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Theories of the state: Neoliberal

The philosophy of neoliberalism is usually considered as a modern alternate of classical economic liberalism. It is centred on a conviction in the self-regulating capacity of the market, and correlatively the need to restrict the scope of action of the state. These twin principles highlight two features of this ideological tradition: the antinomies of state and market on the one hand, and of politics and economics as their respective spheres of operation on the other.

Neoliberal thinkers desired to limit government, but the consequence of their policies has been a huge development in the power of the state. Liberalising the financial system left banks free to speculate, and they did so with reckless eagerness. The result was a build-up of toxic assets that endangered the entire banking system. The government was enforced to step in to save the system from self-destruction, but only at the cost of becoming itself hugely indebted. Consequently, the state has a greater stake in the financial system than it did in the time of Clement Attlee. Yet the government is unwilling to use its power, even to curb the gross bonuses that bankers are awarding themselves from public funds. The neoliberal financial government may have collapsed, but politicians continue to defer to the authority of the market. The role of the state in neoliberal theory is sensibly easy to describe. The practice of neoliberalization has developed in such a way as to depart significantly from the template that theory provides.

Neoliberalism was evolved by the German scholar Alexander Rüstow in 1938 at the Colloque Walter Lippmann (Neilson L and Harris B, 2008). The conference defined the concept of neoliberalism as involving "the priority of the price mechanism, free enterprise, the system of competition, and a strong and impartial state". To be "neoliberal" meant supporting a modern economic policy with state intervention (Javier Martínez, Alvaro Díaz, 1996). Neoliberal state interventionism brought a clash with the opposite laissez-faire camp of classical liberals, such as Ludwig von Mises (Jorg Guido Hulsman, 2012). Though, modern scholars tend to identify Friedrich Hayek, Milton Friedman, and Ayn Rand as the most important theorists of neoliberalism. Most researchers in the 1950s and 1960s assumed neoliberalism as referring to the social market economy and its principal economic theorists such as Eucken, Ropke, Rüstow, and Müller-Armack. Although, Hayek had intellectual bonds to the German neoliberals, his name was only occasionally mentioned in unification with neoliberalism during this period due to his more pro-free market stance.

Neoliberalism offered a dogma based on the inexorable truths of modern economics. However, despite its scientific trimmings, modern economics is not a scientific discipline but the rigorous explanation of a very specific social theory, which has become so extremely entrenched in western thought as to have established itself as no more than common sense, despite the fact that its fundamental assumptions are patently illogical. The basics of modern economics, and of the philosophy of neoliberalism explained by Adam Smith in his great work, The Wealth of Nations. Over the past two centuries, Smith’s opinions have been formalised and developed with greater analytical rigour, but the fundamental assumptions sustaining neoliberalism remain those proposed by Adam Smith.

Adam Smith set the foundations of neo-liberalism with his argument that free exchange was a transaction from which both parties necessarily benefited, since nobody would willingly engage in an exchange from which they would emerge worse off. As Milton Friedman indicated, neoliberalism rests on the “elementary proposition that both parties to an economic transaction benefit from it, provided the transaction is bilaterally voluntary and informed” (Friedman, 1962, p. 55). Subsequently, any restriction on the freedom of trade will reduce well-being by repudiating individuals the opportunity to improve their situation. Furthermore, Smith debated, the expansion of the market permitted increasing specialisation and so the development of the division of labour. The benefits gained through exchange were not advantages gained by one party at the expense of another. Exchange was the means by which the advantages gained through the increased division of labour were shared between the two parties to the exchange. The immediate implication of Smith’s squabble is that any obstacles to the freedom of exchange limit the development of the division of labour and so the growth of the wealth of the nation and the affluence of each and every one of its inhabitants.

During the past twenty years, the concept of neoliberalism has become widespread in some political and academic discussions. Numerous authors have even advocated that neoliberalism is the dominant ideology shaping our world today and that people live in an age of neoliberalism. Neoliberalism is a revitalisation of liberalism. This description proposes that liberalism, as a political ideology has been absent from political debates and policy-making for a period of time, only to emerge in more recent times in a revived form. It advises that liberalism has undergone a process of initial growth, intermediary decline, and finally a recent transformation. Alternatively, neoliberalism might be visualized as a distinct philosophy. In this interpretation, neoliberalism would share some historical roots and some of the basic vocabulary with liberalism in general. This interpretation puts neoliberalism in the same category as American neoconservatism, which is an ideology or political persuasion somewhat similar to and yet evidently different from much conventional conservative thought, and often hardly recognisable as a sincerely conservative ideology (Fukuyama 2006).

