Neo-Liberal Capitalism
/September 1st 2020
Richard Larmour at UCT’s Department of Electrical Engineering has asked me to answer the following question put by a student to a course for 4th year engineering students called New Venture Planning. The course, I understand, is being taught by Leen Remmelzwaal, who read for my graduate IPE course at UCT some years back.
“Do you believe that we are in the late stages of neo-liberal capitalism? If so, what does that mean for contemporary entrepreneurship?”
In order to address this question, we first have to define what is meant by ‘neo-liberal capitalism’, or if we follow the precepts laid down by Giovanni Sartori, we should venture to define what ‘neo-liberal capitalism’ is not. Is the concept, in fact a non-falsifiable proposition? I think the term today can mean most things to most people, and thus it is difficult to define. Let’s start by unpacking some of the core ideas that have underpinned liberalism or neo-liberalism over the years.
When we think of neo-liberalism today, we might equate the term with ‘economic conservatism’, identified by free-market capitalism, deregulation, austerity or globalization. Politically we may argue that neo-liberalism has taken on aspects of Karl Popper’s ‘Open Society’ equated today with the essential conditions of human dignity, freedom, justice or education. The above, perhaps, may be a snapshot of the definition of the term today, but how did we get there?
I have purposely posted this reply on my blog, which I have not visited for four years. I have done so as below there is an outline of an undergraduate course on IPE. I wrote up a treatment there on Liberalism, which you may find useful, and also posted some material on the intellectual arguments between Friedrich Hayek and John Milton Keynes for my graduate students, arguments that I feel defined the post WWII Bretton Woods system that still holds a modicum of sway over our intellectual environment today.
What is the historical course that has led us to this concept of ‘neo-liberalism’? If we think of ‘Liberalism’ today, we think of active state intervention, which is completely at odds with the original Liberal ideas espoused by Adam Smith and David Ricardo. Smith argued explicitly against the mercantilist impulse that state power, or state intervention, is used to create wealth. For Smith, the individual freedom of the marketplace represented the best alternative to abusive state power, or state intervention. His thinking was epitomised in the phrase laissez faire or let it be.
In contrast, John Maynard Keynes envisioned a liberal international system of open markets and free trade, but within that system he opined that individual nations would be able to undertake the sorts of domestic policies that Keynes advocated for moderating inflation, controlling unemployment, and encouraging economic growth. In other words, the state had a fairly important macro-economic role within each nation, but free markets were intended to dominate relations between nations. In a nutshell, the state had a fairly important macro-economic role within each nation, while free markets were intended to dominate relations between nations. The key to Bretton Woods was the notion of ‘embedded liberalism’, coined by John Ruggie, where nation states operated under a modicum of free trade, but with fixed exchange rates and capital controls. As a result, states could control their domestic markets through fiscal and monetary policy, but still manage to push the Ricardian ideal of free trade.
Friedrich Hayek vehemently opposed Keynes, arguing that state interventionist policies in any form distorted the market, ultimately leading to inflation and ruin. In his book, The Road to Serfdom, written in 1944, Hayek opined that state control undermined individual liberty, a concept that resonated with Popper. Hayek’s principles were later taken up by Milton Friedman, who had an enormous influence on Margret Thatcher and her avid disciple, Ronald Reagan. Thus we must understand that neo-liberalism today is not remotely connected to the ideas of Keynes, and this causes all kinds of confusion. Neo-liberalism is certainly not modern-day Liberalism.
If we fast forward to today, we see a world that has fundamentally changed over the past few months as a result of the Covid 19 pandemic. As a result, we have to ask ourselves if the old economic and political arguments still apply, or whether the world will return to a pre-Covid existence once the pandemic is shooed away by a successful vaccine. Even if we agree for the purpose of argument that the world will return to a pre-Covid existence, what form will that world take both economically and politically?
