Who would have thought it? After only three or four decades of neoliberalism stuffing up the world, a small brave band of economists at the International Monetary Fund has begun to doubt whether neoliberalism is really all it’s cracked up to be.

Heresy! And from IMF economists! It’s almost like a cardinal in the Catholic Church suggesting that Galileo might not have been totally wrong about the shape of the cosmos.

The paper by three IMF economists was reported in the Guardian on 28 May. “Austerity policies do more harm than good, IMF study concludes” was the Guardian’s headline. Most of us who aren’t well-paid economists noticed that a long time ago. It wasn’t terribly difficult to do so, because the only “good” from austerity policies was the benefits that accrued to people who were already richer than they deserved or needed to be.

The authors of the paper haven’t yet got the full story, but they have a fair beginning. They have noticed at least two things: (1) neoliberalism increases inequality, and (2) inequality slows the growth of an economy. This is the opposite of official neoliberal theory, which asserts: (1) austerity increases economic growth, and (2) economic growth trickles down from on high, reducing inequality and increasing employment.

The IMF paper, by Jonathan D. Ostry, Prakash Loungani and Davide Furceri, is titled: “Neoliberalism: Oversold?” They focus on just two planks of the neoliberal agenda: the removal of restrictions on international capital movements, and austerity. Looking at the effects of these policies, the authors arrive at “three disquieting conclusions”.

The first is that the increased growth claimed to result from these policies is “fairly difficult to establish when looking at a broad group of countries”. That is a polite academic way of saying that the claims are bullshit.

The second is, “The costs in terms of increased inequality are prominent”. In non-academic language, these policies make the rich richer and the poor poorer.

Their third conclusion is that this increased inequality “hurts the level and sustainability of growth”, which is the opposite of what the proponents of neoliberalism promised.

The authors distinguish between two types of “financial openness” or international capital movements: “Some capital inflows, such as foreign direct investment [FDI] … do seem to boost long term growth. But the impact of other flows – such as portfolio investment and banking and especially hot, or speculative, debt inflows – seem neither to boost growth nor allow the country to better share risks with its trading partners”.

And they note: “Since 1980, there have been about 150 episodes of surges in capital inflows in more than 50 emerging market economies … about 20 percent of the time, these episodes end in a financial crisis, and many of these crises are associated with large output declines”. They suggest that governments should perhaps regulate capital movements – a neoliberal no-no – in order to allow FDI but prevent speculation.

As for austerity, the authors can’t find any good side. “Austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand – and thus worsen employment and unemployment … episodes of fiscal consolidation [austerity] have been followed, on average, by drops rather than by expansions in output. On average, a consolidation of 1 percent of GDP increases the long term unemployment rate by 0.6 percentage point and raises by 1.5 percent within five years the Gini* measure of income inequality.”

Looking at both aspects, they conclude: “[S]ince both openness and austerity are associated with increasing income inequality, this distributional effect sets up an adverse feedback loop. The increase in inequality engendered by financial openness and austerity might itself undercut growth, the very thing that the neoliberal agenda is intent on boosting”.

But, having thrown out the neoliberal baby, the IMF economists are not going to make the mistake of throwing out the ideological bathwater as well. They begin the paper by assuring the reader, “There is much to cheer in the neoliberal agenda”.

Their cheers are for three claims that they don’t try to justify: (1) neoliberalism is responsible for increased international trade, which has “rescued millions from abject poverty”; (2) FDI “has often been a way to transfer technology and know-how to developing economies” (when we non-economists thought it was a way of transferring money to developed economies); (3) privatisation “in many instances [no statistics provided] led to more efficient provision of services and lowered the fiscal burden on governments”.

So, while it’s nice to see that parts of reality can penetrate a little way into even an organisation as pro-capitalist as the IMF, I won’t be making the IMF web page my major source of economic wisdom. And even if the capitalists, and therefore the IMF, switch to neo-Keynesian policies, only the methods, not the goals, will have changed.

* The Gini measure is a number between 0 (representing total equality) and 100 percent (total inequality).