Political Economy After Neoliberalism

If anything could have dislodged the neoliberal doctrine of freeing the market from the government, you might have expected the coronavirus pandemic to do the trick. Of course, the same was said about the global financial crisis, which was supposed to transform everything from macroeconomic policy to financial regulation and the social safety net.

Now we are facing a particularly horrifying moment, defined by the triple shock of the Trump presidency, the pandemic, and the economic disasters that followed from it. Perhaps these—if combined with a change in power in the upcoming election—could offer a historic window of opportunity. Perhaps. But seizing the opportunity will require a new kind of political-economic thinking. Instead of starting from a stylized view of how the world ought to work, we should consider what policies have proved effective in different societies experiencing similar challenges. This comparative way of thinking increases the menu of options and may suggest novel solutions to our problems that lie outside the narrow theoretical assumptions of market-fundamentalist neoliberalism.

Neoliberalism implies a one-size-fits-all set of policy solutions: less government and more market, as if the “free market” were a single equilibrium. To the contrary, we know that there have been multiple paths to economic growth and multiple solutions to economic crises in different societies. By recognizing that there is not one single path to good outcomes, that real-world markets are complex human constructions—governed in different places by different laws, practices, and norms—we open up the possibility that policies that seem objectionable in light of neoliberal abstractions may deliver high performance along both social and economic dimensions. 

We know about these possibilities from the work of economic sociologists, who stress the political, cultural, and social embedding of real-world markets. From work in comparative political economy, demonstrating how the relationships between government and industry and among firms, banks, and unions vary from one country to another. From political and economic geographers, who place regional economies in their spatial contexts and natural environments. From economic historians, who explore the transformation of the institutions of capitalism over time. From an emergent Law and Political Economy (LPE) movement that aspires to shift priorities from efficiency to power, from neutrality to equality, and from apolitical governance to democracy. And from economists—often villainized as the agents of neoliberalism—who are exploring novel approaches to the problem of inequality and the slowdown in productivity, and show renewed concern with the economic dominance of a few large firms.

The challenge is to bring these insights together.

As a step in this direction, we will propose three core principles of an alternative political economy. We then illustrate these principles by discussing the dynamics of the American political economy, focusing particularly on the rise of “shareholder capitalism” in the 1980s. Finally, we apply the principles to the ongoing national policy responses to the COVID-19 pandemic, comparing the United States to Germany.

We recognize that these principles do not resolve the very real problem of the dominance of business in U.S. politics and the political gridlock produced by this configuration of power. Still, they point in new and urgent directions.

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First, then, governments and markets are co-constituted. Government regulation is not an intrusion into the market but rather a prerequisite for a functioning market economy. Critics of neoliberalism often make the case for government “intervention” in the market. But why refer to government action as intervention? The language of intervention implies that government action contaminates a market otherwise free of public action. To the contrary, the alternative to government action is not a perfect market, but rather real-world markets thoroughly sullied with collusion, fraud, imbalances of power, production of substandard or dangerous products, and prone to crises due to excessive risk-taking.

Likewise, critics of neoliberalism often adopt the fictional “free market” as a reference point even as they make the case for deviation from it. For example, they follow the standard practice of economists by identifying market failures and proposing solutions to those failures. To be fair, this can be a useful way to see how government action can remedy specific problems, and to assess when action may be helpful or not. But this approach also risks obscuring the fact that market failure is the rule and not the exception. More fundamentally, the government is not a repair technician for a market economy that functions reasonably well, but rather the master craftsperson of market infrastructure.

Thus, governments pacify a territory and centralize the means of violence, making investment safer and trade less precarious. They create ways to write and enforce contracts via the rule of law. They provide public goods like education and transport infrastructure. No neoliberal denies the value of these things.

Beyond these basic functions, governments establish the conditions for the emergence of new markets, provide the architecture to stabilize existing ones, and manage crises to limit damage and facilitate recovery. Historically, governments fostered many of the largest markets, such housing and banking, by designing new market structures that enabled the mass expansion of goods and services. In the case of the housing market, the U.S. federal government created the 30-year fixed interest rate mortgage as the standard mortgage product. It also stabilized the savings and loan industry by creating rules about paying interest on bank accounts and deposit insurance.

In the postwar era, this system helped propel home ownership from around 40 percent to 64 percent. More recently, many policy failures, such as the financial crisis of 2007–2009, occurred because governments shirked their role of making markets work through “deregulation.” Essentially, the U.S. government allowed financial institutions to enter whichever businesses they liked and with little oversight. In the wake of the Great Recession, predictably, the government re-established control and oversight over the banking sector with the Dodd-Frank Act. One of the provisions of that act was to give the Federal Reserve the ability to ask the largest banks to undergo stress tests every year to determine whether or not they could manage a serious downturn.

Governments also support knowledge creation and dissemination and underwrite the cost of innovation in the private sector. They facilitate the organization of market activity by establishing the legal basis for corporations and by setting the rules for fair and efficient trading practices on stock exchanges. A political economy that does not value the role of government along these different dimensions distorts how markets do contribute to society.

by Neil Fligstein and Steven Vogel, Boston Review | Read more:
Image: Timothy A. Clary/AFP via Getty Images
[ed. See also: Trump’s America Remains Stuck in the Shadow of Reagan (Boston Review):

But in the end, Trump’s most enduring deformation of U.S. political life may derive from his slavish devotion to unchecked corporate power and his work in further consolidating power in the hands of a few billionaires. As Christian Lorentzen recently wrote in Bookforum, the Republican Party under Trump should primarily be understood as “an electoral entity that reliably obtains tax cuts for the wealthy, deregulation for big business, increased budgets for the military, and little of anything else for anyone else.”