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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Michael Keating is a former Secretary of the Departments of Prime Minister and Cabinet, Finance and Employment, and Industrial Relations.  He is presently a visiting fellow at the Australian National University. 

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