By Professor Satya Narayan Misra in Bhubaneswar, July 19, 2024: The intellectual groundwork for the economic policy of the USA and Western economies under Regan and Thatcher in the last third of the 20th Century was laid by Hayek and Friedman who strongly argued for a limited role of the government. The Mont Pelerin Society founded by Hayek in 1947 sought to advance an anti-state vision as they believed that ‘extensions of state’s arbitrary power progressively undermine the position of the individual’.

Hayek’s seminal book ‘Road to Serfdom (1948) writes: If you put the federal government in charge of the Sahara Desert for five years, there would be a shortage of sand. Milton Friedman, his protégé argued that economic and political freedom is intimately connected, with the former necessary for the latter. To prevent descent into ‘serfdom’, one needs to keep the government small, using it to mainly to enforce property rights and contracts, and steering it away from providing public goods, regulating or redistributing.

In a stirring riposte to the system called ‘Neoliberalism’ being practiced on both sides of the Atlantic, Prof Joseph Stiglitz in his latest book “Road to Freedom” argues that neoliberalism in practice can be described as ‘ersatz capitalism’. Drawing reference to the 2008 financial crisis he shows how the government funded the largest bail-out in history; courtesy of the taxpayers.

Stiglitz wrote in his book Price of Inequality (2012): In the aftermath of the financial crisis, instead of Adam Smith’s invisible hand leading to the wellbeing of all, led to the wellbeing of unscrupulous bankers, with the rest of society bearing the cost. ‘Losses were socialized and gains were privatized.’ He also argues
that neoliberalism undermines meaningful democracy and political freedom. Meaningful democracy can only be ensured if there is a mechanism of shared prosperity and where power and money does not have an improper role in the outcomes.

Hayek and Friedman wanted to go beyond the efficiency argument for capitalism. Under neoclassical economics, individuals are rewarded based on their contribution to society- a theory called just deserts. Lucas, the Nobel-winning economist claimed in 2004,as the tide of income inequality was increasing: Of the tendencies that are harmful to sound economics, the most seductive and the most poisonous is to focus on questions of distribution. Such claims are morally wrong and perverse.

Efficiency and distribution cannot be separated. Even the IMF and the OECD have emphasized that economies with greater equality perform better. Piketty in his seminal book “Capital” (2014) has shown how rising income inequalities in Western societies is ‘not an accident of history, but a consequence of pursuing neoliberal policies of Regan and Thatcher, of favoring the super-rich with tax cuts . About Thatcher Stiglitz writes: Her monetarist thinker (Hayek) was responsible for the desertification of human hope.

Milton Friedman suggested that an unbridled form of capitalism is necessary to preserve capitalism. Public education would be replaced by vouchers to finance private education. Public retirement programs would be replaced by private annuities. The great irony of history is that neoliberalism has become a global ideology. Modi swears by neoliberalism when he calls for minimum government.

Panagariya, formerly Vice Chairman of Niti Ayog, openly bats for education vouchers for those below the poverty line in his book India, the Emerging Giant. For a nation with abysmal learning outcomes in government-run schools as reported by ASER surveys, it does not pay heed to the wise counsel of Amartya Sen, the Nobel laureate, to earmark 6% of its GDP to education to fix the rickety infrastructure of schools, improve quality of teachers and bolster the technology footprints of government schools.

Stiglitz identifies a few critical market failures that a neoliberal regime practices and thumbnails more appropriate responses. The foremost amongst them is excessive risk-taking by financial institutions, imposing high costs on the rest of society as it happened during the US subprime crisis in 2007. In contrast, financial regulations that ensure bank solvency and promote economic stability are a better alternative. Similarly, underinvestment in education, health, and technology must be supplanted by adequate public investments in these merit goods, which will benefit society more than individuals.

Similarly imperfect information in a neo-liberal dispensation can be replaced by disclosure requirements. Further, as against the absence of insurance against important risks, safety net programs, health insurance, and unemployment insurance can be put in place.

Finally, excessive inequality, which is not frowned upon in a neoclassical system, can be addressed through redistribution through taxes, policies like better minimum wages and supportive labor legislation, and improving the capability of the deprived citizenry through quality public education and skilling.

A free market neoliberal economy does not constitute a stable equilibrium, without strong guardrails and a broad societal consensus on the need to curb wealth inequality and money’s role in politics. This kind of strong democracy is necessary to sustain a competitive, free economy. Under the very name of freedom, neoliberals and even more the radical right have advocated policies that restrict the opportunities and freedom (both political and economic) of the many in favor of the few. This has drawn many to authoritarian figures like Trump, Putin, Bolsonaro, and Modi. Stiglitz underscores the importance of a good liberal arts education which helps us to understand these insidious forces better. There is an urgent necessity to maximize citizens’ real freedom.

Stiglitz’s Road to Freedom brings to memory Isiah Berlin’s famous statement: freedom for the wolves has often meant death to the sheep. Berlin promoted the notion of ‘positive freedom and participatory democracy. The road to real freedom will need to be paved with an agenda whose focus will be on equality and social justice as Stiglitz argues and not the sham conflation of economic and political liberty, propounded by Hayek and Friedman, creating a sharp unequal society.