Saad-Filho and Johnston (2005:1) stated that “we live in the age of neoliberalism”. Along with the other authors of the book, Neoliberalism, A Critical Reader, they share the quite common, but not necessarily factually accurate, view that power and wealth are, to an ever increasing degree, concentrated within transnational corporations and elite groups, as a result of the practical implementation of an economic and political ideology they identify as neoliberalism. They further describe neoliberalism as “the dominant ideology shaping our world today”. But in spite of its supposedly overshadowing importance, Saad-Filho and Johnston explored “impossible to define neoliberalism purely theoretically”. Its foundations can be traced back to the classical liberalism supported by Adam Smith, and to the specific conception of man and society on which he founds his economic theories (Clarke 2005). In this perspective, neoliberalism is thought of as an entirely new paradigm for economic theory and policy-making the ideology behind the most recent stage in the development of capitalist society and at the same time a revitalisation of the economic theories of Smith and his intellectual heirs in the nineteenth century. This argument is continued by Palley (2005), who debates that a great reversal has taken place, where neoliberalism has replaced the economic theories of John Maynard Keynes (1936) and his followers.

Keynesianism, as it came to be called, was the dominant theoretical framework in economics and economic policy-making in the period between 1945 and 1970, but was then substituted by a more monetarist approach enthused by the theories and research of Milton Friedman (Friedman and Schwartz 1963). After that, it is believed that neoliberalism, i.e. monetarism and related theories, has dominated macroeconomic policy-making, as indicated by the tendency towards less severe state regulations on the economy, and greater emphasis on stability in economic policy instead of Keynesian goals such as full employment and the alleviation of hopeless poverty.

Munck (2005) upheld that the possibility of a self-regulating market is a core assumption in classical liberalism, and an important belief among neoliberals as well. Proper allocation of resources is significant purpose of an economic system, and the most efficient way to allocate resources goes through market mechanisms which Munck defines as neoliberal economic theories. Acts of intervention in the economy from government agencies are almost always disagreeable because intervention can weaken the logic of the marketplace, and thus reduce economic productivity. According to Munck, as the dominant philosophy shaping world today, neoliberalism wields great power over contemporary debates concerning improvements of international trade and the public sector. One is forced, either to take up a position against neoliberal reforms, or else contribute to their diffusion and entrenchment.

Historical review:

Modern literature advocates that neoliberalism is a new phenomenon, recorded usage of the term stretches back to end of the nineteenth century when it appeared in an article by the well-known French economist and central ideologue of the cooperative movement, Charles Gide (1898). In his article, which is mainly a polemic against the so-called neoliberal, Italian economist Maffeo Pantaleoni (1898), Gide suggests later usage of the term, where it is generally thought that neoliberalism is a reoccurrence to the classical liberal economic theories of Adam Smith and his followers. After Gide, others also adopted his concept, and usage is unpredictable, as different authors seem to accentuate different aspects of liberalism, when they define more recent contributions to liberal theory as neoliberal (Merriam 1938). The first book discover, which used the term neoliberalism in its title, is Jacques Cros’s doctoral thesis, “Le néo-libéralisme‘ et la révision du libéralisme” (Cros 1950). To Cros, neoliberalism is the political creed which resulted from a few efforts at reviving classical liberalism in the period immediately before and during World War II, by political theorists such as Wilhelm Röpke (1944; 1945) and Friedrich von Hayek (Hayek et al. 1935).

Main debate of Cros is that these neoliberals have sought to redefine liberalism by reverting to a more right-wing or laissez-faire stance on economic policy issues, compared to the modern, egalitarian of Beveridge and Keynes. Cros generally approve these neoliberals for speaking out against totalitarianism at a time when only few people did so, especially among intellectuals. He remains doubtful to their central thesis, common to most classical liberals, that individual liberty depends on there being a free-market economy, where the state has willingly given up its ability to control the economy for the good of society as a whole, or the interests of its own citizens.

