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Neoliberalism is the resurgence of ideas associated with economic liberalism beginning in the 1970s and 1980s, whose advocates support extensive economic liberalization, free trade, and reductions in government spending in order to enhance the role of the private sector in the economy. The usage and definition of the term have changed over time.
Originally neoliberalism was an economic philosophy that emerged among European liberal scholars in the 1930s attempting to trace a so-called ‘Third’ or ‘Middle Way’ between the conflicting philosophies of classical liberalism and collectivist central planning. The impetus for this development arose from a desire to avoid repeating the economic failures of the early 1930s which was mostly blamed on economic policy of classical liberalism. In the decades that followed, neoliberal theory tended to be at variance with the more laissez-faire doctrine of classical liberalism and promoted instead a market economy under the guidance and rules of a strong state, a model which came to be known as the social market economy.
In the 1960s, usage of the term "neoliberal" heavily declined. When the term was reintroduced in the 1980s in connection with Augusto Pinochet’s economic reforms in Chile, the usage of the term had shifted. It had not only become a term with negative connotations employed principally by critics of market reform, but it also had shifted in meaning from a moderate form of liberalism to a more radical and laissez-faire capitalist set of ideas. Scholars now tended to associate it with the theories of economists Friedrich Hayek and Milton Friedman. Once the new meaning of neoliberalism was established as a common usage among Spanish-speaking scholars, it diffused directly into the English-language study of political economy.
Neoliberalism also represents a set of ideas that are famously associated with the economic policies introduced by Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States.
Today the term neoliberalism is mostly used pejoratively as a general condemnation of economic liberalization policies, such as privatization, open markets, and deregulation. The transition of consensus towards neoliberal policies, and the acceptance of neoliberal economic theories in the 1970s is seen as the roots of financialization with the Financial crisis of 2007–08 as one of the ultimate results. The American scholar and co-editor of the socialist magazine Monthly Review Robert W. McChesney defines neoliberalism as "capitalism with the gloves off".
- 1 Terminology
- 2 Early history
- 3 Post-WWII neo-liberal currents
- 4 Economic schools of thought
- 5 Expanded definition
- 6 Policy implications
- 7 Reach and effects
- 8 Support
- 9 Opposition
- 10 See also
- 11 Notes
- 12 Bibliography and further reading
- 13 External links
The German scholar Alexander Rüstow coined the term "neoliberalism" in 1938 at the Colloque Walter Lippmann. The colloquium defined the concept of neoliberalism as involving "the priority of the price mechanism, the free enterprise, the system of competition and a strong and impartial state". To be "neoliberal" meant advocating a modern economic policy with State intervention. Neoliberal State interventionism brought a clash with the opposite laissez-faire camp of classical liberals, like Ludwig von Mises. While present-day scholars tend to identify Friedrich Hayek, Milton Friedman, and Ayn Rand as the most important theorists of neoliberalism, most scholars in the 1950s and 1960s understood neoliberalism as referring to the social market economy and its principal economic theorists such as Eucken, Röpke, Rüstow, and Müller-Armack. Although Hayek had intellectual ties to the German neoliberals, his name was only occasionally mentioned in conjunction with neoliberalism during this period due to his more pro-free market stance. Friedman´s name essentially never appeared in connection with neoliberalism until the 1980s. And Rand was thought of as many things, but never really a "new liberal." In the sixties, use of the term "neoliberal" heavily declined.
Another movement from the American left that used the term "Neoliberalism" to describe its ideology formed in the United States in the 1981. Prominent neoliberal politicians included Al Gore and Bill Clinton of the Democratic Party of the United States. The neoliberals coalesced around two magazines, The New Republic and the Washington Monthly. The "godfather" of this version of neoliberalism was the journalist Charles Peters who in 1983 published "A Neoliberal's Manifesto."
