Neoliberalism and Minimal State Intervention

Essay

Thatcher and Reagan 

It is suggested that we are currently living in the "age of Neoliberalism," a political concept drawing on the traditional ideas of economic liberalism, believing that states ought to intervene as little as possible in the economy, allowing individuals (including corporations) to participate freely in the self-regulating market. There is an abundance of critical literature on Neoliberalism, most of which exhibits the incoherence of the claims of those economists who favour a limited state. I will be drawing on a number of these criticisms to demonstrate why the pursuit of neoliberalism as a set of political and economic principles by a given government is neither economically nor politically beneficial to the vast majority.

Neoliberalism first appeared as policy in opposition to Keynesianism, when inflation became a major issue for leading capitalist economies in the 1970s. Before this, such criticism of Keynesian economics was not taken seriously. “[Neoliberalism] was often regarded as purely ‘ideological’ in a pejorative sense, meaning that [it was a throwback] to an earlier stage of capitalism and had no real purchase on the realities of modern capitalism.” Since a maximised role of the state had brought the US out of the Great Depression in 1939, the idea of returning to redundant laissez-faire economics was unwelcome. In contrast to Keynesianism, the core principle of Neoliberalism is that the state as a regular restricts capital accumulation and ultimately inhibits economic growth. As Harvey writes, “the neoliberal state should favour strong individual private property rights, the rule of law, and the institutions of freely functioning markets and free trade,” highlighting the neoliberal preference of maximising corporate profit over the use of potential state power to protect the workers subject to the power of these businesses.

After outlining the neoliberal argument for minimal state intervention, I will identify the discrepancies that materialise when neoliberal policy is put into practice. One of the main ideas through which the minimal state intervention approach manifests is deregulation, politically problematic for a number of reasons regarding protection of workers, controlling trade and reducing wealth inequality. As an ideology, neoliberalism excuses corporate misconduct and corruption on the grounds that profit maximisation is of primary importance, and that when this is achieved, the economy will become self-managing, and the most pressing economic issues such as unemployment will naturally diminish. Evidently this is not the case, and arguably minimal state intervention is merely an approach to further empower large corporations and the elite. For example, during the New York City debt crisis, the needs of banks were prioritised over protection of national living standards, one instance of self-interested neoliberal policy.

I will be focussing on the criticism that looks specifically at why neoliberals benefit from minimal state intervention in the economy, and thus why such governments so profusely favour privatisation and state passivity. To demonstrate the detrimental effects of having such a restricted state, I will use examples predominantly from the politics of retrenchment associated with the 1980s and subsequently New Labour.

Neoliberalism in Theory Versus Neoliberalism in Practice

The prospect of neoliberalism sitting back and allowing the market to play out as it will whilst simultaneously working to actively establish and maintain a competitive business climate is somewhat contradictory. This incoherence is only realised when neoliberal policy is practiced in government, and so in the 1970s when it was hypothetically considered as an alternative to an increasingly inadequate Keynesianism, it appeared to be suitable.

The most significant inconsistency is that in practice the state cannot be economically non-interventionist. This is the case particularly when neoliberal governments believe that state intervention would in fact benefit economic elites. As Harvey writes, “state power has often been used to bail out companies or avert financial failures,” demonstrating both how neoliberal cabinets are often closely tied to their nation’s largest corporations and thus how state intervention in economic affairs is preferable only if it will likely benefit these elites. Konings further demonstrates this when he writes:

“Neoliberalism has involved a process of institutional reconfiguration that adjusted some of the key parameters of the existing financial regime in a way that enhanced rather than diminished the infrastructure capacities of the American state.”

It is only when economists have theorised about neoliberal policy that it may appear to contribute to social solidarity and increased social equality, based on the idea that fundamentally, free-market economics enhances individual freedom and choice. There are no further grounds to exemplify how neoliberalism might be beneficial to society. Nevertheless, even in theory today, it is recognised that voters are highly suspicious of neoliberal policy in both the global south and the developed world. Even IMF researchers are questioning its durability.

“Profoundly suspicious of democracy,” neoliberal theorists argue that governance by elites is favourable. This means that under such governments, close collaboration between corporations and state allows for an economic climate in which both of these parties benefit equally from unregulated capital accumulation. For example, archetypal free market economist Lord Hanson’s business interests were directly protected by the Conservative Party’s pursuit of neoliberalism as he had close ties with Thatcher during her leadership. Similarly, Michael Heseltine, as a business owner benefitted from the privatisation of industry that his cabinet sought. He was a key figure in Thatcher’s decision to sell off council houses, an emblematic neoliberal policy. Simply put, neoliberal governments tend to act in their own elite interest, regardless of the public interest they’re meant to be protecting. Evidently this minimises state intervention in the business sector while using the state to limit labour power and minimise forms of social solidarity.