After Cros, the concept of neoliberalism was used only infrequently, and then mainly to describe the situation in Germany, where it was occasionally used as a label for the ideology behind West Germany’s social market economy for which Ropke and other so-called ordoliberals served as central sources of inspiration (Friedrich 1955). Particularly, it is the German social theorist and Catholic theologian Edgar Nawroth (1961; 1962) who attempts, building in part on Cros, to focus his analyses of the political and economic developments of the Federal Republic around a concept of Neoliberalismus.

In Nawroth’s studies, attempt was made by the first two West German Chancellors, Konrad Adenauer and Ludwig Erhard, to combine a market economy with liberal democracy and some elements of Catholic social teachings which are labelled as neoliberalism and as a third way between fascism and communism. Nawroth remains sceptical to this rather eclectic ideology, and he is especially concerned by his insight that the open market economy motivates people to become acquisitive and self-centred, and hampering their moral development and abating the internal solidarity of German society. Briefly, Nawroth’s highly conservative critique of West German neoliberalism inaugurates a new tradition of using the term critically, even if he uses it to define an economic system which usually lacked the doctrinaire rigidity often related with neoliberalism in the critical literature in recent times.

Concept of neoliberalism described by Cros and Nawroth was gradually expanded to the rest of the world. In the decade of

1990, it gained the prevalence. It can be witnessed in the early stages of this movement in an article by the Belgian-American philosopher, Wilfried ver Eecke (1982), which indirectly is an attempt to expand Cros and Nawroth’s concept of neoliberalism to the English-speaking world. Ver Eecke used in his text the concept of neoliberalism to define German ordo-liberalism as well as American monetarism, which according to ver Eecke share a strong preference for a state which reserves for itself the right to intervene in the market only in order to maintain the market economy as such, for instance with the institution of anti-trust legislation and monetary policies solely intended at price stability. In his article, the concept of neoliberalism is seen in a more elaborate manner, compared to the expositions given by Cros and Nawroth.

Under ver Eecke’s understanding, neoliberalism is not an explanation of any kind of recent contributions to liberal theory, but rather a concept reserved for a particular kind of liberalism, which is marked by a radical commitment to laissez-faire economic strategies. Among the proponents of these policies, one finds more uncompromising classical liberals such as Mises and Hayek, monetarists and other economists bent on forming and preserving what they perceive of as free markets, such as Friedman, and finally also those libertarians whose much-repeated persistence on individual liberty issues in a demand for a minimal or practically non-existent state, like Nozick and Rothbard. David stand out as being one of the few who tries, in his A Brief History of Neoliberalism, to give the comprehensive definition of concept, which in part harks back to the analyses submitted by Cros, Nawroth and ver Eecke (Harvey 2005). His description illuminated on the phenomenon neoliberalism. This is explained as under:

“Neoliberalism is in the first instance a theory of political economic practices that proposes that human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterized by strong private property rights, free markets and free trade. The role of the state is to create and preserve an institutional framework appropriate to such practices. The state has to guarantee, for example, the quality and integrity of money. It must also set up those military, defence, police and legal structures and functions required to secure private property rights and to guarantee, by force if need be, the proper functioning of markets. Furthermore, if markets do not exist (in areas such as land, water, education, health care, social security, or environmental pollution) then they must be created, by state action if necessary. But beyond these tasks the state should not venture. State interventions in markets (once created) must be kept to a bare minimum because, according to the theory, the state cannot possibly possess enough information to second-guess market signals (prices) and because powerful interest groups will inevitably distort and bias state interventions (particularly in democracies) for their own benefit” (Harvey 2005:2).