During the military rule under Augusto Pinochet (1973–1990) in Chile, opposition scholars took up the expression to describe the economic reforms implemented in Chile after 1973 and its proponents (the Chicago Boys). Once the new meaning of neoliberalism was established as a common usage among Spanish-speaking scholars, it diffused directly into the English-language study of political economy. In the last two decades, according to the Boas and Gans-Morse study of 148 journal articles, neoliberalism is almost never defined but used in several senses to describe ideology, economic theory, development theory, or economic reform policy. It has largely become a term of condemnation employed by critics. And it now suggests a market fundamentalism closer to the laissez-faire principles of the "paleoliberals" than to the ideas of the original neoliberals who attended the colloquium. This leaves some controversy as to the precise meaning of the term and its usefulness as a descriptor in the social sciences, especially as the number of different kinds of market economies have proliferated in recent years.
According to Boas and Gans-Morse the term neoliberalism is nowadays mainly used by critics as a pejorative term. Nowadays the most common use of the term neoliberalism refers to economic reform policies such as "eliminating price controls, deregulating capital markets, lowering trade barriers", and reducing state influence on the economy especially by privatization and fiscal austerity. The term is used in several senses: as a development model it refers to the rejection of structuralist economics in favor of the Washington Consensus; as an ideology the term is used to denote a conception of freedom as an overarching social value associated with reducing state functions to those of a minimal state; and finally as an academic paradigm the term is closely related to neoclassical economic theory. The sociologists Fred L. Block and Margaret R. Somers claim there is a dispute over what to call the influence of free market ideas which have been used to justify the retrenchment of New Deal programs and policies over the last thirty years: neoliberalism, laissez-faire or just "free market ideology."
Other academics, such as Susan Braedley and Meg Luxton, assert that neoliberalism is a political philosophy which seeks to "liberate" the processes of capital accumulation. American professor of political science and Democratic socialist Frances Fox Piven sees neoliberalism as essentially hyper-capitalism.
Colloque Walter Lippmann
In the 1930s, the mood was decidedly anti-liberal. The worldwide Great Depression brought about high unemployment and widespread poverty. The crises was widely regarded as the failure of economic liberalism. To renew liberalism a group of 25 liberals organised the Walter Lippman Colloquium, an international meeting that took place in Paris in August 1938. Among them were Louis Rougier, Walter Lippmann, Friedrich von Hayek, Ludwig von Mises, Wilhelm Röpke and Alexander Rüstow. Following the core message of Lippmann's book The Good Society participants like Rüstow, Lippmann and Rougier agreed that the old liberalism of laissez faire had failed and that a new liberalism needed to take its place. While for them it was a farewell to classical liberalism, which they thought to have failed, other participants like Mises and Hayek were not convinced to condemn the old liberalism of laissez faire. But all participants were united in their call for a new liberal project. Following Rüstow's original recommendation they called this project neoliberalism. The neoliberalism that came out of the Colloque Walter Lippmann was generally in line with Rüstow's theories of turning away from conceptions of laissez-faire towards a market economy under the guidance and the rules of a strong state. It was an attempt to formulate an anti-capitalist, anti-communist Third Way. Neoliberalism was originally established as something quite different from the free market radicalism with which it is usually associated today.
They had agreed upon to turn the Colloque Walter Lippmann into a permanent think tank called Centre International d’Études pour la Rénovation du Libéralisme. But at the Colloque Walter Lippmann, the fundamental differences between 'true (third way) neoliberals' around Rüstow and Lippmann on the one hand and old school liberals around Mises and Hayek on the other were already quite visible. While ‘true neoliberals’ demanded state intervention to correct undesirable market structures, Mises had always insisted that the only legitimate role for the state was to abolish barriers to market entry. Similar differences of opinion also existed in other questions such as social policy and the scope for interventionism. After a few years the insurmountable differences between old liberals and the neoliberals become unbearable. Rüstow was bitter that Mises still adhered to a version of liberalism that Rüstow thought had failed spectacularly. In a letter Rüstow wrote that Hayek and his master Mises deserved to be put in spirits and placed in a museum as one of the last surviving specimen of an otherwise extinct species of liberals which caused the current catastrophe (the Great Depression). Mises became equally critical of the German neoliberals. He complained that Ordoliberalism really meant 'ordo-interventionism'.
