Critiques of the Neoliberal

Development Policies

Lecture 5

Prof. Dr. Durmuş Özdemir Department of Economics

Yaşar University

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Critiques of the Neoliberal

Development Policies

• More than any other social science discipline, economics is unified by a dominant theoretical structure, highly developed, mathematically stated, scientifically conceived, thought and taught as truth, subject only to slight revisions and changes of emphasis with in academic and policy circles that reach into the highest echelons of power

• The main critical group is;

• Institutional Economics;– New Institutional economics

– Radical Institutionalism

Institutional economics• It is one such alternative, critical of the main stream, yet

preserving connections with it.

• Many institutional economics share the dominant notion of economics as the study of the efficient allocation of resources, but diverge on whether the market is the economy’s guiding mechanism.

• The real allocation mechanism, they say, is the structure of the society, which organizes markets as well as other institutions.

• Institutional economics has a broader interest than the conventional discipline, being concerned more with topics such as power, institutional complexes, individual and collective psychologies, the formation of knowledge in a world of radical indeterminacy and the relations between culture, income, and control of societies.

Critiques of Institutional School• 1) Neoclassical economics employs

methodological individualism, treating individuals as independenyt self-subsisting entities with inherent drives (pleasure/pain) and possesed of given utilitarian preferences, rather than as culturally formed (and culture-forming) sujects, even though analysing markets is clearly a case of methodological collectivism (i.e. Economics is the study of collective institutions)

• 2) the neoclassical quest (arama) for determinate optimal equilibrium solutions forecloses on real world processes that are indeterminate and far from optimal.

Critiques of Institutional School

(Cont.)

• 3) Neoclassical models are static in nature whereas economics are dynamic and evolutionary

• 4) neoclassicis’s analtical categories (i.e. İts mental representation of the world) result from formal, logical, and substantively empty abstractions that result in conservative formulations, positions that see institutional changes (in laws or the state) as undesirable interference in otherwise optimal laisses-faire solutions.

• 5) Neoclassical demand and supply theory channels analysis along presumptive, prefigured lines that loose contact with other aspects of real world processes.

Critiques of Institutional School

(cont.)

• Some instituonalists criticise both the

organization of market economies and the

economics of the pure market, while most are

more empirical, pragmatic, and open to

multidisciplinary approaches.

• Interactions between institutionalism and

keynesianism have produced a school of post

Keynesian economics dedicated to the solution

of real economic problems and the achievement

of a more just and equitable society.

Thorstein Veblen

• Most institutional thinking in economics

derives in some way from the work of

Thorstein Veblen and contains at least 2

main variants;

– New Institutional Economics

– Radical Institutional Economics

New Institutional Economics (NIE)

• ‘NIE builds on, modifies and extends neo-classical economic theory’ (D. C. North 1995, Nobel prize vinning economist)

• Institutions are socially devised constraints that structure human interactions.

• They are different from organizations, in that they are composed of formal rules, as with laws and regulations: informal conventions, for example, norms of behaviour and codes of conduct: and the enforcement characteristics or the circumstances that enable rules to have systematic effcets.

NIE

• By comparison, organizations are groups of individuals guided by institutions in their actions, as with political, economic, social, or educational bodies.

• The new institutional economics criticises the ‘instrumental rationality’ of neoclassical economics.

• This accepts values as given and constant postulates an objective description of the world, and assumes unlimited computational powers on the parts of decisionmakers.

• Under the conditions, only efficient markets matter, while institutions are unimportant.

NIE (Cont.)

• For the New Institutionalist, by comparison,

people have limited capacities to process

incomplete information: indeed, this is why,

according to this perspective, people construct

institutions to impose constraints on their

interactions to structure exchange.

• In conventional economic understanding, the

total costs of producing commodities consists of

LAND, LABOUR, CAPITAL used in transforming

the physical qualities of a good.

NIE (Cont.)

• The new institutional economics adds the transaction costs of institutions, as with the resources used in institutionally defining and enforcing property rights over goods which, it claims, make up 45% of the national income of the USA.

• For institutionalists, the optimizing results of neoclassical economic theory obtain only in an institution free environment where there are no transaction costs.

• An exchange process involving transaction cost implies significant modifications in economic theory and different implications for economic performance.

What difference does this make to

the theory of economic change?• (NORTH says 1995)An institutional/cognitive model of

development begins with the different experiences of social groups in different physical environments; the mental models and languages that define their institutional frameworks as they tackle fundamental economic problems of scarcity, exchange, and production; and the process of learning and cultural transmission that pass institutions through time and space.

• The application of modern scientific disciplines to technology and the relief of scarcity in the nineteenth century entailed immense transaction costs for coordinating and integrating economies, including the development of polity (country, nation, state) that would enact and enforce the ‘rules of the game’ for the conomy.

