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Neoliberalism: The Flawed Economic Doctrine Causing Extreme Inequality


Neoliberalism, the little-understood and misguided economic dogma that has dominated the last four decades.

Since the late 1970’s the economic doctrine of neoliberalism has dominated the policy decisions of politicians on both sides of the partisan aisle. Neoliberalism began as a sincere dogma that expressed doubt in the public sector, and instead put trust in rational markets, private institutions, and the self-interested individual. The atrocities of authoritarian communism provided validation for this world view, and the Soviet Union’s collapse ignited the worldwide proliferation of free-market policies.

But in time, this ideology would prove itself to be a cynical masquerade for the subversion of popular democracy, and the enabling of predatory capitalism and monopoly control of government. Adherents of neoliberalism sought to eliminate all restraints on capital accumulation, including environmental, financial, and labor regulations. Through trade deals like NAFTA, corporations were given free rein to race for the bottom in global labor standards, replacing domestic workers with foreigners who did not legally require a minimum wage, healthcare, and other basic standards. The freedom of fair opportunity was replaced by the radical “freedom” to disregard basic moral norms in the pursuit of profit.

Undoubtedly, free enterprise is an essential element of any prosperous society. But the total removal of restraints on capital has led to environmental destruction, disenfranchised workers, and an unhinged finance sector. Furthermore, many technological breakthroughs were developed with federal grants, such as the internet through DARPA, the micro-chip technology that composes the iPhone, and medical breakthroughs through the National Institute of Health. Technology that was developed generationally and collectively disproportionately serves monopolists through patents, as the taxes that would serve to reciprocate the societal contributions that have benefitted companies like Google or Apple are largely avoided through offshore tax havens and convoluted accounting strategies.

While neoliberals cite classical liberals such as Adam Smith and John Stuart Mill as like-minded forefathers, there is a tremendous distinction between the ideas offered in “The Wealth of Nations” and the policies initiated by Ronald Reagan and Margaret Thatcher. Classical liberals distinguished between productive and unproductive labor, or “rent-seeking.” Modern rent-seeking is demonstrated in deceptive financial fees, student loan interest, and huge health insurance costs. Rent-seeking is also evident in monopoly profits, as a corporation with total market control can hike prices in the absence of competition. A glaring example is evident in American pharmaceuticals, twice as expensive as equivalents in other wealthy countries.

According to The Economist, two-thirds of all American industries were more concentrated in 2012 than in 1997. Our government funded the consolidation of JP Morgan Chase with Bear Stearns and Washington Mutual, the merger of Wells Fargo with Wachovia, and Bank of America’s amalgamation with Merrill Lynch and Countrywide Financial. After the recession, the two largest pharmaceutical giants, Pfizer and Merck, were permitted to absorb drug companies Wyeth and Schering-Plough, eliminating tens of thousands of jobs in the process.

Failure to enforce antitrust legislation has allowed mega-corporations like ExxonMobil and JPMorgan Chase to dictate public policy and secure regulatory advantages that stifle competition. In a true capitalist system, corporations have the freedom to fail. In our system, too-big-to-fail banks hold such an outsized share of the market their failure would allegedly jeopardize the entire economy. But instead of breaking up the banks after the recession, the government made them bigger and richer. And while bankers were alleviated from the consequences of their risky loans, the average American citizen is more indebted than ever.

Shareholder Theory

Another principle tenet of neoliberalism is the prioritization of shareholder returns. Shareholder theory is based on the idea that shareholders must be compensated first because they provide the investment needed for a business to grow. But as economist William Lazonick has shown, many shareholders are just short-term speculators who are seeking a quick profit without long-term investment. The real foundations of a corporation’s success are taxpayers, who provide infrastructure and knowledge, and workers, who perform the company’s necessary operations. Our tax code and pay scale must be restructured to reward the people who are creating value.

