The Return of Rentierism under Neoliberalism (1980s - 2010s)

Under neoliberalism, national governments’ ability to exercise control over the direction of their economy was severely curtailed. The states thus lost their economic sovereignty to the mercy of free flowing foreign capitals while the neoliberal capital-first approach generates economic rent that benefits capital owners to the detriment of the workers. Over time, the balance of power thus shifts towards the dominant economic classes that control capital.

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20 June 2019

The Root of Neoliberalism


The root of neoliberalism (新自由主义), a variant of economic liberalism, can be traced to the school of thought known as the “Austrian economics” (奥地利经济学派) during the interwar years (1919 – 1939). Led by Friedrich Hayek and Ludwig von Mises, this school of thought embraced the freedom of markets from state intervention.


In the aftermath of the World War I, the Austrian economists were alarmed when the centuries-old European empires broke up into a myriad of independent nation states all seeking also for economic independence. To counter the trend of rising economic nationalism (经济国家主义), they constructed models based on an opposing concept of “world economy” that would have no place for states seeking to impede the circulation of money and to downgrade the influence of foreign investors and bondholders. They did not favour a world government though. Instead, they sought for a system of global governance supported by supranational rules-based institutions that would constrict nation-states without being accountable to any public. In the neoliberal vision, ordinary people would experience the economy as they did the weather, as a sphere “outside of direct human control”.


The ambitions of the neoliberals were initially kept in check by the onset of Great Depression which saw governments turning their backs on free-market ideology thought to be responsible for causing the crisis. Then in 1947, a small and exclusive group of passionate advocates –– mainly academic economists, historians, and philosophers –– gathered together around the Hayek to create the Mont Pelerin Society (named after the Swiss spa where they first met). The group’s members depicted themselves as ‘liberals’ (in the traditional European sense) because of their fundamental commitment to ideals of personal freedom. To differentiate from the 19th century classical economic liberalism which also had free market as its goals, the prefix ‘neo’ which means ‘new’ was affixed to the 20th-century liberal economic policies.


After the end of WWII, neoliberals were still kept at bay by states which adopted Keynesianism and welfarism and assumed the role as the guardian of society rather than of the economy. It was not until the late 1970s that the crumbling state finances and market inefficiencies created by overextended welfarism and Keynesianism finally set the stage for the emergence of neoliberalism.


The Rise of Neoliberal Thatcherism and Reaganomics


Tenets of that far-reaching free-market approach include privatization, fiscal austerity, financial deregulationfree trade, and reductions in government spending in order to enhance the role of the private sector in the economy. Neoliberalism therefore required wider and deeper reforms compared to the classical economic liberalism. Because of its emphasis on free market, neoliberalism is often also called market fundamentalism.


In practice, neoliberalism was extensively propagated only by the British Prime Minister Margaret Thatcher and her ideological soulmate the US President Ronald Reagan following their elections in 1979 and 1981 respectively. Riding on their free-market policy regimes, the neoliberals began building a new world order guided by the principle of “capital first”. Accordingly, state industries were privatized, domestic financial markets were deregulated and liberalized, barriers to movement of capital across borders were eradicated, trade barriers between countries were lifted, and social welfare programmes were systematically streamlined or rolled back.


In terms of macroeconomic policies, the state also retreated from the Keynesian approach of using fiscal policies to regulate aggregate demand to maintain full employment and adopted Milton Friedman’s monetarist approach of using monetary policies to control growth while restraining excessive inflation. More importantly, the retreat of the state meant that, over time, roles and power of national governments to control their own economic destiny were severely curtailed.


To justify the primacy of market, the neoliberal invoked Adam Smith’s conception ofinvisible hand’. However, unlike the classical economic liberalism, whose main focus was to foster free market forces for the working of national economy, neoliberalism sought to build an unbridled global economy free from economic nationalism.


In other words, in the neoliberalist vision, national governments’ ability to exercise control over the direction of their economy would be severely curtailed thus rendering economic sovereignty to the mercy of free flowing foreign capitals. Critics thus equate neoliberalism as a new form of colonialism, or called neocolonialism by some, but this time by transnational corporations, not foreign governments.