There are a number of impulses that I wish to address that inform the economic scholarship in general today. We could argue that these impulses have resulted in a fundamental change away from the ‘conservative’ laissez fare economic policies that formally underpinned the European Union’s approach to economic regionalism, or the Conservative Party’s austerity programme in the United Kingdom that held sway until Boris Johnson ascended to its leadership. What we now see are examples of a populist Trumpian economics that have put America first in the United States, the spectacular rise of nationalism under Matteo Salvini, in Italy, Radical Economic Transformation being mooted by a faction of the ANC, and many others. What informs these new impulses? What is leading to the change other than the obvious argument that it is the impact Covid 19?
First and foremost, we have to understand the implications that have devolved, particularly in the West, or the developed world, from globalization. We find ourselves in a world that Thomas Piketty has defined as ‘economically unequal’. In effect globalization has sucked manufacturing jobs from western economies, creating a new economic underclass that feels ‘left behind’. Added to the problem of inequality, we must also understand that neo-liberalism, since the crash of 2008, has advocated policies of austerity, which have profoundly impacted on the social fabric of society around the world. Mark Blyth, an eminent economist from the United States, addressed this issue in his book Austerity: The History of a Dangerous Idea, head on, and more recently, we should take note of Mariana Mazzucato, who in the Entrepreneurial State: Debunking Public vs. Private Sector Myths, challenged the entire neo-liberal concept by arguing that large IT corporations in fact owed their very existence to state entrepreneurial activity. When reading these three authors, the arguments espoused by economists who support neo-liberalism are left in tatters. Thus the very notion that neo-liberalism is still an ideology in play is now contested.
Economic policy that advocates change away from inequality, austerity, and non-intervention by the state can be seen as changing the political landscape in many countries. We must understand furthermore that politics will ultimately trump economics. I argue this point explicitly as the example of the ‘left-behind’ economic underclass plays directly into what we refer politically to as ‘identity’. Another minefield, but let me just point out that identity has been encapsulated by Benedict Anderson as an ‘imagined community’, a concept that has resulted in the rise of nationalism once again.
If I may digress, if we analyse the Euro for one minute, we can argue that it is deflationary. If we compare the deflation occurring in the EU to the problems that occurred in the world economic system under the Gold Standard, we can understand immediately why the European Union is experiencing a world of no growth. Gustav Cassel explained as early as 1920 how a nation may get into a depression as a result of deflation due to tight monetary policy, but his ideas simply have not found traction within the EU, which is experiencing the same economic problems due to its programme of austerity together with the deflationary impulse of the Euro. As a result, we have seen a push back, first from Great Britain in the form of Brexit, but now with increasing momentum from the European states of Italy, France Greece, and Spain. Identity politics, leading to a new nationalism, based on the hollowing out of the manufacturing middle classes is fuelling political movements that back the far right. The governing elites simply cannot continue as they are. State intervention and Keynesian economics or some form of the two are back, and the world is now beyond any perceived late stages of a neo-liberal capitalism.
What does this mean for contemporary entrepreneurship? The answer: that depends. An analysis of contemporary entrepreneurship will turn on a belief on how the market is evolving. Is the world following the ideas of Hayek or Keynes? Is the state now poised to intervene once again or will the policies of non-intervention, austerity and globalization continue without change? One thing is certain, capital will migrate to the richest pastures, following Schumpeter’s notion of ‘creative destruction’. Given that there is ultimately a limit to the amount of capital available worldwide, investors possessing the freedom of capital mobility will, in their normal course of their capital allocation activities, generally prefer the attractions of the new and the still-to-be-known over the complications of the old and the already well-known. If the allocation of knowledge is also assumed to be part of contemporary entrepreneurship, then investment in knowledge and growth will determine through competition where entrepreneurial capital will graze in the future.
Where change may be fundamentally different, however, lies in the argument that Smith’s ‘invisible hand’ may no longer simply be the hand of the rugged individual promoting his own commercial gain, but a state endeavour that ultimately promotes the entire nation through its entrepreneurial intervention, whether through innovation from its universities, or the commercial acumen of its companies, where if prevailing thought takes hold, it will invest.
