Relationship between Neoliberalism, Austrian school of economics and Chicago school of economics - Essay Example

? Relationship between Neoliberalism, Austrian school of economics and Chicago school of economics Introduction and historical viewpoints: Historically, different economic theorists have diversified opinions. Each prominent viewpoint is always provisional with time difference. After the Second World War, economic theories turned out to be more complicated, systematically applying more technical subjects and mathematical techniques. These developments have been accompanied by mathematical tools that gradually helped old contents to be converted into new theories. In this manner, traditionally, the meaning of basic terms also changed such as competition, markets, unemployment, etc. These developments have encouraged establishment of many theories. At the same time applicability of those theories became more prominent and global. Communication networks also became internationalized between economists and governments that have resulted in complex perceptions and harder applications. Although several schools have tried to retain national label like the Austrian school of economics, the latter has become international.1 Bearing this in mind, from the end of 19th century to the early of 20th century, classical economics was threatened by world economic issues. Principles of classical economics include laissez faire, limited government intervention, private property rights, freedom of the individuals, and minimal welfare provision, etc. However, classical economists have failed considerably to describe the causes of global financial and economic crises experienced by several economies in past many years. Classical economics have failed to explain the reasons for economic booms and busts. Unfortunately, this tendency of world economy relates back to the major recessions in 1873-75 and 1893-96 and stock market crash of 1929-30, which was well known terms as ‘The Great Depression’. During this time the unemployment rate reached to 25% in the United States2, and 30% in Germany.3 With application of the Keynesian economic theory, the world economy seemed to recover and indeed has experienced high growth with respect to some economic variables compared to ‘Washington Consensus period’. For instance, the average proportion of global growth in Keynesian period was higher than Washington Consensus period along with the unemployment rate which was lower compared to global status.4 The economic system was dominated by Keynesian theory from post Second World War till the seventies. It has been observed that during this time the primary goal for whole world was to develop each country’s economy, rather than repeating of the Great Depression.5 He observes that “the embedded liberalism that had delivered high rates of growth to at least the advanced capitalist countries after 1945 was clearly exhausted and no longer working.”6 Neoliberalism: On the other hand, when another global economic crisis came, there emerged different opinions which have shown perspectives against the Keynesian point of view. The term ‘neoliberalism’ was created by political opponents; however it is used by supporters with neoliberal policies.7 Neoliberalism means economic liberalism that focuses on the efficiency of the private ownership and control, liberalization of trade, promotion of open markets necessary to augment the growth path of globalization. Neo-liberalists claim that all kinds of central planning destroy personal freedom. Although the role of a government is to maintain the rule of law, government intervention leads to totalitarianism. Markets should maintain freedom and efficiency without any kind of government intervention. In other words, economic and social policies are driven by the market. The theories emphasize on private enterprise, independent trade, and open market for private sector. In the global level of economy, economic crisis chronically spread out at the end of 1970s and the downfall of the Communist philosophy towards the conclusive years of 1980s.These world trends led to reform policies in order to regenerate free market. Indeed, from the early 1980s, communist and socialist states adopted various neoliberal market reforms. During that time, low taxation, privatisation, and deregulation were suggested as ways for retrning to free market.8 Countries emphasised on supply which could compare the idea of Keynesianism. Fewer regulations led to more competitive and more efficient industry. Reagan noted that “government is not the solution to our problem; government is the problem.”9 This implies, individuals are responsible for their own decisions and well-being, without being dependent on governments’ role. Competitive capitalism is a major concern for minorities since public market services are required to protect people from being discriminated from several related and unrelated economic activities including productivity.10 However, an early neoliberal system was attempted in Chile with the conditions of a military dictatorship and heavy social control. Interesting point is that although Chile has objectionable context for implementation of economic liberty, they have one of the highest rate of GDP per capita that proves the fact than economic freedom is more important for prosperity than the presence of stricter democratic institutions. This economic freedom triggered to put force on the autocracy and hence on the political autonomy. Hayek argued that "Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends."11 However, there are opposite views arguing that globalization and liberalization could undermine states’ ability for self-determination. Neoliberalism increases productivity, however it could wear away the circumstances in which production