Before 1980s, the focus on free trade was driven by Ricardian ‘comparative advantage’ (相对优势) which dictates that countries specialize in those goods and services they are more efficient at producing relative to others. After the onset of neoliberalism, led by the US and UK and facilitated by global institutions IMF, the World Bank and WTO, growth becomes progressive underpinned by zero-sum “competitive advantages” (竞争优势) between economies.


In other words, the instead of focusing on doing what they could do best based on comparative advantages, all countries now had to compete and be better at doing the same things. To attract and retain foreign investments, countries compete by lowering costs to boost profits for foreign investors. The ‘race to the bottom’ meant paying workers less, cutting direct taxes, particularly on capital, and providing subsidies to investors.


Declining Labour Share of National Income under Neoliberalism


Since the 1980s, with businesses relocating their manufacturing operations to the lower-cost emerging economies, the share of income going to labour has shrunk in most economically developed countries. Even though governments worked hard on job creation to replace those lost due to deindustrialization, new jobs created pay less. The wage stickiness caused real wages on average to stagnate or fall. The downward pressure on wages generates economic rent that benefits capital owners to the detriment of the workers. Today, work is no longer the road to riches, or even the way out of poverty. In the US, for example, unlike in the past when wages rose with fall in unemployment, workers’ pay today remains stagnant despite improving job figures.


According to McKinsey, labour’s share of national income has been declining since the 1980s due to a combination of factors including superstar effects and industry consolidation, which resulted in the emergence of a small number of dominant firms capturing a disproportionately larger share of economic profit than their peers through the exploitation of information advantages[1]; capital substitution of labour; and globalization and the resultant decline in labour’s bargaining power.


In the US, for example, the labour share of income in the US private business sector declined by about 5.4% between the periods 1998 to 2002 and 2012 to 2016.[2] In contrast, capital share of income has been climbing amid rising corporate power vis-à-vis workers attributable to the emergence of new technologies, globalization, the hollowing out of labour unions, and market consolidation (i.e. by buying up potential competitors).


Meanwhile, in the developing economies, the influx of foreign direct investments did help to lift hundreds of millions from poverty initially but competition between countries for foreign investments helped to ensure that many of the countries do not escape from the ‘middle-income trap’ (中等收入陷阱).


Widening Social Disparity


More pertinently, amid slowing economic growth and rising financial instability, elites in both developed and developing economies have managed to race ahead in their wealth accumulation through rent seeking behaviours made possible by regulatory capture. The neoliberal emphasis of “capital first” means that domestically, the balance of power shifts towards the dominant economic classes that control capital.


Gradually but surely, rentierism by both domestic and foreign capitals has made a discreet comeback after four-plus decades of rolling back the state frontiers since the 1980s.


According to Thomas Picketty, wealth gap in Europe and the US widened through the 19th century and reached its peak in 1910 when top 10% wealth share hit 90% and 80% respectively[3] but began to decline after that firstly as a result of the two world wars and the interwar years Great Depression and of the progressive socioeconomic policies, underpinned by state welfarism and Keynesianism, and the vibrant global economy after WWII. After 1970s, however, wealth inequality resumed its climbing trend because of wide-scale neoliberal policy initiatives driving privatization, deregulation, and changes in tax structure and of technological changes and globalization, all of which contributed to higher return for capital owner while real wages of workers stagnated or event declined.


Keynes were right that capital did become less scarce but was dead wrong about the “euthanasia of the capitalists” who have succeeded in protecting their interests and rent-seeking capability by creating the neoliberal “capital first” global framework of institutions and regulations that allow for rental income maximization. More than eighty years after his proclamation, the rentiers not only live on but have become the main beneficiaries of modern capitalism system.[4]


It is therefore a great irony of history that, two centuries after the publication of The Wealth of Nations, Smith’s most famous idea of market forces as ‘invisible hand’ was invoked by neoliberals as a defence to unregulated markets to protect the interests of rent-seeking private capitalists when his original intention was really to restrict them.


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[1] See Joseph Stiglitz. (2019). “After Neoliberalism.” Project Syndicate. 30 May, 2019.                                                                                   

[2] See McKinsey. (2019). “A new look at the declining labor share of income in the United States.” May 2019.

[3] See Thomas Picketty. “Capital in the 21st Century.”

[4] See Guy Standing. (2016). “The Five Lies Of Rentier Capitalism.” Social Europe. 27 October, 2016.