Neoclassical Theory and Economic Policy

- Arpan Ganguly (M.A.Economics, II year)

The consideration of the fact that nearly 100 nations across the world have experienced crisis in the last thirty years, makes one ponder about the viability of the impact that the mainstream economic theory has had over governmental decision making. As several nations have seen a shift towards Neoclassical economic policy post 1980s, a reason advocated by Joseph Stiglitz towards increased economic instability across nations, is that the changes in the global economic environment perpetrated by capital market liberalizations have resulted in increasing the risks way beyond the coping ability of most developing nations.

The primary motive behind economic policy should be to increase the quality of life or the standard of living of the individuals. Full employment and decent work for all are concerns requiring immediate attention as unemployment does not simply have economic repercussions but also grave social and emotional implications. Neoclassical economic theory treats labour like any other commodity. As long as labour is treated merely as an input in the process of production, welfare of the workers cannot be ensured (An aspect non-existent in Neoclassical welfare economics) A theory which considers no involuntary unemployment to exist at any point of time in the economy and according to which unemployment is a symptom of an increase in the demand for leisure raises serious doubts pertaining to its concerns for improving the welfare of the workers. Infact, one can ask the question whether improving the lives of individuals is even a concern for the Neoliberals, as can be seen from their constant critique of the Public Pension Schemes, job security measures and bailing out of sick firms, and their constant lobbying towards the creation of independent central banks and privatization of agriculture, old age pensions etc.

The Neoclassical argument of markets being efficient enough to restore equilibrium in the economy seems to be more of a platonic picture. For indeed if markets were really that efficient, a soaring unemployment rate of around 9.7% in the U.S, would not have been a state of affairs asking for urgent attention. With the onset of the Neoliberal regime, not only has the labour market received insignificant focus, but also there seems to be a reversal in the benefits that the trade unions and the workers have been able to achieve for themselves over years of protests and collective bargaining.

The recognition of the fact that market failures are impertinent to any market based economy ensues that the role of the Government becomes pivotal in shaping the fortunes of the deprived or the unprivileged classes. Labour market reforms, in most nations, have not been able to produce drastic results, thereby posing a serious question mark pertaining to the primary focus behind governmental policy. Thus, Governments across the world should aim for more focused and radical macroeconomic policies in order to attain full employment, improved working conditions and job security, thereby protecting workers from the unanticipated fluctuations in the global economy.