There's no swear word in politics today worse than "neoliberalism". It's badly on the nose, and the reaction against it has a long way to run. But what is it, exactly? Where does mainstream economics stop and neoliberalism begin?
The term means different things to different people. Professor Dani Rodrik, of Harvard, says in the Boston Review the term is used as a catchall for anything that smacks of deregulation, liberalisation, privatisation or fiscal (budgetary) austerity.
I've always thought of it as a fundamentalist, oversimplified, dogmatic version of conventional economics, one from an elementary textbook, not a third-year text that adds the complications of market power, externalities (costs or benefits not captured in market prices), economies of scale, incomplete and asymmetric (lop-sided) information, and irrational behaviour.
Rodrik's conception of the term isn't very different. He thinks mainstream economics needs to be rescued from neoliberalism because, as people heap scorn on it, we risk throwing out some of economics' useful ideas.
Which are? That the efficiency with which an economy's resources are allocated is a critical determinant of its performance. That efficiency, in turn, requires aligning the incentives of households and businesses with "social" costs and benefits (so as to internalise the externalities).
That the incentives faced by entrepreneurs, investors and producers are particularly important when it comes to economic growth. Growth needs a system of property rights and contract enforcement that will ensure those who invest can retain the returns on their investments.
And that the economy must be open to ideas and innovations from the rest of the world. Of course, economies also need the macro-economic stability produced by sound monetary policy (low inflation) and budgetary sustainability (manageable levels of public debt).
Does all that smack more of neoliberalism than mainstream economics to you? If it does it's because mainstream economics shades too easily into ideology, constraining the choices that we appear to have and providing cookie-cutter solutions.
"A proper understanding of the economics that lies behind neoliberalism would allow us to identify – and to reject – ideology when it masquerades as economic science. Most importantly, it would help us develop the institutional imagination we badly need to redesign capitalism for the 21st century."
There's nothing wrong with markets, private entrepreneurship, or incentives, Rodrik says, provided they're deployed appropriately. Their creative use lies behind the most significant economic achievements of our time.
The central conceit and fatal flaw of neoliberalism is "the belief that first-order economic principles map onto a unique set of policies, approximated by a Thatcher-Reagan-style agenda" – also known as the "Washington consensus".
Take intellectual property rights. They're good when they protect innovators from free-riders, but bad when they protect them from competition (as they often do when the US Congress has finished with 'em).
Consider China's phenomenal economic success. It's largely due to its orthodoxy-defying tinkering with economic institutions. "China turned to markets, but did not copy Western practices in property rights. Its reforms produced market-based incentives through a series of unusual institutional arrangements that were better adapted to local context," Rodrik says.
Some may say China's institutional innovations are purely transitional. Soon enough it will have to converge on Western-style institutions if it's to maintain its economic progress. Well, maybe, maybe not.
What neoliberal proponents of the single route to economic prosperity keep forgetting is that none of the economic miracles that preceded China's – in South Korea, Taiwan and Japan – followed the Western formula. And each did it differently.
Even among the rich countries we see much variance from the neoliberal cookie cutter. The size of the public sector, for instance, varies from a third of the economy in Korea, to nearly 60 per cent in Finland.
In Iceland, 86 per cent of workers are in a trade union; in Switzerland it's 16 per cent. In America firms can fire workers almost at will; in France they must jump through many hoops.
Rodrik repeats an old economists' saying, one forgotten by the neoliberal oversimplifiers. "Good economists know that the correct answer to any question in economics is: it depends."
It depends on the particular circumstances, on how well your economic "institutions" (laws, official bodies, norms of behaviour) fit with those the model assumes to exist, on what you're trying to achieve, on your priorities, and on the political constraints you face.
As the Chief Scientist, Dr Alan Finkel, said when asked if he preferred his own emissions intensity scheme to Malcolm Turnbull's national energy guarantee: "There are a lot of ways to skin a cat."
Economics has many useful insights to offer the community. It must be rescued from neoliberalism because neoliberalism is simply bad economics.
