The Problem With Neoliberalism

Debating the role of the state in the economy.

Neoliberalism is an economic ideology centered around the free market that became widely prevalent in the late 20th century. Its basic philosophy is a laissez-faire approach to the economy, limiting state intervention as much as possible by advocating liberalization policies such as free trade, deregulation, and privatization. Although neoliberalism is often employed in a pejorative way, some of its tenets are generally viewed as beneficial, such as free trade agreements. But other aspects have received mixed criticism: privatizing healthcare or education is usually associated with high costs and failure to provide decent service to the middle and lower classes. Conversely, other sectors hold more successful stories, such as the airline industry, electricity, and telecommunications, where competitiveness can significantly drive prices down.

One of the core disagreements between neoliberals and other economists is whether state intervention is necessary to foster innovation. Neoliberals tend to view state intervention, like subsidies or regulation, as doing more harm than good because it creates perverse incentives and allocates resources less efficiently than markets do. The latter view state intervention as an inevitable force to correct market failures and negative externalities, such as pollution and monopolies. They generally express skepticism about the free market's capacity to regulate itself.

A commonly cited example in favor of private funding is the size of the U.S. tech industry, which is much larger than Europe's — considered the bastion of regulations. A counterexample is China’s heavily subsidized economy. Although central planning led by the Chinese government has shown some weakness — with an impending real estate crisis and a tech industry struggling to attract foreign investment, mainly due to concerns about authoritarianism

Moreover, the idea that the private market drives innovation was challenged in The Entrepreneurial State, a book by Mariana Mazzucato. The author argued that much of the United States' economic success resulted from state-funded investments. For example, Apple popularized government-funded technologies, such as GPS, touch screens, and voice recognition, in smartphones. Google's success essentially resulted from industrializing a search algorithm funded by the U.S. National Science Foundation. The book was published in 2013, and many things have happened since then, but I still believe the core argument is valid, considering that more recently successful companies like Tesla and SpaceX owe much of their success to government subsidies.

Neoliberals would likely refute this argument by claiming that:

1) Most of these technologies would have probably been discovered through private funding anyway.

2) Publicly funded success stories are essentially the result of selection bias. For every successful venture, there have been countless failures.

3) Markets are better at discovering what consumers actually want.

I believe that arguments one and two are mostly true. Given that government-sponsored failures are more costly than privately funded ones, the free market is generally a better approach for selecting champions. The third argument may have a valid premise, but it's misleading. A free-market economy may be conducive to addressing consumers' needs; what people want, however, is rarely what would be most beneficial for society in the long run. Very few people desired clean energy before it existed, which is why its development wasn't driven by market signals, but rather by government funding. One could argue that renewable energy would have been discovered naturally as fossil energy became scarce. However, I think this argument is rooted in flawed reasoning.

To be fair, depicting neoliberalism as merely a disguised version of market fundamentalism is a caricature, not an accurate representation. Most neoliberals would agree that some state funding, as in the case of basic research, is necessary, and that some industrial policies can be fruitful. The exclusive state versus exclusive private funding analogy is rarely debated because they both work hand in hand. Government intervention is often necessary for long-term, expensive projects that do not align with private funding investment horizons. High-speed rail networks are a good example, while in some cases they can become privatized — which was the case for the Shinkansen. On the other hand, markets generally do a great job of rapidly scaling existing technologies while providing incremental innovation. In many respects, neoliberalism is more useful as a way of considering government spending as bad but sometimes necessary rather than massively cutting public spending as an ultimate goal for prosperity.