Theme 10.

The doctrine of the economic

Neo-Liberalism

I. Economic Neo-Liberalism: essence and

place in the evolution of the economic
thought.
II. The Neo-Liberalism of the Freiburg school.
III. Friedrich von Hayek and the Austrian Ultra-
liberalism.
IV. The North-American Monetarism: Milton
Friedman.
V. The theory of the Supply-side economy.
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 I. Economic Neo-Liberalism: essence and place in the
evolution of the economic thought.
Historical background:
The Keynesian and Neo-Keynesian doctrines that had
dominated till the 1970-ties → discredited themselves ← state
budget deficits, the inflationary economic growth, the stagflation.
The Neo-liberalism appeared in 1938, at the Lipmann meeting
→ F. von Hayek, L. von Mises, W. Ropke concluded:
In order to save the Liberalism, it is necessary to limit it
at some extent.
Neo-Liberalism represents continuity of Economic Liberalism:
In theory → reasserting the natural order, the economic
individualism, the free market price formation.
In policy → the privatization, the cut in income tax rate &
budget spending.
In philosophy → critics of any forms of Dirigisme –
Keynesian, Nazi, or Soviet → missing long-term economic
equilibrium & creating numerous bureaucracy → the dictatorship. 2
 I. Economic Neo-Liberalism: essence and place
in the evolution of the economic thought.
Neo-Liberalism represents renovation of Economic Liberalism:
Critics of the conventional Liberalism promoting an abstract
economic freedom & laissez-faire policy → monopolies, huge
social differentiation, economic crises.
Neo-liberalists → the freedom needs to be controlled and
protected, otherwise it turns into monopoly.
Neo-Liberalists developed the following principles:
“Natural order” without generalization;
Economic freedom + business’ social responsibility;
Protection of competition from monopoly;
Free price formation;
Stability of the monetary circulation;
Limited but “active” state interference in the economy –
the state by law. 3
II. The Neo-Liberalism of the Freiburg school
Germany at the end of World War II → a state of total destruction
→ need of rebuilding:
(The economic system → Freiburg School)
+ (Political philosophy → Ordoliberalism)
= Social market economy → the New Germany.
implementation: L. Erhard, minister of economics, chancellor;
theory: W. Eucken, A. Müller-Armack +…, A. Rugină (Romanian).
W. Eucken → the theory of the ideal types of the economy →
the two “ideal types”- models created by people’s mind :
liberal market economy & centralized economy.
The liberal market economy → (democracy + freedom + welfare) →
in reality it is presented by the third way → models of the
contemporary mixed economy:
the German, American, + … Moldavian (?) models.
L. Erhard & W. Ropke → the football team conception:
the liberal market economy as a football field ← the state
interference as arbitrator, elaborating the game rules and
supervising their application, without participating to the game. 4
II. The Neo-Liberalism of the Freiburg school
Freiburg School → the need for the state to ensure that the free
market produces results close to its theoretical potential:
installing social security mechanisms beside the market forces;
forming an economic order, which could be
accepted by any ideology → clearly defined
specialization in economy’s management:
 Monetary policy → an independent central bank → monetary
stability & low inflation;
 Fiscal policy → the government → balancing tax revenue
against government expenditure;
Macro-economic policy → national employers & trade unions
→ collective bargaining.
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II. The Neo-Liberalism of the Freiburg school
Social Market Economy → three principles:
the principle of individuality → individual freedom,
the principle of solidarity → any individual is embedded
into a society of mutual dependencies → need to
overcome injustice,
the principle of subsidiary → an institutional rule to
shape the relation between individuality and solidarity →
anything which can be done by the individual should be
done by it and not by the state.
The European Union →
social market economy ←
Art. I-3 of the Treaty establishing a Constitution for Europe.
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III. Fr. von Hayek and Austrian Ultra-liberalism.
Neoclassical Viennese school → the “new Austrian school”
→ the Ultra-Liberalism (F von Hayek, L. von Mises +…) → the
individualism overpassing the economic theory & connecting
other disciplines (psychology, sociology, law…) → Hayek criticized
economists’ “narrow” specialization + artificial separation
between social sciences.
The Ultra-Liberalism explored two main directions:
The behavior of individuals = subjectivism;
The behavior of individuals ↔ insufficient information.
Hayek → a fundamental feature of any economic system
→ capacity & ways to assure the diffusion of information → in
the market economy the prices = the signal providing information
→ the competition imposes the efficient & rapid diffusion of
information + adequate institutions for the flow of proper
information.
Hayek → the negative consequences of state interference
in monetary sphere → the privatization of money – limiting state
monopoly on money emission.
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III. Fr. von Hayek and Austrian Ultra-liberalism.
Hayek → the entrepreneur = “alertness” → prime mover of the
market mechanism → problem of forming the expectations &
discounting procedure → economic dynamics = catalaxys:
The market is a continuous process;
The equilibrium can’t be long-lasting; there is only the ever-
tendency to equilibrium.
→ the theory of the “spontaneous order” = positive externalities
allowing the economic agents to develop their activity → need of
game rules supervised by the state by law (the single useful state
function) → market economy game rules = obligatory & fair for all
the economic agents.
Conclusions:
The main goal of the economic system is the liberty → more
important than the economic prosperity.
The socialist economy is abnormal & inferior to the capitalism.
The “third way” of economic development is just an illusion.
Sooner or later the economic system of each country adheres to
one of the two “ideal types” of economy. 8
IV. North-American Monetarism: M. Friedman.
The Monetarist revolution (the 1970-ties) = theoretical &
practical reaction to Keynesianism applied in U.S.A.
→ few Monetarist schools including Chicago school
founded by M. Friedman → main principles:
The market is the most efficient regulator of the economy → the
economic liberty = the political liberty;
The state interference is generally negative for the economy → the
main state economic lever should be the monetary policy;
Inflation is a pure monetary phenomena = excessive monetary
mass versus national output ← Quantitative Theory of Money (M×V
=T×P);
All the diseases of the capitalism have monetary origin → the
monetary mass in circulation ≠ the real necessities of the
economy → the Great Depression (1929-1933) = significant
decrease of the monetary mass in circulation.
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IV. North-American Monetarism: M. Friedman.
Critics of the conjunctural economic policy elaborated
by Keynesians →
Monetarists recommended a stable economic policy
that would allow the economic agents to adjust their
expectations using market signals → the main economic
variable to be managed by the state is the monetary mass that
determines the prices, the interest rates, and the rate of
economic growth.
Proposal: increase of the monetary mass with a
constant rate, notwithstanding to the economic conjuncture
(e.g. 3-4 % yearly in U.S.A.).
As concerns inflation, Friedman declared:
“The only way that government may use to struggle with inflation
is to spend and issue a less quantity of money… There is no
other solution.”
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V. The theory of the Supply-side economy.
The theory of the Supply-side economy → A. Laffer,
P. C. Roberts and others:
 Critics of the Keynesian economic policy accusing it
of discouraging the private saving & investment →
the “crowding-out effect”.
 Revival of the Say’s law → the entrepreneur (the
supply) not the consumer (the demand) constitutes
the prime mover of all the economic development.
 The Supply-side theory was elaborated in an
economy with intensive type of economic growth
→ proposal to decrease the direct taxes in order to
stimulate the private investments → Laffer graph …
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