A foot in neither camp.

Source: Hulton Archives/Getty Images

The Free Market Probably Isn't Making You Sick

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
Read More.
a | A

Neoliberalism is a common word in Europe that is slowly making its way across the Atlantic. Basically, it’s another name for free-market, laissez-faire ideology -- the “liberal” in the word comes from classical liberalism, which was the British term for what Americans might call libertarianism.

Anyway, neoliberalism has become a charged word -- a lightning rod for everything the left wants to push back against, both in Europe and in the U.S. British writer George Monbiot blames it for many of our current economic and social troubles:

It has played a major role in a remarkable variety of crises: the financial meltdown of 2007‑8, the offshoring of wealth and power, of which the Panama Papers offer us merely a glimpse, the slow collapse of public health and education, resurgent child poverty, the epidemic of loneliness, the collapse of ecosystems, the rise of Donald Trump…Among the results…are epidemics of self-harm, eating disorders, depression, loneliness, performance anxiety and social phobia.

This is a thesis that claims to explain a large number of recent social phenomena as outgrowths of one simple, underlying cause. Whenever I see an argument like that, I’m suspicious of it. Societies and economies are rarely that simple.

In recent years, we’ve begun to realize that the government-cutting revolution of the 1980s and 1990s went too far. Financial deregulation is the clearest example, because of the 2008 crisis. Free trade might be another -- economists are only now realizing how many American workers were hurt by Chinese import competition. The economics profession, which almost certainly ignored market failures too much in the past, is now scrambling to find alternatives to the simple laissez-faire message propagated by thinkers such as Milton Friedman and Friedrich Hayek in the past century. There is a broad realization that government is more important than those guys believed.

But that doesn’t mean that neoliberalism is a major cause of most of the woes Monbiot cites. For example, social isolation has been documented in the U.S. by, among others, political scientist Robert Putnam. But it isn’t at all clear what kind of economic philosophy, or government policy, could have prevented this development. Social isolation is also a big problem in Japan, which has largely resisted neoliberalism and maintained a corporatist state and dense, well-run cities. The same survey that supposedly ranked Britain as the “loneliness capital of Europe” actually ranked France and Denmark lower on one of its two key metrics, and Germany lower on the other. Are France, Denmark and Germany even more neoliberal than the U.K.? It seems unlikely.

So on casual inspection, how neoliberal a country is seems not that correlated with how lonely its people are. Careful research might reveal a correlation, but there are plenty of alternative hypotheses. Cars, suburban sprawl and the Internet tend to remove and isolate us from our immediate surroundings. The decline of agriculture caused the end of big families, and the multigeneration households of the past have become less appealing as society has become wealthier. These are not the bitter fruits of neoliberalism, but the natural alienation caused by changing technology. Many of the other problems Monbiot cites may also have similar, less sinister roots.

In addition to blaming neoliberalism for too many problems, Monbiot also ignores the possibility that neoliberal ideas might ever be needed. Financialization, for example, is now viewed as a negative thing. But is that always true, or did it simply go too far? What if the U.S. had never handed the reins of corporate capitalism to shareholders, activist investors, investment banks, buyout firms and the like?

The answer is that the country might look a little more like Japan. In that country, most finance is still done by big banks, which in turn are heavily regulated and backed by the government. The private-equity industry is a tiny shadow of what it is in the U.S. But Japanese corporations are also incredibly inefficient; productivity has been stagnant for decades now. A large productivity gap has opened between Japan and the more neoliberal West, especially the U.S. That stagnation is a major reason that Japan, which tries hard to maintain a corporate welfare state and full employment, is nevertheless now experiencing increased poverty and inequality to rival what is happening in more neoliberal countries.

Would a stronger, freer finance industry have helped Japanese companies keep up? There is empirical evidence that private-equity firms do boost productivity at the companies they buy. It’s possible that financialization and neoliberalism was a necessary tonic for corporate ossification in the U.S. in the late ’70s and ’80s. And it’s possible that by never swallowing the tonic, Japan made its own poor people worse off in the long run.

In other words, maybe neoliberalism can be good for poor and middle-class people in some situations, and bad in others. “It depends” isn’t a very satisfying black-and-white, all-or-nothing message, but it might just be the way reality works. Before we declare neoliberalism the arch-villain of modern times, we should remember that there’s no ideal economic system, and the best bet is likely to be a pragmatic mix of ideologies.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net