Hayek’s ideas are just as vital today as they ever were
Just as the free market organisation of economies faces new challenges in the West, its successes and popularity in the developing world evidence its fruits
It does not require many glances of newspaper columns or much frequenting of social media today to stumble across mass vilification of neoliberalism. Or indeed much seeking to find the next political star rising on the back of ethno-nationalistic tendencies. The apparent ‘forces’ of free markets and globalisation are not in their finest hours as far as public attention goes. Virtues of market-oriented economic policy and increasing interconnectivity between countries’ goods, services, capital, labour, land and ideas are, however, still easier articulated than decried – and recent events simply reflect that they are virtues not being articulated widely enough.
In a recent lecture regarding global economic governance, my professor referred begrudgingly to the violent birth of a neoliberal era that marked the late 1970s. It is an era that has come to be associated with rife income inequality, stagnant and suppressed wages and industrial decline in the West. Some even go as far as to say neoliberalism is, as an ideology of small states, the root of all problems. More often than not, the alternative is hailed as a bigger role for state allocation of resources and command over the private sector – for the service of the public’s wavering will. At its worst, opposition to neoliberalism is both hostile to markets and to the free trade and movement which characterise globalisation.
Sympathy towards a bigger role for government is of course not confined to post-Keynesian academia or literature that explicitly strives for a post-capitalist reality. It is now a sympathy also prevalent implicitly in world order, governance and public discourse. With the election of a demagogue who leans towards mercantilism in the United States, the Sanders-Corbyn revolution among the young generation, and Theresa May’s increasing adoption of state solutions at the expense of laissez-faire approaches, we have matured beyond market justice.
According to this trend, state actors know better than markets how to run economies. However, the converse is so starkly true, and recent experience of poverty reduction and economic growth can be our barometer for success. Intercontinental experience of economic reform assures us repeatedly that success defined in this way has been sustained when governments adopt reforms market-oriented in nature.
Indeed, even concerns about income inequality diminish when individuals are forced to consider whether they are better off under free market economies. Among developing countries, a median of 71 percent of respondents to Pew Research Global’s survey regarded free market economies something to be desired regardless of income disparities. This is a higher figure than that from the developed and western liberal market economies where neoliberal institutions are bearing the brunt of every issue and concern.
Looking to understand why this popularity may be the case among developing countries, we can observe the merits of trade liberalisation and market-favouring policies in the neoliberal era – and the rapid, obvious, yet understated, change that accompanies them.
Situated in the impoverished region of Sub-Saharan Africa, Botswana used its country’s independence and democratic election in 1966 to introduce a neoliberal agenda to complement its natural resource wealth – constituting low taxes, deregulation, low tariffs and stronger property rights.
In contrast to its neighbours Namibia and Zimbabwe, it has since achieved the world’s highest sustained GDP per capita growth 1966-2006, seen its leaders awarded free market awards and boasted levels of economic freedom comparable to many western nations. Indeed, in 1994 it became the first country to rise out of the United Nations’ Least Developed Nation status.
Often considered a prerequisite to a successful market-based system, private property rights have been uniquely well enforced in Botswana, standing out from many of its neighbours. Through the control, transfer and advantages of property, individuals are afforded opportunity to participate fully in economic activity and maximise utility.
If the ideology of neoliberalism has strengthened private property rights that generate investment and comfort the private sector, deem Botswana guilty. If it is wrong to protect citizens from expropriation – namely high taxes, price controls and confiscation – Botswana is indeed culpable for facilitating such protection.
The truth is, though, that in reality no universally pleasing economic system exists. Neoliberalism offers us the freedom and wellbeing that we crave, and measures of economic success merely reflect this.
Looking to China, another beacon of poverty reduction and sustained growth, we see similar merits to market reforms in the neoliberal era. Based on the definition of poverty as below $1.25 per day, the World Bank estimates that the percentage of the population in China living in extreme poverty fell from 84 percent in 1981 to 16 percent in 2005.
While it is far from being a free-market economy, the rapid nature of China’s development stems largely from economic reforms initiated in 1978 that favoured market orientation. Characterising reform was the elimination of strict agricultural production quotas and collectivised farming. As reforms spread to industrial sectors, the Chinese economy has seen the private sector outpace state-owned sectors. While there are many reasons for every country’s success, there is little doubt that an explosion in productivity, caused by efficiency gains from reform, has been a significant factor.
The more proudly neoliberal era has not come without the concerns about income inequality that equally dominate conversation in liberal market economies. Although IMF authors Serhan Cevik and Carolina Correa-Caro attribute widening income inequality in China to faster income growth among the rich rather than to stagnant living standards among the poor, a growing income ratio between the rich and poor threatens further reforms.
Income inequality in and of itself is an historical trade-off for vast and rapid poverty reduction. However, in the case of China it has been exacerbated by government spending and unequitable state policies. Unfortunately for neoliberalism’s vocal critics, this is no flaw of superfluous private sector power. Development policies that favour urban over rural residents and coastal regions over less-developed inland developed regions are but one example of immense government missteps where market solutions would have proved superior. It reflects one of many instances whereby the public, not private, sector has contributed to the issues of inequality we attack, as well as to the later distortions bureaucratic meddling produces.
Considering the leaps and innovations that have followed broadly market-oriented policy across the world, we should be reluctant to tolerate policies that compromise trade, that address non-existent concepts to the detriment of poverty reduction, or that revert to the mistakes of economic management in the era of the Bretton Woods system.
Remaining challenges should be viewed as remaining challenges. They are best resolved by local market solutions, just as the poor and disenfranchised are best helped by revitalising a civil society of strong communities, institutions, churches and non-governmental organisations.
The famed Hayekian idea is that the market is a process of discovery and that the economy should be allowed to develop as a spontaneous order. Any form of elitism contending that the state knows best should be rejected, whether in an advanced liberal market economy or one that is not yet there. Government intervention, not neoliberalism, is to blame for more of our problems than today’s political trends would have you believe. Historically, markets have solved issues more quickly and extensively than a heavy state hand. We must not conflate crony capitalism with true market mechanisms and institutions, and we must not allow the injustices of government failure to be instead blamed on free-market arrangement of the economy that has, so far, reaped so many fruits.
Elena Attfield is a former intern of the IEA and currently studies Economics, Politics and German at the University of Leeds
As with all IEA publications, the views expressed are those of the authors and not those of the Institute (which has no corporate view), its managing trustees, Academic Advisory Council or senior staff