Economic Rationalism

Conceptual Overview

Classical economics and liberalism, from which economic rationalist ideas are derived, originally developed in the 17th to 19th centuries through the work of economists and liberalists such as John Locke, Adam Smith, and John Stuart Mill. Neoclassical economics, or economic rationalism, involved a repromotion of these classical ideas from the 1960s by contemporary economists, including Milton Friedman and Friedrich Hayek. Influential think tanks, academic schools, and supranational organizations, such as the World Bank and the International Monetary Fund, were significant actors in seeding the ideas within political arenas.

This was at a time when governments were confronting global oil crises, stagflation, and high government debt—problems that were not addressed adequately within the postwar, Keynesian decision-making paradigm. It was not until the late 1970s, though, that Keynesianism notions of a mixed economy, welfarism, and collectivism were finally rejected by governments in favor of economic rationalism. Notably, Prime Minister Margaret Thatcher of the United Kingdom and President Ronald Reagan of the United States were early adopters, followed quickly by Canada, Australia, and New Zealand. In its modern interpretation, economic rationalism is based on a number of theoretical and conceptual ideas about the role and size of governments, as well as the role of actors within organizations.

Conceptually, economic rationalist ideas question the traditional role of government and suggest that governments should facilitate free market activity rather than directly regulate or control markets. This will achieve economic growth that might be facilitated through deregulation of financial markets, the establishment of strong financial management architecture and new institutional building, the reduction in corporate tax, and the removal of barriers to international trade. Incentives are offered to businesses to attract foreign direct investment and to support the competitive development of home industries.

Economic rationalism also suggests that governments need to give businesses the power to manage their organizations. This might involve governments legislating for industrial relations reform with changes to bargaining approaches requiring a shift away from collective bargaining to employer/employee–negotiated, enterprise-by-enterprise agreements. These are meant to reduce the power of trade unions in political and business arenas.

In governments' direct role, as a provider of public goods and services, economic rationalism moves governments' strategic decision making from a demand-to a supply-side determination. This usually means a reduction in spending on welfare policies and the implementation of fiscal and monetarist policies that reduce government debt. Conceptually, economic rationalism is a resource-based paradigm with limited attention given to collectivist, social concerns.

Such moves toward efficiency and competition involve the downsizing and reorganization of the public sector to make it more businesslike, with organizations adopting private sector managerial techniques. Thus, monopolistic and nationalized government organizations, pertaining to sectors such as banking, energy, health, education, and airlines, are likely to be restructured. This usually occurs in a number of different and combined ways.

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