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PISA2018 – 5.2 – Neoliberal Economics, Democracy, Organisations and the Consequences for Education

I have dealt with economic issues, especially neoclassical and neoliberal economics, public choice and social democracy, in several essays (see below).

That the current orthodoxy is built on shifting sands has been elaborated by many notable economists, including a number of Nobel prize-winners, notably Amatya Sen, Joseph, Stiglitz and Paul Krugman. Studies of behavioural economics especially have demonstrated how the assumptions underlying the beliefs have no basis in the way people behave, the way they make choices or the influence of social relationships, power structures and the beliefs that people grow up with as well as the influence of peers.

The contribution by sociologist, the late Professor James G March of Stanford University (1928-2018), in his advice to a school headmistress, is, I believe, profound. March pointed out (in Society for November-December 1982, p 29-39), “Instead, when faced by a problem, people ask: What kind of a situation is this? What kind of a person am I? What would a person like me do in a situation like this? And one does it! Often when one has a problem one connects to it whatever solution appears to be around at the time.” (March, who collaborated with Nobel Prize-winner Herbert Simon in a study of organisations, was awarded honorary doctorates from no less than 17 universities in the United States, Finland, Sweden, Denmark, Switzerland, Germany, France, Hungary and Spain!)

The relevance to education is that much of policy in many countries, including Australia, is based on the assumptions of economic orthodoxy. The inequality which typifies the Australian system and the failure of the education system in the United States are particularly a consequence.

In many developing countries of the Global South, especially in Africa, education has been held back by the insistence of financial lenders, notably the International Monetary Fund, that school education will be more valued if it is priced. Accordingly governments in those countries has decreed that fees be imposed on school attendance, which means that many cannot afford schooling for their children and that the intrinsic and long-term benefits to society from a well-educated citizenry are marginalised.


Paul Krugman, formerly Professor of Economics at Princeton University, and now at the Graduate Center of the City University of New York observed, “the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations.”

 ‘How Did Economists Get It So Wrong?’ New York Times September 2, 2009

Two years after the financial crisis, the U.S. economy has steered clear of total disaster, with the Dow Jones industrial average currently near its pre-crash level. But the theories that caused it all are still out there, lurking in the shadows”.

John Quiggin, ‘Five Zombie Economic Ideas That Refuse to Die’, Foreign Affairs October 15, 2010


The prevalent economic views have been criticised in their application to organisations, both public and private. I have dealt with some of those previously but quote some again now because of the relevance to the education argument.

Economist Wolfgang Drechsler, one-time advisor to the President of Estonia, executive with the German re-unification project and Senior Legislative Analyst in the US Congress, points out that NPM comes from Anglo-America, and was strongly pushed by most of the International Finance Institutions (IFI’s) such as the World Bank and the IMF.

In “The Rise and Demise of the New Public Management (September 2005) Drechsler wrote, “In recent decades the alliance of neoclassical economics and neoliberalism has hijacked the term “economic reform”. By presenting political choices as market necessities, they have subverted public debate about what economic policy changes are possible and are or are not desirable.”

“NPM ignores the fundamental difference between the public and private spheres. The state is denoted primarily by its monopoly of power, force, and coercion on one side and its orientation towards the public good, the commonweal … The use of business techniques within the public sphere thus confuses the most basic requirements of any state, particularly of a Democracy, with a liability: regularity, transparency, and due process are simply much more important than low costs and speed.”

Whilst the bureaucracy typical of public management in many domains is slow moving and seemingly hidebound that is not by itself a reason for demolishing the public sector and turning it over to the private sector. The alternative to bad public administration (PA) – the “bureaucracy” in common parlance – is not the abolition of public administration, but good public administration, one that works for state, society, and economy alike.


In Sumantra Ghoshal on Governance Theory and Practice I review several issues concerning governance, leadership and management as they have been overrun by current economic theory. Professor Sumantra Ghoshal, in a 2005 paper entitled “Bad Management Theories Are Destroying Good Management Practices” (Academy of Management Learning & Education Vol. 4/1, p 75-91 (2005), wrote, “In courses on corporate governance grounded in agency theory we have taught our students that managers cannot be trusted to do their jobs–which, of course, is to maximize shareholder value–and that to overcome “agency problems,” managers’ interests and incentives must be aligned with those of the shareholders by, for example, making stock options a significant part of their pay.

“In courses on organization design, grounded in transaction cost economics, we have preached the need for tight monitoring and control of people to prevent “opportunistic behavior”. In strategy courses, we have presented the “five forces” framework to suggest that companies must compete not only with their competitors but also with their suppliers, customers, employees, and regulators.

“.. over the last 50 years business school research has increasingly adopted the “scientific” model–an approach that [Frederick] Hayek [(author of The Road to Serfdom)] in 1989 described as “the pretense of knowledge.” This pretense has demanded theorizing based on partialization of analysis, the exclusion of any role for human intentionality or choice, and the use of sharp assumptions and deductive reasoning”

“Why then do we feel surprised by the fact that executives in Enron, Global Crossing, Tyco, and scores of other companies granted themselves excessive stock options, treated their employees very badly, and took their customers for a ride when they could?”

For further comment on economics go to A Word on Economics, Neoclassical Economics : a Failure of Theory or a Theoretical Failure? and Choice Theory


This essay was modified 17 January 2021 to clarify the use of the terms neoclassical and neoliberal economics.