Prior to the 1980s, Neoliberalism was perceived as the ultimate solution to market failure. In the neoliberal state, corporations are legally treated as individuals so that they have autonomy over their internal practices. Theorists claimed that regulation would limit economic growth enough to stagnate the market. Yet in practice, market failure has often been a result of deregulation allowing corporations to avoid paying their full production costs. Equally, to prevent the employees of these corporations gaining enough power to change this system in which no standards exist to determine their treatment, the neoliberal state intervenes. Thus, “deregulation is always re-regulation”, whereby the neoliberal state disenfranchises the workforce while empowering the economic elite.

Neoliberalism and Labour Rights

There is a general incompatibility between neoliberal free-market policy and protection of labour rights. The Washington Consensus praised neoliberalism as beneficial to workers globally. However since the first governmental embodiment of neoliberalism, when its ideas were put into political practice, the pursuit of free-market economics has been associated with the loss of social and political rights of the working classes in the interest of maintaining the competitive economic environment under which the rich thrive.

Margaret Thatcher’s infamous "rolling back of the state" explicitly prioritised corporate profit over citizen welfare. By definition, she looked to reduce the budget of the public services that support the health and welfare of the nation, in the name of neoliberalism. This played a key role in significantly increasing income inequality in Britain in the 1980s, as did the similar work of Reagan in the US. Further, it is shown that a sufficient welfare budget is entirely necessary to protect workers, and so there is no avoiding the fact that when neoliberals cut the welfare state they are definitively stripping rights away to. As Blanton and Pekson find, economic liberalisation, such as reduction of tariffs and general open global trade correlates with reduced worker protection. The main concern is that employers, especially powerful corporations that can take advantage from the support they receive from neoliberal governments, will get away with ignoring the standards of workers’ security they’re meant to be meeting. It is state regulation that enforces such guidelines, and so minimal state intervention essentially amounts to the government turning a blind eye to the neglect of these standards. Both the members of neoliberal governments and the business elite recognise that “the protection of labor rights can be a cost-intensive enterprise, as it connotes the provision of state resources to monitor respect for these rights and to prosecute offenders if necessary,” and so their loophole is the pursuit of minimal state intervention.

The New Labour government of 1997 continued the Conservative Party’s prior engagement with neoliberalism. New Labour arguably adopted a softer version of laissez-faire economics, “that of a social democratic government trying to govern in a neoliberal direction while maintaining its rtraditional working-class and public-sector middle-class support”. Nevertheless, employment laws enacted in this period, such as the Fairness at Work (White Paper) did not change the “power imbalance inherent in the employment relationship” associated with the Conservative’s reduction of trade union influence. The 2004 amendment of the Employment Relations Act 1999 secured the supremacy of employers over trade unions. While this may seem to demonstrate a case of significant state intervention in employment relations, it also highlights a case of subtle but impactful empowerment of employers. This naturally means a reduction in the regulations which contain this potentially abusable power, and in turn insecurity for workers.

Neoliberalism and Tax Cuts

Donald Trump’s tax bill is estimated to significantly increase income inequality in the US. While Trump is not described as a member of the neoliberal establishment and in fact this description is more fitting to Hillary Clinton, his tax bill is characteristically very supportive of neoliberal market logic. Most Americans will get a tax cut, but the wealthy will benefit disproportionately. According to the Tax Policy Center, those making over $307,900 a year will have the proportion of their after-tax income increase significantly more thank those making less than them. Central to Trump’s bill is the significant corporate tax cut from 35 percent to 21 percent. Such cuts constitute an extreme level of limited government and have serious implications for those who realise that regulating the capital accumulation of corporations will directly impact the labour force. Corporations will be using these sharp cuts to award their most wealthy employees, further widening wealth inequality across the US through yet another neoliberal measure to award the rich for being rich.

This is not to say that the top earners have not always benefited disproportionately from neoliberal tax plans. Reagan’s tax bills revolved around his preference of minimal interference with the market economy. His idea was to elicit faster growth and minimise inflation, but it was realised that the plans in fact increased trade and budget deficits. Most importantly, reports show that both the US and the UK between 1976 and 1990 saw dramatic increases in household wealth inequality. It was reported that in both countries, wealth inequality remained relatively constant from 1973 to 1979 and then increased sharply between 1979 and 1983. The accelerated rate of income inequality which coincides with the beginning of the first terms of both Reagan and Thatcher can be said to be a result of welfare state reduction policies enacted by these administrations, in addition to the US recession in the 1980s. Further, Britain’s homelessness crisis unfolded in the late 1980s after almost a decade of Thatcher’s free-market policy. “As the Conservative government of 1979-1983 embarked upon a radical restructuring of the British space-economy, the British labour market showed the first signs of growing income and occupational polarisation”. Such political and social disturbances can be concluded to be a result of neoliberal monetary policy. The correlations between the implementation of such measures and various cases of increased wealth inequality and economic upset is clear.