Michel Foucault uses the term in this sense in his famous 1978-79 lectures on "biopolitics". He discusses the late 30s German meaning used by Walter Lippmann and others, of a middle way between capitalism and socialism. He says "Neo-liberalism is not Adam Smith; neo-liberalism is not market society"  and to him it clearly does not mean Hayek and Milton Friedman.
Mont Pelerin Society
The Mont Pelerin Society was founded in 1947 by Friedrich Hayek to bring together the widely scattered neoliberal thinkers and political figures. "Hayek and others believed that classical liberalism had failed because of crippling conceptual flaws and that the only way to diagnose and rectify them was to withdraw into an intensive discussion group of similarly minded intellectuals." With central planning in the ascendancy world-wide and with few avenues to influence policymakers, the society served to bring together isolated advocates of liberalism as a "rallying point" – as Milton Friedman phrased it. Meeting annually, it would soon be a "kind of international 'who's who' of the classical liberal and neo-liberal intellectuals." While the first conference in 1947 was almost half American, the Europeans concentration dominated by 1951. Europe would remain the "epicenter" of the community with Europeans dominating the leadership.
Post-WWII neo-liberal currents
Neoliberal ideas were first implemented in West Germany. The neoliberal economists around Ludwig Erhard could draw on the theories they had developed in the 1930s and 1940s and contribute to West Germany’s reconstruction after the Second World War. Erhard was a member of the Mont Pelerin Society and in constant contact with other neoliberals. He pointed out that he is commonly classified as neoliberal and that he accepted this classification.
The ordoliberal Freiburg School was rather moderate and pragmatic. The German neoliberals accepted the classical liberal notion that competition drives economic prosperity, but they argued that a laissez-faire state policy stifles competition as the strong devour the weak since monopolies and cartels could pose a threat to freedom of competition. They supported the creation of a well-developed legal system and capable regulatory apparatus. While still opposed to full-scale Keynesian employment policies or an extensive welfare state German neoliberals' theory was marked by their willingness to place humanistic and social values on par with economic efficiency. Alfred Müller-Armack coined the phrase "social market economy" to emphasize the egalitarian and humanistic bent of the idea. According to Taylor C. Boas and Jordan Gans-Morse Walter Eucken stated that "social security and social justice are the greatest concerns of our time".
Erhard had always emphasized that the market was inherently social and did not need to be made so. He had hoped that growing prosperity would enable the population to manage much of their social security by self-reliance and end the necessity for a widespread welfare state. By the name of Volkskapitalismus there were some efforts to foster private savings. But although average contributions to the public old age insurance were quite small, it remained by far the most important old age income source for a majority of the German population. Therefore, despite liberal rhetoric, the 1950s witnessed what has been called a ″reluctant expansion of the welfare state″. To end widespread poverty among the elderly the pension reform of 1957 brought a significant extension of the German welfare state which already had been established under Otto von Bismarck. Rüstow, who had coined the label "neoliberalism", criticized that development tendency and pressed for a more limited welfare programs.
Hayek did not like the expression "social market economy", but he stated in 1976 that some of his friends in Germany had succeeded in implementing the sort of social order for which he was pleading while using that phrase. However in Hayek's view the social market economy's aiming for both a market economy and social justice was a muddle of inconsistent aims. Despite his controversies with the German neoliberals at the Mont Pelerin Society, Ludwig von Mises stated that Erhard and Müller-Armack accomplished a great act of liberalism to restore the German economy and called this "a lesson for the US". According to different research, however, Mises believed that the ordoliberals were hardly better than socialists. As an answer to Hans Hellwigs complaints about the interventionist excesses of the Erhard ministry and the ordoliberals, Mises wrote, "I have no illusions about the true character of the politics and politicians of the social market economy." According to Mises, Erhard's teacher Franz Oppenheimer "taught more or less the New Frontier line of" President Kennedy's "Harvard consultants (Schlesinger, Galbraith, etc.)".
