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Classical and Neoliberalism in Global Economy Essay

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Updated: Jul 6th, 2021

Introduction

In the field of international finance and the global economy, the issue of government intervention in the business activities of organizations has always been an ambiguous aspect. Supporters of the classical principles for resolving these relations adhered to the position of removing restrictions from authorities and providing the freedom of financial activity to those companies that brought profit to the budget.

However, today, the concept of neoliberalism promoted in many states involves reassessing corporate opportunities and freedoms, which is the topic of discussions and protests among some of the companies involved. In order to evaluate the manifestations of both concepts, it is essential to analyze their key features and compare how their provisions and principles differ. Based on the examples of the activities of large international organizations, neoliberal influence will be examined from the perspective of economic impact. In the current context of global finance, the role of government in regulating cash flows and profits is significant, and sometimes, control approaches maintained by state boards are controversial and ambiguous.

Classical Liberal Economic System

The core of the classical liberal economic system includes several aspects. In particular, the founders of this theory promoted the contractual nature of the relationship between the government and business, the restriction of authorities’ intervention, and autonomy in the context of asset allocation. According to Baylis, Owens, and Smith (2017), classical liberal theorists considered this concept in relation to international organizations and noted that these corporations were able to maintain peace through the competent distribution of finances.

Over time, more features of the liberal economy began to emerge. For instance, Baylis et al. (2017) note a negative attitude towards the overgrown economic and social functions of the state as a component of classical theory. Such an assessment implies excluding mediation between companies and authorities and maintaining exclusively business interaction.

When comparing the theory of classical economic liberalism with modern approaches to the formation of the financial market, the unique features of the traditional concept may be distinguished. In particular, Stockhammer (2016) remarks that, in accordance with the initial practice, corporations were able to create markets and demand on their own, thereby controlling the specificity and volume of supply.

In its traditional form, classical liberalism reflects the idea that for a sustainable business, there is no need to involve governments in order to organize stable and productive monetary control. Markets can work better if they function independently of the state and its motives, and this idea is justified in view of the freedom to develop business prospects and engage any interested parties for cooperation.

Work in the financial sector involves interaction with authorities, but taxation is to be the only way of control from official boards. Thus, the contacts of international organizations with governments should be minimized in accordance with the concept under consideration. Regarding the relevance of this strategy to business sustainability, it is productive and stimulates the development of financial activities in the conditions of healthy competition, which does not contradict the norms of market interaction. In addition, fair conditions are promoted, and each of the market participants has an opportunity to develop a specific business freely and openly. Nevertheless, over time, classical liberal principles succumbed to new approaches that offered different conditions of government-organization interaction.

Nature of Neoliberalism

The current trend of economic globalization and involving numerous market participants to trade unions has become one of the factors that influenced the transformation of classical liberalism. As Blanton and Kegley (2016) argue, geopolitical principles play an essential role in the modern system of international finances, and the aspects of political power affect the economy significantly. As a result of these changes, the trend of neoliberalism has developed.

According to Baylis et al. (2017), this concept does not imply amendments in domestic financial practices solely but means “a process of fundamental structural change in the global political economy” (p. 259). In other words, neoliberalism is the idea of ​​converging a free market and a planned economy by enhancing government control. Despite the fact that this theory was designed to strengthen financial flows and regulate the economic activity of corporations to distribute resources equally, it caused mixed reactions from many stakeholders.

The idea of ​​moving to an updated cash flow control system is explained from different perspectives. Blanton and Kegley (2016) cite the position that numerous currency crises have led to the need to create more reliable mechanisms for coordinating financial activities. However, when analyzing the neoliberal approach to the economy, the integration of business and government structures can have a negative impact on market structure.