takes place in the long term. Therefore, it is not maintainable within the world's restricted topographical space.12 Neo-liberal economics could endorse abuse of labor and labor power. Neo-liberal policies harvest disparity as a negative economic consequence. Some anti-corporate establishments consider that neoliberalism could change financial and administrative policies to encourage the control of corporations and big business houses. This is a move to help the upper classes more than the lower classes.13 Urban citizens are progressively disadvantaged with respect to the power to figure the basic situations of daily life.14 One might presume that deregulation of the labor market yields ‘flexibilization and casualization’ of labor, larger informal unemployment, and an extensive increase in business accidents and professional ailments.15 Furthermore, neoliberalism is referred as the "American Model," and according to some critics it promotes low wages and high inequality. Neo-liberal strategies have backed the U.S. economy where around one third of workers earn "low wages", and around 35 percent of the workforce is "underemployed". “Low wages” signify a smaller amount than two-thirds the median income for permanent workers. Merely 40% of the inhabitants who are in their working years are suitably working.16 The Center for Economic Policy Research (CEPR) has contended that the dynamic forces responsible for the rising disparity in the U.S. have been a sequence of thoughtful, neo-liberal policy choices comprising anti-inflationary unfairness, anti-unionism, and profiteering in the health industry.17However, nations have used neo-liberal strategies at changing levels of concentration; for example, the OECD (Organization for Economic Cooperation and Development) has intended that only 6% of Swedish labors are affected with wages it thinks to below, and that Swedish wages are in general lower owing to their absence of implementation of neo-liberal policies.18 CEPR’s scholars have examined the influence of concentrated Anglo-American neo-liberal policies in contrast to mainland European neoliberalism. These scholars have argued that, "The U.S. economic and social model is associated with substantial levels of social exclusion, including high levels of income inequality, high relative and absolute poverty rates, poor and unequal educational outcomes, poor health outcomes, and high rates of crime and incarceration. At the same time, the available evidence provides little support for the view that U.S.-style labor-market flexibility dramatically improves labor-market outcomes. Despite popular prejudices to the contrary, the U.S. economy consistently affords a lower level of economic mobility than all the continental European countries for which data is available.”19 The Chicago school: The Chicago school of economics also emphasizes on intervention free form of market and economy. The proponents of this school of thought have rejected regulation in free-markets and advocated the benefits of laissez-faire. In other words, Chicago school of economics has banned Keynesianism and has marked their approval for monetarism. This school of economics has largely applied the rational expectation hypotheses in various fields of economics. They have successfully applied this concept in financial economics that contributed to the production of efficient market hypothesis. In this context, Kaufman observed: “A deep commitment to rigorous scholarship and open academic debate, an uncompromising belief in the usefulness and insight of neoclassical price theory, and a normative position that favors and promotes economic liberalism and free markets.”20 This school of economic thought refers to 1950’s economists teaching at the University of Chicago and they frequently discussed several outlooks of economic issues, such as price theory. Although Chicago school was located in the academic arena as another pillar of economic theory, it was considered to lie outside the mainstream of economic theory because of popularity of the Keynesian economy. In one of their arguments it was mentioned that laissez-faire policy is more desirable than government-led policy in the economy. Friedman argued, “One of the great mistakes is to judge policies and programs by their intentions rather than their results.”21 That is, government’s aim needs to be pointed out to the position that should be neutral about monetary policy towards the long-term prospect of economic growth. He also claims that generally prices are decided by using the quantity theory of money so that easy credit or tax or spending policies could have unplanned negative effects. He wrote, “There is likely to be a lag between the need for action and government recognition of the need; a further lag between recognition of the need for action and the taking of action; and a still further lag between the action and its effects.”22 The Chicago school and Neoliberalism: On the other hand, there are claims regarding economists’ agreement that “Washington Consensus” was not complete or “disappointing”.23 The countries in Latin America will require going past the initial period of macroeconomic and trading reforms and launch some programs in order for maintenance of the poor. The Chicago school favors unencumbered free markets and small government interventions that came under attack during the financial crisis of 2007.24 Opponents have also claimed that Chicago school observes in terms of human rationality leading to bubbles in various fields. One of the principles of this school stating that market self-regulation has no protection for the economy, has become a debatable issue following the crisis.25 After Keynesianism, the neoliberal theories brought about many changes in the world economy; some experts argue that there were obvious