Topic: Individual assignment

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BUSM 3886

Week 5 Neoliberalism and economic development

Dr Joseph H. Kim School of Management

RMIT University

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Today’s lecture

• Understanding neoliberalism: Brief history of capitalism

• Government and trade: Free trade vs protectionism

• Economic development and government’s role

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Government and national competitiveness

• National competitiveness: “the degree to which a nation, under free and fair market conditions, produces goods and services that meet the test of international markets while simultaneously maintaining and expanding the real incomes of its citizens” (The President’s Commission on Industrial Competitiveness, US)

Q. Should GOVERNMENTS take the lead in exercising foresight

over the future direction of economic activities of BUSINESSES?

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Understanding neoliberalism: Brief history of capitalism

Liberalism • Adam Smith (1723 - 1790)

- During the time of industrial revolution and the rise of bourgeoisies - Opposition to mercantilism: accumulation of gold and silver - Rational self-interest, division of labour and competition as sources of nation’s wealth

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.”

- “Invisible hand” in the market: market is able to self- regulate - Role of government?

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Understanding neoliberalism: Brief history of capitalism

Keynesianism • John Maynard Keynes (1883 – 1946)

- Insights from Henry Ford? - Emphasis on active role of government

in managing economy by controlling money supply

- Role of government? - End of Keynesianism in the 1970s

- Prolonged Vietnam War & oil shock  Stagflation (stagnation + cost push inflation)

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Understanding neoliberalism: Brief history of capitalism

Neoliberalism • Monetarist view (Milton Friedman, Fredrich Hayek):

Criticism of Keynesian approach as “fool in the shower” - Withdrawal of the state from the economy (small

government) - Reinstatement of the free operation of the market - Cause of stagflation: rising costs of production - Removal of restrictions on business and trade

▪ tax cuts (income tax, corporate tax) ▪ flexible labour market ▪ limit public expenditure ▪ privatisation ▪ deregulation ▪ liberalisation of trade

- Effectiveness of neoliberalism?

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Government and global competitiveness

Free trade vs protectionism

• Protectionism “Assisting domestic industries by imposing barriers to foreign competitors, or subsidising or compensating domestic industries to assist them against foreign competition” (Hughes and O’Neill)

• Some common forms of protectionism - Tariffs - Import quotas - Subsidies to domestic producers - Voluntary export restraints - ‘Buy local’ campaigns / restrictions

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Arguments in favour of a smaller government role

• Economic and political freedom would be threatened • Private enterprise system works better than government:

greater efficiency in resource allocation • Rent seeking behaviour: businesses pending their efforts on

trying to persuade government to assist them rather than working harder to become more competitive

• Government is incapable of picking and nurturing “winners“ (e.g. failure of planned economies)

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Arguments in favour of a larger government role

• There is no such thing as a free market anyways (invisible hand is not effective in the present environment): To intervene (or plan) or not to intervene is not the question

• Promoting strategic industry, infant industry or industry closely associated with national defence

• Government has ability to select and nurture successful industries • Price competition and profit maximisation unduly emphasise short-run

factors and neglect nation’s long-term interests in such areas as employment, energy and climate change