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

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.

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 minimal government interference in the economic issues of individuals and society.

Laissez-faire economics is the philosophy that minimal state interference and participation in the economy will maximize economic growth and prosperity.

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 at a low rates, libertarians tend to advocate for a low flat tax or total elimination of income taxes. The two often differ philosophically as well. With libertarians focused on economic freedom and rights, and neoliberals more focused on the free market economy as the way to the goal of more growth.

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

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
• Free trade 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 of 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

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 health and education can lead to an increase in inequality and the underfunding of resources (health and education) necessary for the long-term health and viability of an economy.

Monopolies

The adoption of neoliberal policies in the Western world has run concurrently 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 are thought by some 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

Studies suggest that Neoliberal policies 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 say causes factories to be closed and jobs to be moved overseas.

Neoliberalism's naysayers also claim that its call to replace government-owned corporations with private ones can cause various forms of societal harm such as reducing access to essential services and harming workers' rights.

In addition, those opposed to neoliberalism claim that it is anti-democratic, and can lead to exploitation and social injustice. They also claim it can lead to corporations using their power and resources to subvert the will of the majority of people. Others assert that it leads to support for undemocratic regimes that implement neoliberal economics.

The Bottom Line

Broadly speaking, neoliberalism is an economic policy stance that governments should take a limited role in economies and privatize all functions that can be. Similar to many economic policy ideas and theories, there are advantages and disadvantages to neoliberalism.