For North (1995)

• This suggests a ‘radically different development economics and system of policy prescription.

• Neoclassical development policies based on ‘getting the prices right’ work only when agents already have in place a set of property rights and institutions to enforce them.

• Economic development is based on the continious interaction of institutions and organizations in an economic setting of scarcity and competition, with competition forcing organizations to continually invest in skills and knowledge that shape perceptions about opportunities and choices that in turn incrementally alter institutions.

• This sets economies on certain paths of development in which key elements involve entrepreneurs learning about profitable opportunities.

NIE (cont.)

• For new institutionalists, the rate of learning determines the speed of economic change, while the kind of learning determines its direction.

• From North’s perspective, economic policy should therefore focus on the institutional framework of development.

• This turns out to be complex; for example, transfering the formal political and economic rules of one society (USA) to others (he mention Latin America but post communist Russia would be better example) is not sufficient for improving performance because the informal rules differ and the enforcement characteristics may not be in place.

NIE (cont.)• Thus privatization is not the universal panacea

(her derde deva) neoliberal claim it is.

• For North, the heart of development policy is the creation of policies that enforce efficient property rights; ‘long run economic growth entails the development of the rule of law and the protection of civil and political freedoms’.

• North concludes, Thre is no greater challange tahn forming a dynamic of social change that enables an understanding of an economy’s ‘adaptive efficiency’ by which he means a flexible institutional matrix that adjust to technical and demographic changes as well as to schocks to the system.

Radical Institutionalism (RI)

• Far more critical of teh economic statusquo than the NIE.

• Thorsten Veblen advocated fundamental change in capitalism in the direction of an egalitarian system founded on community control of the economy.

• Veblen saw history as absurd, as blind drift, rather than (as with Marx) as dialectical movement shaped by contradiction.

• Unlike Smith and Marx, Veblen did not see economies headed toward some kind of balance, equilibrium, or optimal state.

• For veblen, output was a communal product that should be distributed communally.

The Main Themes of Contemporary

Radical Institutionalism

• 1) The economy is a process of cumulative change rather than equilibrium.

• 2) Individual rationality results from socialization in the context of power relations and can be distorted.

• 3) Power and Status legitimacy

• 4) Equality is important

• 5) Based on Existantial philosophy

• 6) RI are untiestablishmentarian

• 7) RI is a radical paradigm

1) The economy is a process of cumulative

change rather than equilibrium.

• Cumulative change such as improvement, deterrioration, underdevelopment etc.

• i.e. Gunnar Myrdal (Sweedish Institutionalist), ‘Economic development is a process of circular and cumulative causation which tends to award its favours to those who are already well endoved and even to thwart the efforts of those who happen to live in regions that are lagging behind.’

2) Individual rationality results from

socialization in the context of power

relations and can be distorted

• Distorted by myths, stereotyps, and

emulation, under which the lower orders of

Stratified societies may burn with desire to

mimic the achievements and lifestyle of

the upper strata.

3) Power and Status legitimacy

• Power and status legitimate authority by

turning predatory, exploitative practices

into rightful duties.

• The market does not result from Smith’s

natural system of liberty, but is defined,

and given its leading characteristics, by

the State.

4) Equality is important

• Equality is instrumentally effective in terms of maintaining demand, increasing productivity, and with full participation, bringing new drive, spirit, and ideas into the community.

• Progress occurs from the bottom up, being based not on charity but on equality; the redistribution of income and power is an essential component of progress.

5) Based on Existantial philosophy

• Radical Institutionalism is based on an existantial philosophy.

• It is also institutionalist in a democratic, policy oriented way.

• Radical institutionalist lack the neoclassical faith in the automatic benevolance of the markets believing instead that nations have to plan for their economic well being.

6) RI are untiestablishmentarian

• Radical institutionalists are

untiestablishmentarian and democratic in

the sense of participatory democracy

(people affected by decisions make them).

• Indeed, the idea i that the participatory

drive (people practically solving problems)

pushes the social system forward.

7) RI is a radical paradigm

• 7) Radical Institutionalism is a radical

paradigm predicted on the economy

conceived as a process, rather than an

equilibrium, with radical breaks possible,

such as the movement from the free

market status quo to national economic

planning.

Radical Institutionalism• In general Radical Institutionalism explain the

capitalist economy as a process dominated by power and status distorted by irrationality, but capable of being transformed into a democratic, egalitarian system of abundance for all.

• Greatly different from its distant cousin, the radical version of institutionalism proposes, re constructing economics from its initial assumptions to the politics of its policy conclusions.

• As radical institutionalism begins to argue, criticism of economics as ‘science’ must be complemented by criticisms of economics as political ideology.

Conclusion

• Questions

• Discussions