 19th and early 20th Century. Which as Thomas Lemke notes, “derives from the former, takes it a step further, and gives it a more radical form. (2001, p.190)” Of those prominent economists Ludwig Von Mises of the Austrian School, had an “uncompromising devotion to the free market, (Rothbard, p.375)” and staunchly opposed “every form of statism.” His steadfast view of the market stemmed from his perception of the natural world and his preference for an environment in which individuals can act freely as opposed to being subjected to overbearing governmental coercion. He believed that a free market was the key to market efficiency, social efficiency, strong development, affluence and growth. State interventionism according to Von Mises was the road to disaster, with social struggles, war, poverty and a regressive society the only rational outcomes.


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