MICHAEL KEATING. Why Blame Neo-Liberal Economics?

The claim is frequently made that neo-liberal economic policies are responsible for an increase in inequality. However, no supporting analysis is ever offered to sustain such claims; the obvious reason being because they reflect the author’s imagination and prejudices.

In the introduction to a recent posting on this blog the claim was made that ‘governments internationally have allowed neo-liberal economics to undermine social equity today, with most of the spoils going to the privileged few’ (Bishop Vincent Long, posted 23 June 2017). Of course, if this were the only such claim I would not bother replying.  Many such claims have, however, been made over what is now quite a long period, and none of them ever seem to be accompanied by any serious analysis.

For a start, what is the evidence linking neo-liberalism with increasing inequality?  Indeed, what exactly is there about neo-liberalism that it inevitably leads to more inequality? Surely those who seek to blame neo-liberalism for the increase in inequality should feel some obligation to answer these questions, but that never actually occurs. So, in this brief article I will endeavour to set the record straight about the causes of the increase in inequality and the role of neo-liberal economic policies over the last thirty years.

First, one thing we are all agreed upon is that the evidence published by the OECD (and others) clearly shows that inequality has risen in most advanced economies since the early 1980s. Furthermore, the evidence shows that the increase in inequality over the last thirty years has been greatest in the US, which is the most market-liberal economy. But the evidence also shows that the other countries that have experienced the biggest increase in inequality are Finland, Germany, Luxembourg and New Zealand, with the Scandinavian countries not far behind in the extent to which inequality has risen there too. And of course, most of these countries would not be considered forerunners in the adoption of neo-liberal economic policies.

In addition, and just to complete the picture, the same evidence shows that income inequality has not risen much in Australia; indeed, by less than almost all other developed economies, but the critics of neo-liberalism in Australia seem to be blissfully unaware of such facts.

In short, a coincidence does not prove causation[1], and in this case there is not even a compelling coincidence between the increase in inequality and the adoption of so-called neo-liberal economic policies.  Instead, of neo-liberalism, the vast majority of independent experts, who have studied the evidence, have concluded that technological change has been the principal driver of the increased inequality observed over the last thirty years. Technological change has particularly impacted middle-level jobs and has thus hollowed out the workforce, which then shows up as an increase in inequality. To a much lesser extent globalisation has also played a role, and an increase in rent seeking is responsible for much of the huge increases in the share of people in the “top 1%” of the income distribution. But that begs the question of why the members of this top 1% could access such rents, and that comes back to the role of neo-liberal economic policies.

Speaking as someone who was engaged in the provision of much of the official economic advice to the Hawke and Keating Governments, I am sure that all involved thought that the purpose of the economic reforms of that era were intended to make the economy more competitive, productive and flexible. Increasing competition was the best way to reduce the opportunities for rent seeking, but where monopolies continued it was agreed that regulation should also continue, irrespective of ownership.

Importantly, none of the principal people involved thought the reforms would make the economy less equitable, and as summarised above there is no evidence that they did, with technological change accounting for most of the increase in inequality in Australia.  Instead, what these so-called ‘neo-liberal’ economic reforms made possible was the more than a quarter of a century of economic growth, involving large increases in employment and wages, which is about the best recorded, both in our history and relative to other developed countries.

My gripe is that the critics of neo-liberalism now want to throw away these achievements in the mistaken belief that somehow (still to be explained) that will improve equality.  But instead of offering any proof based on an examination of the evidence, we are asked to take these nostrums on trust.

In truth, these populists from what is often a ‘Leftist Elite’ are no different from the populists from the Right.  The right-wing populists blame foreigners for our problems, and the left-wing populists blame markets. They are not so very different. Both rely on their convictions rather than evidence. Both would do enormous damage to the principal drivers of economic growth and therefore to jobs and incomes. Both right-wing populists and left-wing populists should equally be resisted.

Nevertheless, as both the IMF and the OECD have been saying for some time, inequality is bad for economic growth, and governments can make a difference. Furthermore, the way forward to improved equality involves more government intervention, but not a return to the past. Instead, future government intervention should aim to help people adapt to the inevitable changes being brought about by increased technology; not shutting the gates to progress.

Michael Keating, AC was the Secretary of the Departments of Employment and Industrial Relations, Finance, and Prime Minister and Cabinet from 1983 to 1996. The ideas summarised above are more fully developed in a forthcoming book, co-authored with Professor Stephen Bell, Fair Share: Competing Claims and Australia’s Economic Future.

[1] If Bishop Long were interested he might like to reflect on the statistical finding that there was a very strong correlation between the length of the Archbishop of Canterbury’s sermons on a Sunday and the number of deaths in the Boer War in the following week.