In Germany, neoliberalism at first was synonymous with both ordoliberalism and social market economy. But over time the original term neoliberalism gradually disappeared since social market economy was a much more positive term and fitted better into the Wirtschaftswunder (economic miracle) mentality of the 1950s and 1960s.
In the 1960s, Latin American intellectuals began to notice the ideas of ordoliberalism; these intellectuals often used the Spanish term neoliberalismo to refer to this school of thought. They were particularly impressed by the social market economy and the Wirtschaftswunder (“German miracle”) and speculated about the possibility of accomplishing similar policies in their own countries. Neoliberalism in 1960s meant essentially a philosophy that was more moderate than classical liberalism and favored using state policy to temper social inequality and counter a tendency toward monopoly.
In 1955, a select group of Chilean students (later known as the Chicago Boys) were invited to the University of Chicago to pursue postgraduate studies in economics. They worked directly under Friedman and his disciple Arnold Harberger, while also being exposed to Hayek. When they returned to Chile in the 1960s, the Chicago Boys began a concerted effort to spread the philosophy and policy recommendations of the Chicago and Austrian schools, setting up think tanks and publishing in ideologically sympathetic media. Under the military dictatorship headed by Pinochet and severe social repression, the Chicago boys implemented radical economic reform. The latter half of the 1970s witnessed rapid and extensive privatization, deregulation, and reductions in trade barriers. In 1978 policies that would reduce the role of the state and infuse competition and individualism into areas such as labor relations, pensions, health, and education were introduced.
Two decades after it was first used by pro-market intellectuals in the 1960s, the meaning of neoliberalism changed. Those who regularly used the term neoliberalism in the 1980s typically applied it in its present-day, radical sense, denoting market fundamentalism. Neoliberalism had not only become a term with negative connotations employed principally by critics of market reform, but it also had shifted in meaning from a moderate form of liberalism to a more radical and laissez-faire capitalist set of ideas. Scholars during this period had also ceased to identify the Germans as neoliberalism’s intellectual progenitors, tending instead to associate neoliberalism with the theories of Friedrich Hayek and Milton Friedman. Indeed, Pinochet’s 1973 coup emerges as some kind of a watershed in the usage of neoliberalism. Neoliberalism gained a negative, radical sense just after this date. Once the new meaning of neoliberalism was established as a common usage among Spanish-speaking scholars, it diffused directly into the English-language study of political economy.
In 1990 the military dictatorship ended. Hayek argued that increased economic freedom had put pressure on the dictatorship over time and increased political freedom. Many years earlier, in The Road to Serfdom (1944), Hayek had argued that "economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends." The Chilean scholars Javier Martínez and Alvaro Díaz reject that argument pointing to the long tradition of democracy in Chile. The return of democracy had required the defeat of the Pinochet regime though it had been fundamental in saving capitalism. The essential contribution came from profound mass rebellions and finally old party elites using old institutional mechanisms to bring back democracy.
In Australia, neoliberal economic policies have been embraced by governments of both the Labor Party and the Liberal Party since the 1980s. The governments of Bob Hawke and Paul Keating from 1983 to 1996 pursued economic liberalisation and a program of micro-economic reform. These governments privatized government corporations, deregulated factor markets, floated the Australian dollar, and reduced trade protection.
Keating, as federal treasurer, implemented a compulsory superannuation guarantee system in 1992 to increase national savings and reduce future government liability for old age pensions. The financing of universities was deregulated, requiring students to contribute to university fees through a repayable loan system known as the Higher Education Contribution Scheme (HECS) and encouraging universities to increase income by admitting full-fee-paying students, including foreign students. The admitting of domestic full fee paying students to public universities was stopped in 2009 by the Rudd Labor Government.
Economic schools of thought
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The Austrian School is a school of economic thought which bases its study of economic phenomena on the interpretation and analysis of the purposeful actions of individuals. It derives its name from its origin in late-19th and early-20th century Vienna with the work of Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser, and others. Currently, adherents of the Austrian School can come from any part of the world, but they are often referred to as "Austrian economists" or "Austrians" and their work as "Austrian economics".