The distribution of income in accordance with state justice standards may violate the existing competitive trends promoted among organizations, thereby changing the system of budget revenues. Also, a decrease in inflation as one of the postulates of neoliberalism may be fraught with an increase in taxes levied on financial institutions, which, in turn, will affect their profits negatively (Baylis et al., 2017). These aspects are the reason to doubt the uncompromising benefits of the new economic trend and its relevance to the modern financial market.

Comparison of the Theories

When comparing the concepts of classical liberalism and neoliberalism, one can note that the latter theory is more controversial and ambiguous in relation to existing financial trends. Stockhammer (2016) states that neoliberalism, as a global movement, “has given rise to an unstable finance-dominated accumulation regime” (p. 365). A characteristic feature of the neoliberal practice is that economics and politics do not form two dimensions of social reality, which, being autonomous themselves, interact and intersect under the influence of globalization.

The neoliberal economic model may be considered the system that excludes the creative potential of markets and is designed to work solely to bring profit to the budget due to the constant interaction of governments with organizations. At the same time, as Baylis et al. (2017) note, this concept may be relevant in the context of economic globalization. The authors remark that governments often conflict with private financial institutions due to violations of business equity principles (Baylis et al., 2017). Accordingly, an updated liberal theory can stimulate closer contact between authorities and the financial sector in order to eliminate any biases and flaws.

Therefore, while comparing both economic models, it is crucial to note that classical liberalism offered more free conditions for the activities of international organizations. However, in the context of economic globalization, neoliberalism can help rule out illegitimate practices and establish fair market relations among stakeholders. Thus, the changes have become the consequences of reforming not only in a single area but in the global financial system as a whole.

Reasons for Heavy Government Intervention

The reasons for heavy government intervention in the economy are usually associated with the trend of globalization and the challenges of control over monetary funds. According to Blanton and Kegley (2016), “the speed and breadth of finance capital flow throughout the entire globe” are those factors that require addressing (p. 325). Based on the complexity of market participants’ interaction and, consequently, control difficulties, governments cannot allow the unauthorized establishment of rules and approaches to financial dynamics. In this regard, the practice of neoliberalism is promoted as a principle that may give authorities the opportunity to control all flows and, at the same time, benefit due to replenishing the budget.

Another possible reason is a steady increase in domestic debt and, as a result, searching for ways of involving organizations to help solve this problem. Stockhammer (2016) argues that in the USA, the principle of neoliberalism is a common practice in view of the presence of this problem in the state. Therefore, the reasons for government intervention are associated not only with the desire to equalize market possibilities and eliminate biases but also to solve the problems of domestic economies.

Areas for Government Intervention

Despite the fact that in its optimal form, neoliberalism presupposes market freedoms and the possibility of the independent regulation of financial flows, government interventions take place often. In particular, according to Blanton and Kegley (2016), exchange rate fluctuations are one of the reasons why authorities seek to control state monetary policies. The authors also note that the tax system is another economic sector in which interventions are observed (Blanton & Kegley, 2016).

Attempts to pay off public debts, reduce inflation, minimize social expenses, and other activities are reasons for the desire to control the amount of taxes from large companies and introduce individual practices of contributions. One of the possible manifestations of such an activity is an increase in taxes for those enterprises whose work is environmentally unsafe in order to cover the costs of disposal and prevent harmful environmental impacts. Such examples prove that government intervention in domestic economies is a common trend that is hard to avoid.

Promoting Neoliberal Principles

When assessing neoliberalism as a general concept, one can note that by resorting to this movement, governments seek to provide the freedom of choice and respect for individual human rights. However, in the context of the economic sector, this background is erased, and some controversial aspects are manifested. For instance, as Baylis et al. (2017) argue, states with a neoliberal approach to the economy strive not to preserve the existing order but to develop programs “to dismantle any remaining regulatory structures” (p. 472).