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david gray

Michael Keating, I was disappointed and even angry that your defence of neoliberal economics conflated so many things, including what “neoliberal” has come to mean. Few would argue with the desirability of opening up our economy to the world as happened with your input in the Hawke/Keating era. However, your short piece has generated a rich and diverse discussion which contains some real gems, worth thinking about at length. Stephen Tardrew’s comments drew in some really insightful and pertinent (crossover) ideas about evolution and the way human rationality/irrationality actually work. Paul Frijters made extensive comments I am going to reflect… Read more »

Dog's Breakfast

So many eminent minds here, I can hardly add value. Thanks to those who have responded to question some of the weaknesses in Michael’s article. I thought pretty much everyone was starting to get on board, but this reads as a rearguard action defending the indefensible. That is not to denigrate much of the opening up of the economy under Keating and Hawke. So many others have said all that I was thinking. Don’t under-estimate just how unequal the Australian economy is now. That worries me, I’m doing quite well but I don’t sit high up the mountain thinking how… Read more »

Jim Coombs

Just read Tony Judt’s “I’ll Fares The Land”, Michael.

Not sure why you’d recommend that to a non-believer. Do you think it is written to persuade people who don’t agree with it’s perspective?

Bruce

The biggest flaw in neoliberal economic theory is the concept of a free market. That, in the world of mass capital, is a fairy tale. A free market assumes that an individual can compete on a level playing field. Ask anyone who has tried to run a small to medium sized business “competing” against capital. It is akin to Tonga going to war against the United States. As the owner of a series of small businesses and as an investor in the share market for over a decade so called level playing fields are economic mumbo jumbo. If you can… Read more »

Stephen Tardrew

Very much an insiders point of view conditioned by an entrenched paradigm that has not demonstrated near enough flexibility or self-criticism. Taking the middle road is in fact a cop out because it ignores the fact that economics is not a science and is riddled with opinion and attempts to map mathematics onto the model rather than the other way around re: Steve Keen, Prof Bill Mitchell, Warren Mosler, Stephanie Kelton in fact the whole school of heterodox economists who have formulated a non disruptive transitional economic model more suited to the facts of a fiat economy rather than hangover… Read more »

Jennifer Meyer-Smith

Well said, Stephen

Peter Lynch

I take issue with some of Dr Keating’s assertions. Firstly, he may be right that inequality in Australia is not as bad as in some other countries, but it is still egregious. It is at a level that recent research shows cannot be good for the economy, let alone for society. Secondly, while much good came from the Hawke/Keating reforms, a loosening of the reins on the market allowed some major distortions to develop. One of the worst has been the growth in monopolies and semi-monopolies in areas such as banking, telcos and retailing. Thirdly, reduced regulation has seen an… Read more »

Jennifer Meyer-Smith

Hear, hear, Peter Lynch.

John Bushell

To some extent Michael Keating is correct – the neo liberals have hidden much of the increased in inequality behind “commercial in confidence” screens. For example borrowing for privatised infrastructure costs about 10% per annum, whereas government borrowing for provision of this infrastructure would cost about 2.5% p.a. Consider a person living in the Eastern Suburbs of Sydney who can travel locally and to the CBD without road tolls. Move to the Western Suburbs and you have to pay for the roads you use, particularly to access city jobs. In the last census Wentworth in the Eastern Suburbs had the… Read more »

Wayne J McMillan

Hi Michael, I hope you read all the thought provoking responses to your excellent article. They represent a broad set of observations across the economic political divide that no thinking person could ignore. It has left me with some serious food for thought. Thank you for stimulating an interesting discussion.
Best Wishes
Wayne J McMillan

Thanks Paul,

Completely beats me why you needed the maths to see the cost or magnitude of rent seeking within organisations. I can’t see your maths, but I believe your argument.

Graham Jones

I must say I was surprised by this article being authored by Michael Keating. It may be a rather shallow but I would have hoped that even a devout economic rationalist was not so blinkered or naive. Keating’s understanding of ‘neoliberalism’ is obviously limited – the neoliberal ideology believes that competition is the defining characteristic of the polity where citizens are redefined as consumers. Prescriptions flowing from this market fetish include, for example, minimising government, expansionary austerity, trickle-down economics, passive fiscal policy, tax and regulation should be minimised, public services should be privatised etc etc. If Keating spent more time… Read more »

paul frijters

Hi Michael, I am agreed with you that in principle, pro-market economics is not antithetical to a quite equitable society. I also agree that the label ‘neoliberalism’ for those riling against inequality is poorly chosen for a variety of reasons. At the end of this reply I regurgitate a remark I made a few days before to the same issue elsewhere on this blog. But I do have two gripes with your general assertions about inequality. The first is whether inequality has gone up and the associated claim that the US is the most liberal market economy we have (which… Read more »

Jennifer Meyer-Smith

Hear, hear, Paul Frijters.