and unmistakable changes in the past thirty years.26 That is, international trade and flows of capital from country to country have increased remarkably. It also explains that trade barriers are eliminated. In public sector, employment downturns during this period compared to the Keynesianism period. Government or public owned enterprises are denationalized. The sharing of states’ economic wealth from the top layer to the bottom ones actually took place.27 In terms of reduction of government intervention, this period has shown marked changes compared to past. Government spending reduction took place as a short-term as well as long-term phenomenon during the 1990s in many countries of the world. Friedman claimed that economic freedom is a basic condition of political freedom while it is an important factor of total freedom. Political control always occurred during centralized control of economic actions. In his viewpoint, the intended characteristics of all businesses in a free market are threats to political leaders that reduce power to coerce. When national control over economic activities is eliminated, economic power can be detached from political control and hence both of them can keep the balance. The Austrian school of economics: On the other hand, the Austrian School of Economics is known as an unorthodox school.28According to this school, methodological uniqueness is the way of understanding economic progress. The theory focuses on the non-neutrality of money that describes the economy’s capital structure is based on heterogeneous goods which have multi-specific uses that are needed to be aligned. The consolidating power of the price instrument is the main focus of this school. Austrian economists are supporters of laissez faire strategies.29 Generally, mainstream scholars implement mathematical replica and numerical approaches in order to assess economic actions. Austrian economists argued that exact mathematical models and statistics are untrustworthy ways of examining and challenging economic theory as a replacement for following the process of derivation of economic theory from basic human actions. Additionally, although both experimental investigation and natural trials are implemented in main economics, Austrian economists disagreed about the viability in economics and specific mathematical model in a market are not practically possible. They also claimed that demonstrating in a market, intense on human actors cannot be placed in a lab-setting atmosphere without altering their future activities. However, proponents of this school hold that economic theory cam apply forms of market actions to investigate and check They performed many trials which are expected to produce useful information about individual preferences.30 Austrian economists consider that induction cannot guarantee likewise deduction, as real world financial statistics are integrally vague and subject to an assembly of impacts which cannot be detached or enumerated. Austrian economists therefore claimed that mainstream economics has no way of confirming cause-and-effect in practical economic proceedings, since financial data can be connected to manifold potential fetters of causation.31 Major economists pledge that conclusions that can be attained by pure rational inferences are incomplete and feeble.32 Economists detected that such rejection of empirical confirmation in economics has steered the Austrian School to be laid off inside mainstream economics.33 Uncertainty and the utility of "conventional" financial models raised by Austrian school economists, who argued for an essentially different method of risk evaluation in economics from that implemented by conventional economics. They contended that mathematically correct "probabilities" could not be allocated to "singular" cases. The usefulness and correctness of financial modeling is a continuous source of discussion, even inside the Austrian School.34Also they contended that the presentation of probabilistic uncertainty would necessitate the aptitude to exactly imitate accurately similar actions to get an accurate perception of the range of probabilistic results of any occurrence, and this is not possible in actual marketplaces, where past market proceedings closely affect the current and the future. Something that most noticeably makes the Austrian school vary from neoclassical economics is the view regarding the market structure and its functioning.35 Austrian economists have often misinterpreted contemporary economics, leading them to exaggerate their variances with it. For example, many Austrian economists are against the use of cardinal utility in microeconomic theory; however, microeconomic theorists give great efforts to show that their consequences hold for all severely monotonic alterations of utility, and this holds for the purely ordinal preferences.36 The outcome is that conclusions about utility preferences are valid irrespective of what values are allotted to them. Austrian economics usually have no scientific rigor, discards the systematic method, and castoffs the usage of experiential data.37 Moreover, Austrian school of economics has supported a refusal of scientific methods which comprise direct use of experiential data in the expansion of falsifiable theories. Application of experimental data is central to the scientific technique.38 Austrians claim that empirical data independently cannot clarify anything, which in turn suggests that experiential data cannot invalidate a theory. Austrian school economists have rejected empirical statistical approaches, natural trials and created experiments as apparatuses appropriate to economics, saying that while it is suitable to the natural sciences where factors can be quarantined in laboratory situations, the actions of humans are too multifaceted