The State as an Enabler

It is somewhat paradoxical that neoliberalism claims to favour universal minimal state intervention in the economy when, in fact, the industries of liberal capitalist economics often desperately require state support. Perhaps it is more accurate to to argue that neoliberalism prefers to manipulate state interference, whereby it only intervenes at the desire of the corporate elite. Konings demonstrates that taxpayer money will often go towards bailing out exploitative businesses, claiming that “massive amounts of public funds have shielded financial elites from experiencing the consequences of bad bets while ordinary people are suffering the full effects of the crisis”. It is unfortunate that by no choice of their own, the taxpaying populace, including the labour force of over-powerful businesses see their earnings put towards the protection of the very companies that are failing them. Based on the interests of the elites leading the neoliberal governments, it is their tax policy that decides to prioritise corporate profit.

The implementation of free trade policy in numerous neoliberal states has been extremely complimentary to globalisation over the past thirty years. This has in turn of course increased corporate revenue and thus corporate power. As Harvey writes, “states collectively seek and negotiate the reduction of barriers to movement of capital across borders and the opening of markets to global exchange”. The various social implications of free trade agreements, particularly for workers, is discussed by Baker in his paper on the relationship between trade and inequality. In the cases of the US removing tariffs and trade barriers with developing countries, “the expected outcome would be a decline in the relative price of less-educated labor…and an increase in the relative price of more educated labor,” in other words a direct increase of wage inequality will occur, as the gains from free trade increase. States deciding to remove their own ability to control the trade flows in and out of their countries constitutes the government using its own power to enable the market economy to run uninterrupted. The state, by cutting corporate tax so fiercely and by enabling free trade, is essentially allowing big businesses, who are the disproportionate beneficiaries of such measures, to conduct their production in the most profitable way possible, regardless of labour rights and financial controls.

Globalisation has allowed for the expansion of the neoliberal agenda. Western neoliberal governments severely exploit the desperation of poorly treated workers in under-developed countries. “What neoliberals aspired to, both in rich countries where their ideology emerged and in the developing world, was a weak State that allowed national economies to become a playing field for large corporations”. This has been achieved by some measures, and since the 1980s further increased all types of social inequality and resulted in numerous financial crises. Minimal state intervention in the economy has meant less scrutiny of influential financial bodies, which are in positions to take advantage of their political authority. This is certainly utilised, and economic liberalisation, such as reduction of tariffs and general open trade conclusively correlates with reduced worker protection. Neoliberalism unequivocally goes against the arguably most important priorities of political action - combatting wealth inequality as well as other forms of social injustice. To do so it is necessary in the context of government intervention that the state uses its power to universally scrutinise private institutions in order to uphold protection of workers, which expands to encompass protection of equality measures.

Thatcher followed the neoliberal idea that competition is the defining feature of human relations. This is a character consistent with corporate exploitation of low labour costs, particularly in under-developed countries. Both Thatcher and Reagan entirely embraced these trends centred around the principle of minimal state intervention, allowing for the long-lasting triumph of the free market.

The individualism that neoliberalism encourages assumes that unemployment is the fault of the unemployed, and more generally, “the victim is all too often blamed.” As an ideology, neoliberalism sits in a position somewhat contrary to the maintenance of democracy. As Gamble writes, “the welfare state has proved a remarkably difficult structure to dismantle, certainly within the constraints of democracy…welfare programmes are part of the ransom capital has to pay in order to be protected;” however, this seems to have been avoided by state minimisation. Following a strict neoliberal agenda inevitably involves the sacrifice of democratic protection of the politically vulnerable. This is primarily why, in practice, neoliberalism presents economic and social difficulties which, in theory, may not be apparent and result in inefficient security provision to individuals.

Ultimately, neoliberalism is a tool to protect the rich. Intentional restriction of undeniably positive state protection measures is the most efficient way to ensure that the elites, who are in such a position due to deregulated capital flow, and therefore accumulate huge corporate profit, retain their financial power. Their financial interests are so well protected in neoliberal states because these governments are made up of the same elites in the same fortunate economic positions; positions they will retain if their enterprises remain unchecked and exploitative. 

Now Reading
Neoliberalism and Minimal State Intervention
Read Next
Help Save Our Oceans