Topic Paper 1
October 8, 2014
I have neither given or received nor have I tolerated others’ use of unauthorized aid.
Introduction to the neoliberalism
Neoliberalism inherits and extends the classical liberal economic theory, which advocates liberalization, privatization, marketization and globalization. In terms of finance, neoliberalism believed in the “efficient market hypothesis”, in which the financial market could produce economic problems. Neoliberalism advocates to reduce government intervention and control, promoting free trade and international capital to be unlimited and free flowing as much as possible.
Explain how neoliberalism differs from classical and neoclassical market models
“‘Neoliberalism’ is a rather broad and general concept referring to an economic model or ‘paradigm’ that rose to prominence in the 1980s. Built upon the classical liberal ideal of the self-regulating market, neoliberalism comes in several strands and variations. Perhaps the best way to conceptualize neoliberalism is to think of it as three intertwined manifestations: (1) an ideology; (2) a model of governance; (3) a policy package” (Steger & Roy, 2010, p. 11).
First, ideology explains the complicity of the political world, and a clearer picture of the world as it is and makes claims to legitimize a certain political interest to challenge and /or to defend certain dominant power structures.
Second, neoliberalism refers to certain modes of governance within particular premises, logics, and power relations. Neoliberalism government is rooted from entrepreneurial values and competitiveness, self-interest, and decentralization.
Finally, public policies refer to the D.L.P. formula, which refers to deregulation, liberalization and privatization. These in turn offer massive tax cuts, reductions of social services and welfare programmes.
Compared with the neoliberalism model, classical economics highlights national interests rather than private interests. According to the book, International Political Economy, classical economists believe that people want to pursue their own interests, so goods are traded to meet demand. The government only needs to protect the country’s interests. The market is an invisible hand that adjusts the balance of the output and income” (Miller, 2008, p. 9).
According to the division of labor and the demand of the market, people produced more goods. Therefore, with the increase of market’s transaction the economy also increases, which can change the market conditions to produce more economic benefits. At the same time, if people want to satisfy their own demands, the market will produce more products to consumers, but the problem is that if wages do not increase, people do not have enough money to purchase the goods As a result, economy would fall, which influences market benefit. Due to problems of the wages must also increase to meet market demand, the neoclassical economy appeared. Neoclassical economics is more complex than classical economics. The economists provide a number of assumptions that are disputed by some due to their failure to represent realistic situations.
The neoclassical model makes three important predictions. The first prediction involves the assumption that people will be more productive if given more capital, hence the prediction that increasing capital relative to labor promotes economic growth. The second prediction is that economies of poorer countries with lower per capita GDP will grow faster. This prediction is based on the assumption that each investment in capital produces higher returns in poor countries than in rich countries. The third prediction is that economies will eventually cease to grow due to diminishing returns to capital, thus leading to a steady-state economy.
Four impacts of neoliberalism on global economics through the Washington Consensus
Since the 1980’s, neoliberalism has controlled the world economy, then comes the "Washington Consensus" which…