for such a conduct because humans are not inert and non-adaptive subjects. As Herbener noted, "there are no statistical characteristics to human behavior. It is purposeful rather than random, and changeable rather than constant".39Austrian economists state that one should detach the rational developments of human action.40 Austrian philosophies are not obtainable in scientific form; advocates rely mostly on verbal debates based on what are claimed to be obvious axioms. Murray Rothbard has contended that the scientific technique of the natural sciences is not appropriate to the social sciences, and has forbidden any effort towards use of mathematics in the study of economics, referring it a form of "scientism". Conventional economists consider that this makes Austrian theories too roughly defined to explicate or forecast real world happenings. Paul Krugman has stated that because Austrians do not use "explicit models" they are ignorant of holes in their own philosophy.41 The Austrian school and Neo-classical economics: The Austrian and neoclassical schools of economics are alike in numerous ways. The main part of argument between neoclassical economics and the Austrian school of economics lies in their opinion of the market system as a procedure. It should not be considered using equilibrium models, but also to be observed as a never-ending development. This process inclines toward a continually altering point of stability. A second area of dispute between neoclassical theory and the Austrian school is over the likelihood of customers being neutral between choices. The neoclassical theory declares it is possible, whereas Mises overruled it as “impossible to observe in practice.” Utility functions are ordinal, and not cardinal; that is, the Austrian school economists argue that an individual can merely grade preferences and is not able to assess their concentration.42 The Austrian School discards any neoclassical consequences that are founded on cardinal utility and critiques conventional economics for allegedly adopting cardinality,43 despite the fact that neoclassical economists have revealed that their effort is valid for ordinal preferences also44. Methodology: Methodology is the area where Austrian economists differ considerably from other schools of economic views. Conventional schools like Keynesians and Monetarists assume experiential, mathematical, and numerical approaches, and emphasize on training in order to build and test theories. Austrian economists discard experiential or numerical approaches, ordinary and created experiments as apparatus appropriate to the financial side, saying that while these are appropriate in the natural sciences where influences can be secluded in laboratory conditions, the actions of humans are too multifaceted for such a conduct because humans are active and non-adaptive subjects. Herbener has noted "there are no statistical characteristics to human behavior. It is purposeful rather than random and changeable rather than constant".45Austrian economists have suggested that one should separate the logical procedures of human action. Mises referred this stream as "praxeology.”46 The Austrian praxeological method is founded on the substantial use of rational inference from what they proclaim to be irrefutable, obvious axioms or indisputable truths about human presence.47 If performance takes place correctly, reasoning is preferred to initiation in understanding economic developments. It leads to certain conclusions that must be true if the fundamental expectations are proved to be accurate. Conclusion: The Chicago school of economics focused mainly on the need for minimal government intervention and proposed for the laissez-faire policies. These economists have argued against the effectiveness of government-driven economic policies. But these views came under serious attack after the advent of global economic slowdown of 2007. In this time the severe need for active government intervention was felt all over the world. On the contrary, the policy of Neoliberalism focused mainly of the active prevalence of free-market system in the economy. This was free from any kind of government intervention. The Austrian school, on the other hand, has argued in favor of the active use of the empirical data that includes the human action at the right scale and at the right dimension of making economic policies more effective. This school also supported the laissez-faire policies, but in the different dimension regarding the analytical concepts and uses of economic policies compared to the Chicago school. It then can be said that the Austrian school of economics is more positively related with the concept of neoliberalism that is more concerned with the advocacy of the laissez-faire policies. On the other hand, the Chicago school of economics focuses more on rational expectation hypothesis that is more concerned with the active and efficient government intervention in providing all the information at the right time to all the decision makers so that they can take rational decisions. References: 1. Roger E. Backhouse, ‘The Penguin History of Economics’, (2002),England: Penguin books, pp.306-308 2. Joseph Swanson andSamuel Williamson,(1972), ’Estimates of national product and income for the United States economy, 1919–1941’.Explorations in Economic History,10: 53–73 3. Public Broadcasting Service (PBS) < http://www.pbs.org/wgbh/commandingheights/lo/countries/de/de_economic.html> accessed December 6, 2011 4. Robert Skidelsky (2009). ‘Keynes: The return of the Master’, Allen Lane, pp. 116, 126 5. David Harvey (2005),‘A Brief History of Neoliberalism’, USA: Oxford University Press 6. Jeremy Shearmur, (1992), ‘In defence of neoliberalism’, Journal of Democracy 3(3), pp.75-81 7. 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