(Tiểu luận) neoclassicalcounterrevolution marketfundamentalism theory and its applications

Le Hang My HanhClass Code: ML31 Trang 2 Ho Chi Minh City, September 2023 Trang 3 ---***---Table of ContentsCHAPTER 1: OVERVIEW OF NEOCLASSICAL COUNTERREVOLUTION: MARKET FUNDAMENTALISM1

FOREIGN TRADE UNIVERSITY

HO CHI MINH CITY CAMPUS

-*** -MIDTERM ASSIGNMENT

Subject: Economic Development

NEOCLASSICAL COUNTERREVOLUTION: MARKET FUNDAMENTALISM THEORY AND ITS APPLICATIONS

Lecturer: PhD Le Hang My Hanh

Class Code: ML31

Group 23: Hà Nh t Quang ậ 2011100000

Kinh Văn Trung 2011155647 Nguy n Tu n V ễ ấ ỹ 2011156120

Ho Chi Minh City, September 2023

-*** -Table of Contents

CHAPTER 1: OVERVIEW OF NEOCLASSICAL

COUNTERREVOLUTION: MARKET FUNDAMENTALISM 1

1.1 Overview of neoclassical counterrevolution 1

1.2 Theory foundation 1

1.3 Implication of neoclassical counterrevolution 3

1.3.1 Emphasis on Free markets 3

1.3.2 Economic influence and policy 3

1.4 Criticism of Neoclassical 4

CHAPTER 2: ANALYSIS OF NEOCLASSICAL COUNTERREVOLUTION: MARKET FUNDAMENTALISM 5 2.1 Free-market analysis 5

2.2 Public-choice theory 6

2.3 Market-friendly approach 7

2.4 Traditional Neoclassical Growth Theory (Solow Growth Model) 8

CHAPTER 3: CONCLUSIONS AND APPLICATION OF NEOCLASSICAL COUNTERREVOLUTION: MARKET FUNDAMENTALISM THEORY 10 Conclusion 13

CHAPTER 1: OVERVIEW OF NEOCLASSICAL COUNTERREVOLUTION: MARKET

FUNDAMENTALISM

1.1 Overview of neoclassical counterrevolution

Neoclassical theory emphasizes the beneficial role of free markets, open economies, and the privatization of inefficient public enterprises Its recommended strategy for development is to free markets from state control and regulation, so that capital, goods, and services can have total freedom of movement and there can be greater openness to international trade

The neoclassical or neoliberal perspective represents a modification and further elaboration of modernization theory However, in contrast to modernization theory, neoclassical theorists see development as the outcome not of strategic state action but of the action of market forces The central claim is that failure to develop

is primarily the result of too much government intervention and regulation of the economy

1.2 Theory foundation

During the 1980s, many governments of the developed world adopted a free-market theory of economics This viewpoint has been referred to as the Neoclassical Counterrevolution The theory supported freer markets, private ownership, statist planning, and government regulation of economic activities Economists that supported this theory argued that poor resource allocation and too much state intervention was preventing markets from functioning properly and hampered growth

This viewpoint supports increasing exports and free trade, eliminating government controls on prices, and attracting foreign investment In contrast to dependency theorists who argued that the developed world was taking advantage of

counterrevolution placed the blame on the governments of developing nations who were often corrupt and did not offer economic incentives

This theory stems from the basic argument that markets are most efficient when they regulate themselves In other words, the forces of supply and demand will determine production and consumption, and that the collective will of all producers and consumers will allocate resources better than a central body is capable of doing Under this theory, any government intervention that interferes with this automatic self-regulation of the market will distort prices and hinder growth

The world's most powerful financial agencies, the International Monetary Fund and World Bank, advocate this point of view Their efforts to provide incentives for developing nations to adopt a free-market approach have been successful in causing change in many countries They also encourage governments

to set up strong financial systems with a high degree of transparency, and for the government to invest in key infrastructure and education

The other side of this argument is that through this process of liberalization, greater foreign investment will be attracted