Among the contributions of the Austrian School to economic theory are the subjective theory of value, marginalism in price theory, and the formulation of the economic calculation problem. Many theories developed by "first wave" Austrian economists have been absorbed into most mainstream schools of economics. These include Carl Menger's theories on marginal utility, Friedrich von Wieser's theories on opportunity cost, and Eugen von Böhm-Bawerk's theories on time preference, as well as Menger and Böhm-Bawerk's criticisms of Marxian economics. The Austrian School differs significantly from many other schools of economic thought in that the Austrian analysis of the observed economy begins from a prior understanding of the motivations and processes of human action. The Austrian School follows an approach, termed methodological individualism, a version of which was codified by Ludwig von Mises and termed "praxeology" in his book published in English as Human Action in 1949. Mises was the first Austrian economist to present a statement of a praxeological method. Since that time, few Austrian thinkers have adopted his approach and many have adopted alternative versions. For example, Fritz Machlup, Friedrich von Hayek, and others, did not take Mises' strong a priori approach to economics.
During the early 1950s, Murray Rothbard attended the seminar of Mises at New York University and was greatly influenced by Mises' book Human Action. The Volker Fund paid Rothbard to write a textbook to explain Human Action in a fashion suitable for college students; a sample chapter he wrote on money and credit won Mises’s approval. As Rothbard continued his work, he enlarged the project. The result was Rothbard's book Man, Economy, and State, published in 1962. Upon its publication, Mises praised Rothbard's work effusively and, for Mises, uncharacteristically.:14 Rothbard founded the Center for Libertarian Studies in 1976 and the Journal of Libertarian Studies in 1977. He was associated with the 1982 creation of the Ludwig von Mises Institute in Auburn, Alabama, and was vice president of academic affairs until 1995. During the 1970s and 1980s, Rothbard was active in the Libertarian Party. He was frequently involved in the party's internal politics. He was one of the founders of the Cato Institute, and "came up with the idea of naming this libertarian think tank after Cato’s Letters, a powerful series of British newspaper essays by John Trenchard and Thomas Gordon which played a decisive influence upon America's Founding Fathers in fomenting the Revolution."
The former U.S. Federal Reserve Chairman, Alan Greenspan, speaking of the originators of the School, said in 2000, "the Austrian School have reached far into the future from when most of them practiced and have had a profound and, in my judgment, probably an irreversible effect on how most mainstream economists think in this country." In 1987, Nobel Laureate James M. Buchanan told an interviewer, "I have no objections to being called an Austrian. Hayek and Mises might consider me an Austrian but, surely some of the others would not." Republican U.S. congressman Ron Paul states that he adheres to Austrian School economics and has authored six books which refer to the subject. Paul's former economic adviser, investment dealer Peter Schiff, also calls himself an adherent of the Austrian School. Jim Rogers, investor and financial commentator, also considers himself of the Austrian School of economics. Chinese economist Zhang Weiying, who is known in China for his advocacy of free market reforms, supports some Austrian theories such as the Austrian theory of the business cycle. Currently, universities with a significant Austrian presence are George Mason University, Loyola University New Orleans, and Auburn University in the United States and Universidad Francisco Marroquín in Guatemala. Austrian economic ideas are also promoted by bodies such as the Mises Institute and the Foundation for Economic Education.
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The Chicago school of economics describes a neoclassical school of thought within the academic community of economists, with a strong focus around the faculty of University of Chicago. Chicago macroeconomic theory rejected Keynesianism in favor of monetarism until the mid-1970s, when it turned to new classical macroeconomics heavily based on the concept of rational expectations. The school is strongly associated with economists such as Milton Friedman, George Stigler, Ronald Coase and Gary Becker.
The school emphasizes non-intervention from government and generally rejects regulation in markets as inefficient with the exception of central bank regulation of the money supply (i.e., monetarism). Although the school's association with neoliberalism is sometimes resisted by its proponents, its emphasis on reduced government intervention in the economy and a laissez-faire ideology have brought about an affiliation between the Chicago school and neoliberal economics.
