What is the relationship between neoliberalism and the global financial crisis and can critical theory help us to understand this contemporary crisis?

In the core of the term “neoliberalism” stands the understanding that the economic and social problems can be resolved by means of competitive markets[i]. The competitive markets are considered to be superior in regard to efficiency, justice, freedom, or a combination of them[ii]. Neoliberalism promotes substitution of government functions with services offered by private profit-seeking firms and encourages privatization, deregulation of labour and financial markets, deregulation of business activities, free trade and smaller government through reduced taxes, spending and regulation[iii].

However, the most prominent development under the neoliberal era that begun in the late 1970s was experienced by the financial markets. As a consequence of the financial deregulations financial markets became more complex and extremely volatile. Financial innovations created sophisticated financial instruments that remained weakly understood by the investors and unregulated not because of lack of capacity but because of the prevailing attitude preventing the governments to intervene[iv]. Thus, the sudden collapse of the most developed financial markets expectedly brought down the global economy.

The main reason for this extremely deep and strong impact of the developed financial markets crush onto the world economy is the free capital movement, which is the essence of the neoliberal doctrine. This is diametrically opposite to John Maynard Keynes’ vision of the development of global economy, which he considered as a single whole[v]. However, his view supported the idea that “central control of capital movements, both inward and outward, should be a permanent feature of the post-war system”[vi]. His main apprehension was that unstable global finance can impact negatively and slow down the global economic development. However, it is questionable whether his view can resolve the discrepancy between contemporaneous state organization of the world and the globalized market economy.

In that regard it is important to understand how neoliberalism became a mainstream economic and political paradigm in order to establish a realistic view about its appearance and development. In fact, this doctrine gained power in the middle of the worst postwar economic crisis, which erupted and unfolded since the beginning of the 1970s, when the Bretton Woods agreement collapsed, oil price shock hit the world and new economic phenomenon emerged, namely the stagflation,which discredited Keynesian orthodoxy[vii]. Under these circumstances many policymakers, scholars and experts turned attention to the theory created and proposed by intellectuals led by F. A. Hayek and further developed and propagated by Milton Friedman and his monetarism. Thus, “rather than emerging from any sort of “master plan”, it was, in fact, series of local choices in the face of unyielding inflation, the Carter administration’s appointment of Paul Volcker as Chairman of the Federal Reserve Board in 1979, or the reluctant decision of Hayekian free marketeers to make uneasy peace with social conservatives — that led to the neoliberal breakthrough”[viii].

It should be noted that the essence of the critical theory is oriented toward not only understanding or explaining the society but changing it as a whole. The roots of the critical theory can be traced to the Marxist tradition concerning the economic base and ideological superstructure[ix]. Its main focus is to explain how the existing forms of power and domination impact peoples’ life. Considering these ideological determinants, the explanations given by this theory of the erupted crisis from 2008-2009 should be taken into account in order to enrich the whole understanding of the unfolding processes but not as a single mean of understanding and explanation. Critical theory’s very strong leaning toward explaining the undergoing processes from the class confrontation point of view creates excessive social tensions and premises for a solution outside the established democratic framework. That is why firm adherence to and exploration of the facts is of overwhelming importance in the explanation process of the contemporary world!

[i]George, D., 2008, , “On Being ‘Competitive’: The Evolution of a Word, ”realworldeconomicsreview,48(6), December 2008, pp. 319–334, available at: http://www.paecon.net/PAEReview/issue48/whole48.pdf#page=48

[ii]Patomäki, H., 2009, “Neoliberalismand the Global Financial Crisis”, New Political Science, 31(4), December 2009, pp. 431-442, available at: http://www.mv.helsinki.fi/home/patomaki/Neoliberalism-and-%20Global-Financial-Crisis-(NPSc).pdf

[iii]Beder, S., 2009, “Neoliberalismand the Global Financial Crisis”, Social Alternatives, 8(1), 2009, pp. 17-21,available at: https://ro.uow.edu.au/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=1220&context=artspapers

[iv]Bello, W., 2008, “Primer on Wall Street Meltdown.” MR on line, 3 October, 2008, available at: https://mronline.org/2008/10/03/a-primer-on-wall-street-meltdown/

[v]Keynes, J.M., 1980, “Proposals for an International Currency Union”, The Collected Writings of John Maynard Keynes, Vol. XXV, London: Macmillan, 1980 [1941]), p. 46.

[vi]O’Hara, P., 2006, “Growth and Development in the Global Political Economy: Social Structures of Accumulation and Modes of Regulation”, London: Routledge, 2006, p. 208, available at: http://pohara.homestead.com/files/book4.pdf

[vii]Clune, M. W., 2013, “When neoliberalism exploded”, Salon, March 9, 2013, available at: https://www.salon.com/2013/03/09/the_world_according_to_milton_friedman_partner/

[viii]Jones, D.S., 2012, “Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics”, Princeton University Press, 2012

[ix]Crossman, A., 2019, “Understanding critical theory”, ThoughtCo., January 24, 2019, available at: https://www.thoughtco.com/critical-theory-3026623