Neoliberal political philosophy: To thoroughly study neoliberalism, from the perspective of normative, political theory originated by Anna-Maria Blomgren (1997). In a critical analysis of the political thought of Friedman, Nozick and Hayek, she defines their respective political and economic theories as representative of neoliberal political philosophy. Blomgren basic characterisations of neoliberalism overlay to a considerable degree with Harvey’s definition, but emphasise more evidently the internal diversity of neoliberal thought. This denotes, “Neoliberalism is commonly thought of as a political philosophy giving priority to individual freedom and the right to private property. It is not, however, the simple and homogeneous philosophy it might appear to be. It ranges over a wide expanse in regard to ethical foundations as well as to normative conclusions. At the one end of the line is anarcho-liberalism, arguing for a complete laissez-faire, and the abolishment of all government. At the other end is “classical liberalism”, demanding a government with functions exceeding those of the so-called night-watchman state (Blomgren 1997:224).

In vast literature, it is observed that neoliberalism is a loosely demarcated set of political beliefs which most conspicuously and prototypically include the belief that the only legitimate purpose of the state is to defend individual, especially commercial, liberty, as well as strong private property rights (Hayek 1979). This belief usually issues in a belief that the state ought to be minimal or at least considerably reduced in strength and size, and that any wrongdoing by the state beyond its sole legitimate purpose is unacceptable (Hayek 1979). These beliefs could apply to the international level as well, where a system of free markets and free trade ought to be executed as well; the only acceptable reason for regulating international trade is to protect the same kind of commercial liberty and the same kinds of strong property rights which ought to be realised on a national level (Friedman 2006). Neoliberalism also includes the belief that freely adopted market mechanisms is the optimal way of organising all exchanges of goods and services (Norberg 2001). It is believed that free markets and free trade will set free the creative potential and the business spirit which is built into the spontaneous order of any human society, and thereby lead to more individual liberty and well-being, and a more efficient allocation of resources (Hayek 1973).

Neoliberalism could also include a viewpoint on moral virtue. It is believed by thinkers that the good and virtuous person is one who is able to access the relevant markets and function as a competent actor in these markets. He or she is willing to accept the risks related with participating in free markets, and to adapt to rapid changes rising from such participation (Friedman 1980). Individuals are also visualized as being merely responsible for the consequences of the choices and decisions they freely make. Instances of inequality and blatant social injustice are morally acceptable, at least to the degree in which they could be seen as the result of freely made decisions (Nozick 1974). If a person demands that the state should control the market or make reparations to the unfortunate who has been caught at the losing end of a freely initiated market transaction, this is regarded as an sign that the person in question is morally immoral and underdeveloped, and scarcely different from a supporter of a totalitarian state (Mises 1962).

Neoliberalism becomes a slack set of ideas of how the relationship between the state and its external environment ought to be organised, and not a complete political philosophy (Malnes 1998). Actually, it is not assumed as a theory about how political processes ought to be organised at all. Neoliberalism is silent on the issue of whether or not there ought to be democracy and free exchanges of political ideas. Harvey (2005) designated that policies inspired by neoliberalism could be applied under the sponsorships of autocrats as well as within liberal democracies. In fact, neoliberals just claim that as much as possible ought to be left to the market or other processes which individuals freely choose to take part in, and subsequently that as little as possible to be subjected to genuinely political processes. Advocates of neoliberalism are often in the critical literature depicted as sceptics of democracy: if the democratic process slows down neoliberal transformations, or threatens individual and commercial liberty, which it sometimes does, then democracy ought to be avoided and replaced by the rule of experts or legal instruments designed for that purpose. The practical application of neoliberal policies will lead to a transfer of power from political to economic processes, from the state to markets and individuals, and finally from the legislature and executives authorities to the judiciary (Tranoy 2006).

Practically, neoliberalism has shaped a market state rather than a small state. Shrinking the state has proved politically impossible, so neoliberals have turned instead to using the state to reshape social institutions on the model of the market -a task that cannot be done by a small state. An increase in state power has always been the inner logic of neoliberalism, because, in order to introduce markets into every part of social life, a government needs to be highly invasive. Health, education and the arts are more controlled by the state than they were in the period of Labour collectivism. Autonomous institutions are intertwined in the machinery of government targets and incentives. The consequence of redesigning society on a market model has been to make the state ubiquitous.

