something happened A recent retrospective above The neoliberal wave That rocked the world in the last quarter of the 20th century. I would like to add the perspective of someone who lived through that era. Many things that seem obvious to us today, only seem so in retrospect:
- South Korea has a better economic model than North Korea.
- British government should not run auto manufacturing firms.
- Airfare should not be fixed by government officials.
- The tax rate on income should not exceed 90%.
These claims may seem obvious today, but they were not obvious when I entered college in 1973. For example, a 1967 CIA Report 14 years after the end of the Korean War suggests that North Korea was richer than South Korea. (true or falseThat was the perception.) The UK had a top tax rate of 98% on investment income.
It helps to look outside the US. The French refer to 1945-75 as “Les Trente Glorieuses,” three decades of stellar economic growth. And it wasn’t just France. Europe, Latin America and most of the Soviet bloc experienced very strong growth. There was no obvious need for reform.
Also remember that the Great Depression, WWII and the rise of socialist ideology pushed the world in a much more statist direction from 1929-1973. So this rapid growth was taking place under an economic model that rejected laissez-faire capitalist ideals.
After the mid-1970s, almost the entire world hit a wall. Growth has slowed almost everywhere. Voters were increasingly disillusioned.
But there was one important exception – the “tiger economy” of East Asia. Places like South Korea, Taiwan, Hong Kong, and Singapore experienced extremely rapid growth in RGDP between the mid-1970s and mid-1980s. Japan was no longer an outsider, no longer the only successful non-white economy. More and more economists are beginning to see East Asia’s export-oriented model as superior to Latin America’s import-substitution model. I remember reading Far Eastern Economic Review As a college student (yes, I had no life), and was deeply affected by what was being reported.
Today, some pundits (wrongly) suggest that places like South Korea grew because of statist policies. This is not true, and certainly was not understood in the 1970s. When I entered college, the South Korean alternative was not seen as the laissez-faire of Hong Kong, it was the statist economy of North Korea. And it was still not 100% clear which model was better.
Many things came together to create the neoliberal wave:
1. East Asia’s export-oriented low-tax economies grew much faster than other countries during 1975-85.
2. Voters became opposed to higher taxes where living standards stagnated.
3. Regulations were increasingly causing glaring inefficiencies in areas such as transport and finance
4. Western Europe has lost contact with America and has dropped below about 25% of our per capita GDP levels. Inefficient state-owned European firms were seen as part of the problem.
5. The communist economy begins to stagnate.
Once the neoliberal wave is gone, it feeds on itself. Places like Australia, New Zealand and Chile have done better after liberalisation. (Whenever I say “better,” I mean compared to other places—in the absolute sense there was little better than 1945-75.) Although neoliberalism is often associated with Ronald Reagan, the neoliberal wave was actually more pronounced outside the United States.
Free market ideologues such as Milton Friedman gained additional prestige for successfully predicting unrelated issues such as the unreliability of the Phillips curve model and the importance of monetary policy in controlling inflation. In fact, some on the left mistakenly conflate “monetarism” with “neoliberalism.”
The meaning of the term “economic reform” has changed. Before the 1970s, this meant an increased role for government. After the 1970s, this meant a reduced role for the government. In fact the term “neoliberalism” was necessary because in the 1970s many people (especially in America) began to associate liberalism with statism. In that case, what does it mean to “liberalize” an economy?
Brad DeLong suggests that the neoliberal era ended around 2010, which seems about right. But it is too early to have any perspective on these trends. Others have found that the neoliberal era had the opposite trend with regulations on housing, occupational licensing, and the environment. As always, it’s a very complicated picture.
You can write a 1000 word essay on the causes of neoliberalism or view a picture:
HT: Doug Irwin