If only the neoliberals were really in charge

IT IS common to hear about the ascendancy of “neoliberal” economics. Many on the left use it as an explanation for the deregulation that they blame for causing the financial crisis. And some argue that it is the dominant school of thought within the economics profession. These are myths, and I want to challenge some of them based on evidence from one of the classic cases of supposed neoliberal epidemics – in Eastern Europe following the collapse of communism.

Firstly, critics have a tendency to conflate neoliberalism with neoclassical economics, which is the standard textbook fare. Note that neoclassical economics, far from believing that a free market allocation of goods and services is always the most efficient possible, has a rich theory of market failure, and few neoclassical economists are libertarians. Ideas such as asymmetric information, monopoly inefficiency and welfare economics are hardly imposed on a reluctant discipline by outsiders – they are part and parcel of Economics 101. By contrast, there are some economists that are genuine market fundamentalists – that believe privatisation is a matter of principle not efficiency, that there should be no government role in the provision of goods and services, and that neoclassical economics is in large part a socialist toolkit for central planning.

Yet in Eastern Europe there is little evidence of that sort of market fundamentalism determining policy. Organisations such as the World Bank and the IMF are not neoliberal in any meaningful sense, and even so their influence is often overstated. Other organisations dominated the transition process.

Indeed, the second main myth is that the process was imposed on reluctant locals by Western institutions. This is not only patronising, it is incorrect. For one thing, the advice of the Washington Consensus wasn’t as influential as people think. In many cases – such as the Russian hyperinflation – their advice to cut government spending was ignored. As Jeffrey Sachs said in an interview with the LA Times: “The advice that I gave: eliminate price controls, stop subsidies to loss-making state enterprises, make the currency convertible and open the economy to trade. This kind of economic medicine produced an end of hyperinflation and strong economic growth in Poland, Estonia, Slovenia and other economies that I advised. The same advice would have worked in Russia, but it was not followed.”

Where free market policies were followed, they weren’t necessarily imposed from outside. Estonia’s adoption of the flat tax was championed domestically by Mart Laar and was done against the advice of the IMF. Poland’s Balcerowicz Plan for its transition from communism to capitalism was not named after an American.

I went into more detail in my 2009 book, The Neoliberal Revolution in Eastern Europe, but that was written primarily for academics. Sadly, most commentators that talk about neoliberalism ignore the academic literature. But let me simplify it for them. If you want to know what I think of the rise of neoliberal economics, I’d reply as Gandhi did when asked what he thought of Western civilisation: I think it would be a good idea. If only it were true.

Anthony J. Evans is associate professor of

economics at London’s ESCP Europe Business School, and Fulbright scholar-in-residence at San Jose State University. www.anthonyjevans.com