From the early-1980s, much of the western world began turning to neoliberalism – a faith in free markets and smaller government. The collapse of the Soviet Union by the end of that decade confirmed neoliberalism as the dominant economic philosophy. But neoliberalism is now dead. Who killed neoliberalism and what will replace it?
It all seemed so clear back then. In 1992, Francis Fukuyama declared the end of history, with western liberal democracy having prevailed over central planning.
Yet, just nine years later, China signed up to the rules-based global trading system by joining the World Trade Organization (WTO). China rose to rival the US as the world’s largest economy, effectively ending any unipolarity.
Ronald Reagan and Margaret Thatcher were neoliberalism’s leading advocates.
In Australia, Bob Hawke, Paul Keating and their cabinets sought to create competitive markets as the pathway to prosperity. But their model was not neoliberalism. While competitive markets could create prosperity, Hawke and Keating knew markets alone could not spread it to the disadvantaged.
Instead, they used government regulation and institutions to ensure prosperity was shared fairly. They provided universal health care through Medicare, increased income support for poor families, doubled the proportion of young people finishing high school and opened the gates of universities to underprivileged students.
Keating created a superannuation system to provide security in retirement for working people.
Tony Blair rejected Thatcher’s neoliberalism and adopted the Hawke-Keating model, calling it the Third Way.
Globally, neoliberalism fell to its knees in 2007, struck down by the Global Financial Crisis and the ensuing Great Recession of 2008-09. Financial giants collapsed, giving governments little choice but to bail them out with bucketloads of taxpayers’ money.
In 2016, newly elected American president, Donald Trump, administered the last rites with his reversion to protectionism. The US, the birthplace of neoliberalism, became its graveyard.
Trump’s successor, Joe Biden, is maintaining the tariffs against China. On the sidelines of the recent APEC meeting, the US unilaterally dumped the trade pillar of the Indo Pacific Economic Framework (IPEF), which it launched only last year.
IPEF was conceived as a substitute for the Obama Administration’s pursuit of the Trans-Pacific Partnership as America’s pivot into Asia, but which presidential candidates Hillary Clinton and Donald Trump abandoned during the 2016 presidential campaign.
With next year’s presidential election to be decided in six swing states where, according to polling, Trump leads Biden, don’t expect any early return to trade liberalisation.
The Republican Tea Party represented the last vestiges of neoliberalist small government. Nowadays, US federal government deficits are nudging 6 per cent of GDP, rising in each pre-pandemic year of the Trump presidency.
Where did neoliberalist theory and practice go so horribly wrong?
Governments that put their faith in markets forgot one word – competition.
Drawing on the works of Adam Smith almost 250 years ago, 21st century neoliberalists advocated competitive markets. Smith had observed that merchants seldom got together, even for a piss-up at the local boozer, without the conversation soon turning to how they might collude in a “conspiracy against the publick.”
While businesses in competitive markets are ever mindful of the need to keep prices and costs down, provide quality service and innovate, oligopolies and monopolies are under far less pressure to do so.
Political parties, too, stand to benefit from tolerating or even creating concentrated markets.
Donations flow when governments assure donor corporations that they will not confront the menace of competition.
Governments privatising business enterprises have been attracted to offering protection to the prospectively privatised entity to maximise the sales proceeds.
On the human side, governments have neglected to support those who lost from the opening of their industries to competition.
In the US Rustbelt States, manufacturing plants collapsed when exposed to international competition through tariff reductions, leaving their workers unemployed as governments failed to provide financial compensation and retraining.
This failure helps explain why Trump’s pledge to make America great again was so attractive to low-income working-class voters in 2016 and why he remains favoured by them.
It also goes a long way in explaining the strong support for Brexit among the same voting cohort in Britain, whose architects came up with the idea that Britain was better off selling into a small domestic market than a big European one.
In Australia, a similar demographic is being targeted for votes by the Coalition, promising to keep out migrants who might compete for their jobs in what it describes as Labor’s “Big Australia”.
The Albanese government can build on the open, competitive model by reinvigorating competition policy, pressing ahead with an integrated university-training scheme, better schooling and further policies for gender equality. And it might consider using instant asset write-off for company tax purposes to encourage much-needed new investment.
The APEC leaders’ statement committed their economies to a return next year to the WTO’s rules-based trading system, including a revived dispute-settling system. In an American election year, with Trump spooking the Biden administration with his promise of even greater protectionism, that seems ambitious.
A new approach is needed, based on the Hawke-Keating model of open, competitive markets and the use of some of the proceeds from those markets to ensure prosperity is shared fairly.
In The Theory of Moral Sentiments, Adam Smith, a humanitarian, advocated public funding of a quality education for the children of poor parents. That would be a good starting point for post-neoliberalism across the western world.
Craig Emerson is managing director of Emerson Economics. He is Director of the APEC Study Centre at RMIT University, a visiting fellow at the ANU and an adjunct professor at Victoria University’s College of Business.