Theoretical framework demonstrated that the neoliberal state should favour strong individual private property rights, the rule of law, and the institutions of freely functioning markets and free trade. These are the institutional arrangements considered essential to assure individual freedoms. The legal framework is that of freely negotiated contractual obligations between juridical individuals in the marketplace. The sanctity of contracts and the individual right to freedom of action, expression, and choice must be protected. The state must use its monopoly of the means of violence to preserve these freedoms at all costs. To expand the concept, the freedom of businesses and corporations to operate within this institutional framework of free markets and free trade is considered as a fundamental good. Private enterprise and business initiative are seen as the major factors to innovation and wealth creation. Intellectual property rights are protected so as to encourage technological changes. Constant increases in productivity should deliver higher living standards to everyone. Neoliberal theory holds that the elimination of poverty (both domestically and worldwide) can best be secured through free markets and free trade.

Neoliberals are not revolutionaries, who object to any kind of government, or libertarians, who want to limit the state to the provision of law and order and national defence. A neoliberal state can include a welfare state, but only of the most limited kind. For neoliberals, using the welfare state to realise an ideal of social justice is an abuse of power Social justice is an ambiguous and contested idea, and when governments try to realise it they compromise the rule of law and undermine individual freedom. The role of the state should be limited to safeguarding the free market and providing a minimum level of security against poverty.

The thinkers who helped shape neoliberal ideas are differing extensively among themselves on many vital issues. Oakeshott's scepticism has very little in common with Hayek's view of the market as the device of human progress, for example, or with Nozick's cult of individual rights.

It is debated that the neoliberal state is theoretically unstable. Others stated that social democracy is the only viable alternative. Neoconservatives have been among the loudest critics of neoliberalism. They debated that the unfettered market is amoral and destroys social consistency. A similar view has surfaced in British politics in Phillip Blond's "Red Toryism".

Inherent criticism can demonstrate that the neo­liberal theory of the state is internally conflicting. It cannot elaborate how these contradictions are to be resolved and in fact neoliberals who have become influenced that the minimal welfare state they favour is politically impossible and do not usually become social democrats. Most opt for a conservative welfare state, which aims to prepare people for the labour market rather than promoting any idea of social justice.

Neoliberalism has its strength to its philosophical appeal, but neoliberalism is not just an ideology, it purports to rest on the scientific foundations of modern liberal economics. Modern neoliberal economics is no less doctrinaire than its nineteenth century predecessor in resting on a set of simplistic assertions about the character of the market and the behaviour of market actors. The economist opponents of neoliberalism have constantly exposed how restrictive and unrealistic are the assumptions on which the neoliberal model is based. It is debated that the neoliberal model is impractical and somewhat to miss the point, since the neoliberal model does not purport so much to describe the world as it is, but the world as it should be. The point for neoliberalism is not to make a model that is more adequate to the real world, but to make the real world more passable to its model.

Appraisal of neoliberalism theory of state:

In this theory, there is positive contribution for endogenizing the state into development theory (rather than treating it as an exogenous factor). Neoliberal arguments are based on the assumption that minimization of the State will create the conditions of “perfect competition”. Generally the markets are prone to failures themselves such as tendency towards monopoly/oligopoly profits.

Prerequisites of perfect competition do not exist because society already has a class structure where equal access to knowledge and know-how does not exist; hence there is no equal grounds for fair competition. Consequently, gross inequalities in income distrinution or widespread poverty emerge as common outcomes. Even when competitive conditions exist, market may not provide the incentives for undertaking of necessary investments in infrastructure, social overhead capital (education and health system), technology R&D, etc.

To summarize, neoliberalism has flourished well in political economy, and as a result, become overextended to the point where pervasive concerns have been raised about its feasibility and relevance. Neoliberalism signifies a reaffirmation of the fundamental principles of the liberal political economy that was the principal political ideology of the nineteenth century in Britain and the United States. The arguments of political economy were based on intuition and statement rather than on rigorous analysis, but their strength rested on their political appeal rather than on their analytical rigour. Neoliberalism appeared as an ideological response to the crisis of the ‘Keynesian welfare state’, which was hastened by the generalised capitalist crisis related with the end of the post-war renewal boom and was brought to a head by the escalating cost of the US war against Vietnam at the beginning of the 1970s (Clarke 1988). The crisis revealed itself in a slowing of the pace of global capitalist accumulation, alongside rising inflation and a growing difficulty of financing government budget deficits, which forced governments to impose restrictive monetary policies and cut state expenditure plans.