Foreign capital is attracted to markets, which are free and stable They are also attracted by the stability of democracies, secure, and transparent financial systems An infusion of foreign capital is equivalent to raising the savings rate, which can be shown to increase GDP using the Harrod-Domar growth model The Solow neoclassical growth model also factors in labor and technology It shows diminishing returns to scale for labor and capital separately and constant returns jointly Technology explains long-term growth, though this factor is exogenous, which means it is set outside the model Therefore, growth in the traditional neoclassical model can result from increases in labor quantity and quality, increases

in capital, and improvements in technology The free-market system is especially important in influencing capital and technology because openness to outside markets allows capital and technology to flow in from the developed world

Thomas Friedman in his book, The Lexus and the Olive Tree: Understanding Globalization The freedom to choose political leadership as well as allocate resources as one sees fit is a natural match Democratic government provides stability because it provides a method for dealing with corruption and a model for change that is oriented towards the best interests of the people and the economy as a whole, rather than a particular political leader or party

1.3 Implication of neoclassical counterrevolution

1.3.1 Emphasis on Free markets

The neoliberals argue that by permitting competitive free markets to flourish, privatizing state-owned enterprises, promoting free trade and export expansion, welcoming investors from developed countries, and eliminating the plethora of government regulations and price distortions in factor, product, and financial markets, both economic efficiency and economic growth will be stimulated Neoclassical counterrevolution theory also introduced the concept of rational expectations This theory posited that individuals and businesses make decisions based on rational assessments of the future, considering all available information This challenged the effectiveness of government policies that relied on the element

of surprise to influence economic behavior

Neoclassical economics places a strong emphasis on the efficiency of free markets This shift led to a greater belief in market forces and a reduced role for government intervention in the economy Policies favoring deregulation and privatization became more common

1.3.2 Economic influence and policy

Neoclassical counterrevolution emphasized the importance of free markets and the self-regulating nature of market forces This led to a greater emphasis on deregulation and the reduction of government intervention in economic activities Policymakers believed that market competition and price mechanisms could

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Neoclassical economics, with its emphasis on free markets and minimal government

intervention, had a significant influence on economic policy around the world,

especially during the era of globalization Many countries embraced neoliberal

economic policies, which were closely aligned with neoclassical principles

Monetary Policy: Neoclassical economists, influenced by the monetarist

school of thought, advocated for a focus on monetary policy to control inflation

They argued that central banks should target money supply growth as a means to

stabilize the economy

Fiscal Policy: Neoclassical economists were generally skeptical of the

effectiveness of fiscal policy (government spending and taxation) in managing the

economy They believed that fiscal policies were often subject to lags and could

lead to inefficient resource allocation

1.4 Criticism of Neoclassical

The Neoclassical Counterrevolution also sparked debates within the field of

economics, leading to the development of various schools of thought, such as New

Keynesian economics, which attempted to integrate some Keynesian insights with

neoclassical principles

Assumption of Rationality: Neoclassical economics assumes that individuals

and firms are rational decision-makers, always making choices that maximize their

utility or profits Human behavior is often influenced by emotions, cognitive biases,

and imperfect information, which can lead to decisions that do not align with

neoclassical predictions

Perfect Information: Neoclassical models often assume perfect information,

where all market participants have access to the same information In the real world,

information is often imperfect and asymmetric, leading to market inefficiencies and

failures

Inflexible Wage and Price Adjustment: Neoclassical models assume that

wages and prices are flexible and adjust quickly to changes in supply and demand

In reality, wages and prices can be sticky, meaning they do not adjust immediately,

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role of financial markets and institutions in the economy This oversight became particularly evident during the global financial crisis of 2008 when financial market imperfections played a significant role in the crisis

CHAPTER 2: ANALYSIS OF NEOCLASSICAL COUNTERREVOLUTION: MARKET

FUNDAMENTALISM

The neoclassical counterrevolution can be divided into three component

approaches: the free-market approach, the public-choice (or “new political economy”) approach, and the “market-friendly” approach

