Neoliberalism and Micromotives

Jeff Heuer — Sat, 21 Jan 2006 16:55:51 +0000

James Surowiecki writes in the New Yorker this week about the failure of neoliberalist “Washington Consensus” policies to lift Bolivian peasants out of poverty. He argues that while neoliberalism gets the big picture strategy right — privatization of state-owned enterprises, balanced budgets, free trade, and openness to foreign investment — it doesn’t place enough emphasis on the details, “and it’s increasingly clear that when it comes to development God really is in the details.” While a campaign of economic shock therapy in 1985 was successful in stopping Bolivia’s runaway inflation, per-capita economic growth since then has averaged just half a percent a year.

Neoliberalism failed in Bolivia because a macroeconomic checklist is not enough to make an economy work. Incorporating a new business in Bolivia, for instance, takes fifty-nine days, entails fifteen separate procedures, and costs twice as much as the average person earns in a year. So, according to a recent World Bank study, most of Bolivia’s businesses remain “informal,” which means that they have no legal protection, and limited access to credit markets.

The functioning of an economy certainly depends on the legal and institutional infrastructure a government establishes, but at the end of the day it is the constant stream of small, individual decisions people make that actually create an economy. Anticipating and engineering these micromotives is a key component to achieving the economic outcomes we want.

For much more on the small details of developmental economics, see The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, by Peruvian economist Hernando de Soto.

Micromotives » evo-morales

Neoliberalism and Micromotives