Neoliberalism and Corporate Buybacks

Perhaps the most dysfunctional trend enabled by shareholder theory is corporate buybacks. Buybacks refer to a company purchasing its own stock to artificially boost share prices and pay quick dividends to investors. With near-zero interest capital on tap from the fed, major corporations have taken on huge debt loads to continue an unsustainable system of buying their own stock instead of investing in long-term success through research & development, which still hasn’t returned to pre-2008 levels. The consequences of buybacks can be demonstrated by Walmart in 2016. The retailing giant spent $8.3 billion in buybacks, while taxpayers paid out $6 billion to assist employees with food stamps and public housing. Furthermore, executives are paid heavily in stock options, making buybacks an incentivized form of self-enrichment.

Buybacks were illegal and designated as “market manipulation” until 1982. They are now the mainstream in corporate America, breaking a new record at $1.1 trillion in 2018.

According to Financial Times columnist Rana Foroohar, buybacks, securities, and other financial products make up about 85% of money circulated by major financial institutions in the closed loop of the market, while only around 15% of their capital is lent to businesses that support the real economy. Eighty-four percent of stock is held by ten percent of the population. The stock market can reach record highs while the actual economy stagnates and wages remain flat, contradicting the original vision of Adam Smith, who envisioned finance serving a supportive role to business. The finance sector has taken an extremely oversized role in the economy, creating only four percent of jobs while taking in 25 percent of corporate profits.

The unsustainability of shareholder theory can be further demonstrated by the different spending behavior of public and private companies. Public companies, which are beholden to shareholder theory, spend half as much as private companies on research & development, worker education, and other forms of long-term, value-creating investment. The pressure to maintain endless quarterly growth has encouraged public companies to engage in the buyback frenzy of the last few decades, depriving our real economic engine (taxpayers, workers, and innovative research) in the process.

Trickle Down Economics

Tax cuts on the top socioeconomic class, sometimes referred to as supply-side or “trickle down” economics, is another core pillar of market orthodoxy. The theory is that the super-wealthy are job creators who will use their savings to invest in the economy, and that low corporate taxes attract businesses.

If supply side economics worked, tax havens like Ireland and the Cayman Islands would be growing prosperous from Apple and Google using them to avoid federal taxes, and high-tax countries like Norway or Germany would be desolate. High-tax states like New York and California perform far better than low-tax states like Missouri or Kansas, because a skilled-work force and quality infrastructure are more important factors in attracting business and investment than low tax rates. Supply-side economics also exacerbates the huge disparity between worker and executive compensation, which has already been worsened by the destruction of labor unions.

Corporate executives in the US compensate themselves 361 times more than the average worker, even when they completely fail their jobs (in the 1950’s that ratio was 20/1). CEOs of the too-big-to-fail banks gave themselves huge bonuses six months after receiving federal rescue funds from crashing the economy. Another example is Sears, in which the US bankruptcy court approved over $25 million in bonuses to executives, even though they led their company into bankruptcy and laid off thousands of workers. As Lucian Bebchuk and Jesse Fried show in their book Pay Without Performance, there is considerable and growing evidence that increasing CEO compensation has nothing to do with performance, and is damaging pay structures throughout the economy.

Neoliberalism and Flawed Economic Indicators

Another major flaw in our economic system lies in the metrics we use to evaluate its success. GDP (gross domestic product) measures the total goods and services produced by an economy, but “externalities” such as infant mortality, education, health care, and environmental destruction are completely absent from its analytical parameters. Incomes shrank for half the population in 1981, 1984, and 1986 despite GDP growth during all of those years.

Credit card companies make more profits from penalties than interest. Even though compound debt reduces people’s ability to buy goods and services, profit from credit card penalties is considered a “financial service” and is added to GDP. GDP calculates profits from predatory rent-seeking as “growth,” even though they undermine the real economy and extract value instead of creating it.

Neoliberalism, shareholder theory, buybacks, monopolization, supply-side economics, and over-reliance on flawed metrics like GDP have contributed to the faltering and unbalanced economic condition of the last few decades. Entrepreneurship declined by 44% between 1978 and 2012, wage growth remains anemic, we have the worst inequality since the Great Depression. The market is an essential component of any functioning society, but we must liberate our minds from ideological dogmatism in order to address these systemic flaws and create prosperity for the many instead of the few.

Peter Castagno

Peter Castagno is a co-owner Citizen Truth.

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