In other words, governments seek to monopolize or, at least, strengthen market leadership, which is expressed in the discontent of many business companies. Baylis et al. (2017) mention some principles that authorities follow in promoting neoliberalism, in particular, the privatization of public services, the abandonment of support programs, as well as “the deregulation of business” (p. 472). To implement their ideas, governments often use the services of some supranational organizations, and this approach proves the extreme interest of many states in promoting neoliberalism.

Regarding the involvement of international financial organizations as tools to maintain the policy of neoliberalism, condemnation is found among interested parties. For instance, according to Blanton and Kegley (2016), the International Monetary Fund (IMF) is often criticized for not being able to influence currency fluctuations, which may thus be beneficial to governments. Also, as the authors state, claims are made against the World Bank, the organization that is called to control global financial funds but is unable to resolve issues of imbalances (Blanton & Kegley, 2016).

The World Trade Organization (WTO), as one of the guarantors of compliance with a fair market economy, promotes the ideas of individual countries’ dominance, which contradicts the policy of equality (Baylis et al., 2017). Such criticism is justified since the inability or unwillingness to regulate financial flows and the relationships of market participants violates the idea of ​​a free economy.

As a result, the possibility of influencing and enforcing trends lies in the hands of individual governments of the former colonial states that impose neoliberal rules. Stockhammer (2016) notes that such countries as the United States, the United Kingdom, and some other WTO members subsidize their production, thereby violating the ideology of a free market. The outcome is the economic decline of the countries of South America, Africa, and other states that cannot compete with more developed market participants.

Stockhammer (2016) also cites the example of southern European countries and remarks that rising inflation and the loss of competition in the international arena are the consequences of a neoliberal propaganda policy. Thus, the promotion of this concept may have negative implications for countries with weak economies.

Significance of Anti-Neoliberal Globalization Protests

Protests against the neoliberal policies promoted by the governments of different countries are evidence of the dissatisfaction of the parties involved with economic changes. Actions in support of free business without the participation of state boards have often been held in recent years in different world cities, which proves the urgency of the problem. Quinn (2018) provides an example of student protests in Quebec in 2012, which drew attention to the issues of global neoliberalism. The author notes that people’s desire to influence international trends through local strikes may be productive and meaningful if protesters’ demands are sufficiently justified and legitimate (Quinn, 2018).

Based on the experience of other protesters in different cities (Montreal, Ontario, Washington, and others), Quebec residents raised the topic of labor opportunities in the context of government intervention in the activities of business organizations. The requirements to abolish strict control principles were based on people’s desire to work in large corporations that, in turn, could not promote their market policies due to government restrictions. As a result, the importance of such protests around the world lies in the controversial nature of economic neoliberalism and its implications.

Conclusion

The controversy and ambiguity of the neoliberal policy promoted by modern governments in the context of market globalization are due to state boards’ influence on the activities of business organizations. Compared to the classical concept, the renewed neoliberal trend allows for the regulation of markets through government intervention. State participation can be observed in the areas of taxation and monetary exchanges. As instruments of influence, supranational organizations (IMF, WTO, and the World Bank) are involved.

Neoliberalism in the financial sector is often criticized in different countries, and the states of southern regions with underdeveloped economies experience the greatest challenges due to the inability to compete in the market. World protests prove the importance of this topic and serve as the ways of attracting authorities’ attention to the negative implications of neoliberalism.

References

Baylis, J., Owens, P., & Smith, S. (Eds.). (2017). The globalization of world politics: An introduction to international relations (7th ed.). Oxford, UK: Oxford University Press.

Blanton, S. L., & Kegley, C. W. (2016). World politics: Trend and transformation, 2016-2017. Boston, MA: Cengage Learning.

Stockhammer, E. (2016). Neoliberal growth models, monetary union and the Euro crisis. A post-Keynesian perspective. New Political Economy, 21(4), 365-379. Web.

Quinn, H. E. (2018). My protest body: Encounters with effect, embodiment, and neoliberal political economy. New Proposals: Journal of Marxism and Interdisciplinary Inquiry, 9(2), 51-65.

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