2.1 Free-market analysis

Free-market analysis in neoclassical counterrevolution theory represents a fundamental pillar of conservative economic thought Emerging as a response to the perceived excesses of government intervention and Keynesian economics in the mid-20th century, this theory posits that markets, left to their own devices, are the most efficient allocators of resources and generators of wealth Drawing inspiration from classical economists like Adam Smith, neoclassical counterrevolution theorists emphasize the virtues of minimal government interference, arguing that competitive markets naturally balance supply and demand, leading to optimal outcomes Free-market analysis asserts that markets alone are cost effective and efficient because markets provide us the best cues for investments in new events, labor markets respond appropriately to these new industries, manufacturers know best what to produce and how to produce efficiently

The assertion that free-market analysis deems markets as cost-effective and efficient due to their ability to provide the best cues for investments in new events highlights a central tenet of the free-market ideology According to this perspective, the competitive nature of markets, driven by supply and demand dynamics, fosters

an environment where resources are allocated efficiently In such a system, prices serve as signals, reflecting the collective wisdom of countless individual actors making decisions based on their self-interest This price mechanism is believed to

away from less promising endeavors, thus minimizing waste and maximizing productivity Proponents argue that market-driven investment decisions are inherently superior to centralized planning, as they adapt to changing circumstances and harness the collective knowledge of society However, critics contend that this perspective often downplays the role of government in regulating markets, addressing externalities, and mitigating income inequality Moreover, it may not always account for instances where markets fail to provide accurate cues, such as in the case of speculative bubbles or monopolistic practices In sum, while free-market analysis champions the efficiency of market signals for investment decisions, it remains a topic of ongoing debate in economic theory and policy

2.2 Public-choice theory

Another approach to the neoclassical counterrevolution is the public-choice theory, which argues that elected officials, bureaucrats and other government agents are ineffective in their actions due to their self-interested perspective

Within a political and economic context, public-choice theory explains the decision-making principle and provides valuable insights into the behavior of individuals and groups in the public sphere Developed from the study of taxation and public spending, this theory has been long used for normative purposes in order to identify

a problem or to suggest improvements to constitutional rules In 1986 when James Buchanan, one of its two leading architects, was awarded the Nobel Prize in economics, this theory received widespread public attention

The foundation of public-choice theory was built based on the fact that individuals, including politicians, bureaucrats, and voters, are driven by self-interest and act to maximize their personal gains This challenges the traditional assumption that individuals in public positions always act in the best interest of society Instead,

it emphasizes that these actors are rational beings who respond to incentives and seek to advance their own preferences and goals

This is because the public-choice theory assumes that governments use their

political influence to obtain special benefits from government policies that restrict access to important resources Policymakers and politicians, for example, are motivated by the desire to gain reelection or secure lucrative post-political career opportunities They are more likely to support policies that appeal to their constituents or interest groups that can provide financial or political support Similarly, bureaucrats are driven by the desire to expand their budgets and increase their power and influence Moreover, states use their power to confiscate private property from individuals As a consequence, these actions lead to the misallocation

of resources and the general reduction in individual freedoms

In conclusion, public-choice theory suggests that minimal government is better for the economy This offers a valuable perspective on the complex dynamics

of decision-making in the public sphere by recognizing the role of self-interest, incentives, and interest groups It serves as a valuable tool for analyzing and evaluating public policies and institutions, ultimately contributing to a more comprehensive understanding of the complexities of governance in modern societies

2.3 Market-friendly approach

The last component approach of neoclassical counterrevolution is the market-friendly approach This is also known as oriented or market-based approach, which advocates for the primacy of free markets and limited government intervention in economic affairs This approach emphasizes the efficiency and effectiveness of market mechanisms in allocating resources, promoting innovation, and driving economic growth

Central to the market-friendly approach is the belief that markets, left to operate without excessive regulation or interference, are the most efficient and fair way to allocate goods, services, and investments The theory suggests that market forces, such as supply and demand, competition, and price signals, can best determine how resources are allocated among various uses and individuals This