Monday, January 23, 2012

Neoliberalism and the Fallacy of the Shock Doctrine

Since I call myself the Capitalist Lawyer, it's hard for me to resist the temptation of enrolling in one of my law school's courses: Law and Political Thought - Neoliberalism and Its Critiques. After all, I always believe that you can't properly learn a thought if you don't learn its critiques. One of the required readings in this course is Naomi Klein's book, the Shock Doctrine. The basic idea of her book is that the globalization of neoliberalism is primarily caused by the shock doctrine, where neoliberalism supporters use a crisis in a particular place in the world to spread their ideology in an effective way, ensuring that the changes can be made in a massive scale and that such changes would be almost irreversible once they are established as governmental policies.

To add the spices, the book also shows how the shock therapy is administered to various part of the world such as Chile (Auguste Pinochet case), Iraq (the oil companies saga), Asia tigers (the 1997 crisis where Indonesia was part of the victims), China (Deng Xiaoping reformation and the Tiananmen Square) and also England's liberalization (under Margaret Thatcher rule). Furthermore, she also believe that all of these disasters were caused by the idea of Milton Friedman, the famous economist from the University of Chicago. Milton Friedman who was very famous for his teaching on the power of freedom, free market and limited government was blamed as the prime perpetrator of neoliberalism. He was also quoted as the guy who first started the idea of using crisis as a way of spreading ideology.

I must say that reading her book, I am not convinced that there is a strong relationship between the idea of Milton Friedman and the administration of the shock doctrine. It seems that most, if not all, of her critiques and evidence used in the book are precisely not a part of Milton Friedman teachings, nor should they be considered as a part of the original idea of neoliberalism. I would say that she has mixed neoliberalism with corporatism and/or crony capitalism which should be rejected from any point of view.  

First of all, using crisis as a starting point of spreading your idea is totally legitimate. Through out the history, we have seen numerous times how crisis change how people perceive the world. If it is not because of the Great Depression in the 1930s, Keynesianism would never had the chance to spread. No one would believe that the solution for depression is additional government consumption.  And if it is not for the 2008 crisis, no one would write books on Keynes revivalism. I think the reason why crisis is so effective to spread new ideas is simply because during crisis, people are shocked, their previous believe is shaken, they are vulnerable and would easily see any other new alternatives as the solution. This is what we call as hindsight bias.  

Unlike her idea, that shock therapy is a bad idea, I believe that crisis is neutral. Any person can use a crisis for his own advantage, including spreading his ideas. Whether such idea is good or not is a separate matter and history will usually determine the longevity of an idea, whether it will survive for a long time or not. The same thing also happened in Indonesia during the 1966s. When Sukarno fell from his throne and Indonesia was consumed by more than 600% rate of inflation, it was also the right time to dethrone the socialism ideology and replace it with a balanced government intervention-free market economic system. In reality it was a success until Indonesia was turned into a state of crony capitalism and ended badly in the 1997 crisis. If we don't have such crisis, who knows where will our beloved country actually end. Maybe worse than now.

Second, her stories show how dictators use their power to force the free market idea into the society and how corrupt governmental officials cooperate with corporate officers for the sake of their own profits and interests (business lobbying is a serious problem, even in the United States). While that might be true, I don't think that represents the vision of Milton Friedman on capitalism and freedom. The capitalism that I know and believe as the best economic system for the welfare of society does not support dictatorism nor does it support crony capitalism. The capitalism that I know also does not support absolute freedom where business firms can do everything without any liabilities whatsoever. That does not make any sense. Economics teaches us that there are externalities that can be produced by a party against the welfare of the society and that in order to enable the market to work efficiently, such party must be held liable and internalize the costs that it has imposed to the society.

This is where I think Naomi Klein miscalculated her own idea. She work really hard to show how evil Milton Friedman is and how bad neoliberalism is, where government is being stripped from their power and the state assets are sold to several oligopolists who then control the market for their own benefits. Yet in reality, none of these represent neoliberalism thought. Minimum government should not be translated into: "you can do whatever you want". It means that the government should not try to be too big and then used by various interest group for their own purposes. We know that government consists of people, and we also know that they are not angels. To believe that government would always consist of good people would be as naive as believing that the market would always full with good people.

Ronald Coase in his famous Theory of the Firm has shown that firms, coordinated and integrated business units where capital, management, and employee meet and work together, exist within the market. Some empirical researches also show that 50% of the businesses conducted in the market are being run by firms. In short, this means that coordinated effort is necessary and also useful to the extent that the costs of doing so is cheaper than doing transactions via the market. So naturally, there is a balance between coordinated economy and uncoordinated economy where the invisible hand will work.

So in the end, what is neoliberalism? I am still looking for the answer during the course. But I don't believe that it should be placed in the same place with dictatorism and crony capitalism. The idea to promote the welfare of the society by maximizing the freedom of the people and limiting the role of the government in order to make it focus on its essential duties should never be used to justify greed and crimes. It is stupid if you think everything should not be regulated, but that's just the same with the idea of regulating everything. I'll update this issue once I finish the course.

2 comments:

Christine Elisia,  Monday, May 28, 2012 3:43:00 AM  

Great writing, Bang Pram. Reading this article reminds me of a discussion I attended with a professor from the Netherlands, some FHUI lecturers and PhD students last week. In some countries, including Indonesia, there are fears of law and economics approach. This is due to the such labels as 'economic', 'efficiency', 'neoliberalism', etc. used. It is thought to refer to capitalism and does not take the side of the folks. (People here are way too devoted to romanticism, for example Pancasila and justice to all.) Mixed up concepts, I suppose.

This false prejudice, to some extent, has impeded the development of the thoughts, in order to give recommendation to more efficient law in Indonesia. Do you think there is a way to correct this wrong interpretation?

Pramudya A. Oktavinanda Tuesday, May 29, 2012 12:06:00 AM  

Christine, you are correct that in Indonesia, Law and Economics is not yet a famous subject. This issue also persists in various other Civil Law countries. A part of this is caused by the reasons that you describe, and another is because in Civil Law countries, judges are expected to just follow what the regulation says and thus less discretion for the judges.

The only way to correct this wrong interpretation is to actively engage with this idea in the public sphere. This is one of the goals of my writings in Law and Economics, i.e. to introduce Law and Economics issues to the public.

Now, it might take a life time to develop Law and Economics in Indonesia, after all developing a new thought would never be easy. But hopefully, both of us can significantly contribute to such development during our life time and improve the Indonesian legal system.

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