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2013-10-07 The Liberal-Neoliberal.docx

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Political Science
Political Science 2211E
Adam Harmes

The Liberal-NeoliberalApproach to Economic Policy October 7, 2013 -e.g. lower taxes, fewer regulation on businesses, weaker unions, less social programs -Conservative Party in Canada and Republican Party in US -neoliberal, free market approach vs. Keynesian welfare/government intervention approach -these are the ideas that underpin social policy, economic policy, environmental policy, etc. Mitt Romney – ‘I’ll vote for Freedom and Free People’video -government pushing down ‘economic freedom’ -these views underpin the debates we see in politics -lower taxes, less regulation, more business friendly labour laws -all of the policies he listed surround economic freedom Today’s Topics 1. Classical Economic Liberalism -benefits of free market system 2. Neoliberalism -the more contemporary version of free market approach 3. Terminology Classical Economic Liberalism -Original free market approach to economic policy -Decentralized economic decision-making by firms and consumers rather than by government -Believed to be more efficient than centralized command economy -Cuba is mostly a state-run economy -they decide how many products they produce -centralize: top-down approach -decentralized: companies decide what and how many of products they should produce Adam Smith -Father of “classical economic liberalism” -1776 The Wealth of Nations -“Invisible hand” of market forces would automatically coordinate decentralized decisions -centralized: government forecast how many cars they should build -free market: made in decentralized decisions -you won’t produce too many or too little cars, you’ll produce the right amount of cars -Efficient allocation of resources 1 -“the whole is greater than sum of its parts” -even if every single person act on self-interest, the sum total of the whole is better for society as a whole..? -sufficient allocation of products Alfred Marshall -1890 Principles of Economics -Created “neo-classical economic liberalism” -Formalized Smith’s notion of the ‘invisible hand’based on laws of supply and demand and price signals -argued that the notion of ‘invisible hand’is laws of supply and demand and price signals -this is what tells consumers what to buy and how much to buy and tells producers what to sell and what not to sell -not demand or supply determine the price, it’s the intersection of where supply and demand meet -that price sends a signal to producers and consumers whether they should consumer more of that product of less Demand and Prices (Short-term) -When demand goes up, gas prices go up -if demand goes up, you can charge more -rational and acting in self-interest: you would charge more -if demand goes down, gas prices go down Supply and Prices (Short-term) -supply goes down, then gas prices go up -e.g. hurricane that knocks down oil rig = less oil on market = gas prices go up because supply is reduced More demand than supply = prices rising More demand than supply = prices rise -nothing happens to demand = supply goes down (e.g. war, oil spill, etc.) = prices rising Demand, Supply and Prices -More demand than supply = prices rising -Less demand than supply = prices falling 2 Supply, Demand and Price (Long-term) -when demand goes up, gas prices go up -gas prices go up = demand goes down -people look at alternative -consumers thinking of their behaviour: stop buying SUVs, buy fuel-efficient cars, start carpooling -send message to people -if gas prices go up, supply goes up as well Alberta Oil Sands -oil mixed with sand -must be mined rather than pumped -more expensive than oil from a well -oil sands have only been economically viable as oil prices have increased -oil prices collage = why buy oil sands Price Signals Supply and demand determines prices -Prices then send signals to producers and consumers -Free markets react to change automatically -Price signals are the invisible hand Government Policy -‘Nightswatchman State’or ‘Minimalist State’ -Intervention in the economy kept to an absolute minimum to let invisible hand work - Governments should protect private property, enforce contracts, provide national defense, and not much else. -government intervention in economies should be kept absolutely minimum because it throws a monkey wrench to the workings of invisible hand (lead to inefficient outcome) Benefits of a Free Market System -1. Automatically coordinates supply and demand -free market flexible -supply matching demand; you’re not producing a lot of something -2. Stimulates innovation -creates competition 3 -not good enough to get good product; you want the best product -creates incentive; by innovating, more people would want your product and it creates competition -3. Automatically self-corrects problems -problems relating to supply and demand Reduce-to-Clear -Used for products with low demand -Lower price until consumers are willing to buy -Market automatically clears excess supply -clearance and discounts: an effort to get rid of stuff you can’t sell -little demand for product: only way to sell that by lowering the price to the point where someone buys it -sometimes you need to drastically reduce price (e.g. save up o 65%) High Unemployment -Too much supply of workers relative to demand -Lower wages cause employers to hire -Unemployment automatically self-corrects -neoclassical economists argue: if workers are unemployed, this means there’s too little supply of labour -workers unemployed reduce their price (accept lower wages) -you start lowering your price and expectation -if you leave unemployment alone, it will self-correct Problem of Government Intervention -Government intervention disrupts free market -Minimum wage prevents workers from lowering wage demands -Unemployment fails to self-correct -e.g. government passes law that says t-shirts cannot be sold under $10 -you would be unable to reduce stock -if government passes law of increasing minimum wage -unemployment will fail to automatically self-correct when government passes these laws -minimum wage laws prevent workers from reducing their prices -how may employment insurance reduce unemployment? -at a rational level, the social programs are good intentions but disrupt free market 4 Benefits of a Free Market System -1. Automatically coordinates supply and demand -2. Stimulates innovation -3. Automatically self-corrects problems -4. Decentralization of power -Promote individual freedom by creating decentralization, and therefore political and economic power -free market economy: highly decentralized; promote more individual economic freedom and prevents one group gaining too much economic and political power Neoliberalism -Contemporary branch of free market approach -Classical liberalism was dominant from 1800s to the 1930s Great Depression -After Depression, government intervention became more dominant -discred
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