Thanks for the post Michael, and I hope you can join the discussion below. The debate seems to be remaining comfortably ideological with Mike not admitting quite a few of the big things the ALP government did that promoted inequality. Cutting the top marginal rate, introducing 15% flat taxes on what is now $2 trillion of savings and introducing dividend imputation which is very strongly regressive and disgorges over $20 billion in capital tax revenue foregone without lowering the cost of capital (quite a feat I’d say!) But there were Brian Howe’s great achievements in the packages behind the words… Read more »

Peter Walsh

Usual a big fan of Michael’s writings. But here he might have usefully defined his own boundaries for “neo-liberalism” – the scope of the term is obviously contested. Its also a turn-off when anyone references a conclusion of “the vast majority of independent experts” without some supportive sources. If neo-liberalism just means faith in the free market (setting aside the idea of privileging economic over social and environmental lines). Then there is an obvious link to globalisation. Isnt it reasonable to conclude that neoliberalism brought down trade (and other) barriers at various scales and thus caused globalisation. There are indeed… Read more »

Christopher Sheil

With respect Michael, you seem rather ‘blissfully unaware’ of the literature yourself. Notwithstanding some ambiguity about what you mean by ‘neoliberal’ economics, there is a rather well known book by Thomas Piketty that has argued that rising inequality is a function of unmediated orthodox microeconomics, summarised here: http://media.wix.com/ugd/b629ee_2d2a62b529e847e89942d5a3d3a58580.pdf That well known ‘elite lefty populist’, the deputy head of the IMF’s research department, Jonathan Ostry, has also published some biting critiques of ‘neoliberal’ economics and its inequality effects. Here’s a short one for starters: https://www.imf.org/external/pubs/ft/fandd/2016/06/pdf/ostry.pdf As for Australia, you will apparently be surprised to find the growing level of inequality revealed… Read more »

Jon Stanford

Surely it is important here to distinguish between policies that increase the size of the economy and those that determine the distribution of the additional wealth that is created. It is difficult to sustain an argument that neoliberal, or market-based policies, are inimical to economic growth, which ultimately depends on productivity growth. Policy changes such as opening up the Australian economy and national competition policy, introduced largely by the Hawke and Keating governments, provided the basis for much higher productivity growth in Australia. So in simple terms those policies made the cake bigger than it otherwise would have been. But… Read more »

Here is one explanation for increasing inequality:
http://cooksourdough.blogspot.com.au/2016/10/the-great-economic-divide-explained.html
and there are many more here:
Game of Mates 2.5 min video

I liked both the content and the message of this essay, but I would have like a sentence or two about what exactly Mike meant by ‘neo-liberal’ Other commenters have used the lack of clarity here to push their own barrows. I agree with the author that we need to anticipate the adverse outcomes produced by technological change and help people adapt to them.

Rent seekers were mentioned but not elaborated upon. In the 80’s our essential services was in government hands and the public was sold the lie that corporations could fulfill the role of administering these essential services more efficiently and at a lower cost. One only has to see the disaster which is the electricity industry with private operators maximizing their profits and in so doing gouging the consumer. In effect the electricity consumer is paying a hell of a lot more than if it was in government hands. How much more the consumer is paying is a question that I’m… Read more »

eva cox

Were neoliberalism just focused on freeing markets, your comments may have some force, but you ignore the other changes it brought. Firstly, its basic assumptions are individualised, as homo economicus is a self interested rational being , and a customer not citizen. So our relationships, particularly with government changed as benefits were seen as individual , not communal or social. Secondly, the assumption that markets offer better services and value that public or welfare run services has resulted in privatising or marketising most once public and community services, thus adding to the distrust of government, as user pays grew. Thirdly,… Read more »

Greg Bailey

Eva has rightly pointed out that neoliberalism is a cultural system as well as a politico-economic system. It is predicated on individual choice, short term time frames (exacerbated by digital technology), competition and an absence of any cooperative ethic. The latter, in particular, is why it is necessary to have governments who will blunt the extremes of the large corporations who will always move towards monopoly situations as economic historians show us. When the economy began to be deregulated from 1983 onwards it benefited mainly those who already held large swathes of capital, not those who had none of it… Read more »

Wayne J McMillan

Excellent points Greg.

Tony Kevin

I am too focussed on other issues – opposing Cold War Redux- to seriously tackle Michael Keating’s interesting thesis ‘Why blame neo- liberal,economics?”. Let me just make a few quick points: Neoliberal economics might be the wrong words. If one replaces them by globalisation, the critique holds strong, as your first critical letter by Michael Lacey suggests. Why globalisation hurts ordinary people here as elsewhere , is because it surrenders power to a class ( the very rich owners and controllers of capital wealth) that has no national loyalty – the people who will close down a factory in their… Read more »

michael lacey

“Surely those who seek to blame neo-liberalism for the increase in inequality should feel some obligation to answer these questions!” # The creditor classes have banded together to create a market friendly revolution and they liberated finance, deregulated banks and integrated the economies of the world # Here’s the crunch they globalised labour such that labour could no longer demand that it gets its share of productivity, if you don’t do as you’re told I will just move your job somewhere else! # All those trade agreements that were signed under globalisation which was inevitable, you cannot role back! Just… Read more »