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The meaning of neoliberalism has changed over time and come to mean different things to different groups. As a result, it is very hard to define. This is seen by the fact that authoritative sources on neoliberalism, such as Friedrich Hayek, Milton Friedman, David Harvey and Noam Chomsky do not agree about the meaning of neoliberalism. This lack of agreement creates major problems in creating an unbiased and unambiguous definition of neoliberalism. This section aims to define neoliberalism more accurately and to show how its evolution has influenced the different uses of the word.
One of the first problems with the meaning of neoliberalism is that liberalism, on which it is based, is also very hard to describe. The uncertainty over the meaning of liberalism is commonly reflected in neoliberalism itself, and is the first serious point of confusion.
The second major problem with the meaning of neoliberalism is that neoliberalism went from being a purely theoretical ideology to become a practical and applied one. The 1970s onwards saw a surge in the acceptability of neoliberalism, and neoliberal governments swept in across the world, promising neoliberal reforms. However, governments did not always carry out their promised reforms, either through design or circumstances. This leads to the second serious point of confusion; namely, that most neoliberalism after this point isn't always ideologically neoliberal.
Classical liberalism in the 20th century
|This section relies too much on references to primary sources. (June 2013)|
Classical liberalism was revived in inter-War Austria by economists, including Friedrich Hayek and Ludwig von Mises. They were concerned about the erosion of liberty by both socialist and fascist governments in Europe at that time and tried to restate the case for liberty. Hayek's 1970s book, The Constitution of Liberty sums up this argument. In the introduction he states: If old truths are to retain their hold on men's minds, they must be restated in the language and concepts of successive generations.
Hayek's belief in liberty stemmed from an argument about information. He believed that no individual (or group, including the government) could ever understand everything about an economy or a society in order to rationally design the best system of governance. He argued this only got worse as scientific progress increased and the scope of human knowledge grew, leaving individuals increasingly more and more ignorant in their lifetimes. As a result, he believed it was impossible for any person or government to design the perfect systems under which people could be governed. The only solution to this, he believed, was to allow all possible systems to be tried in the real world and to allow the better systems to beat the worse systems through competition. In a liberal society, he believed, the few who used liberty to try out new things would come up with successful adaptations of existing systems or new ways of doing things. These discoveries, once shared and become mainstream, would benefit the whole of society, even those who did not directly partake of liberty.
Due to the ignorance of the individual, Hayek argued that an individual could not understand which of the various political, economic and social rules they had followed had made them successful. In his mind, this made the superstitions and traditions of a society in which an individual operated vitally important, since in probability they had, in some way, aided the success of the individual. This would be especially true in a successful society, where these superstitions and traditions would, in all probability be successful ones that had evolved over time to exploit new circumstances. However, this did not excuse any superstition or tradition being followed if it had outlived it usefulness: respect of tradition and superstition for the sake of tradition and superstition were not acceptable values to him. Therefore classical liberalism combined a respect for the old, drawn from conservatism, with the progressive striving towards the future, of liberalism.
In emphasising evolution and competition of ideas, Hayek highlighted the divide between practical liberalism that evolved in a haphazard way in Britain, championed by such people as David Hume and Adam Smith, versus the more theoretical approach of the French, in such people as Descartes and Rousseau. Hayek christened these the pragmatic and rationalist schools, the former evolving institutions with an eye towards liberty and the later creating a brave new world by sweeping all the old and therefore useless ideas away. Hayeks's ideas on information and the necessity of evolving evolutions placed liberalism firmly on the pragmatic side against both rationalist socialists (such as communists, fascism and social liberals) and rationalist capitalists (such as economic libertarians, laissez-faire capitalists) alike.
The rule of law
At the centre of liberalism was the rule of law. Hayek believed that liberty was maximised when coercion was minimised. Hayek did not believe that a complete lack of coercion was possible, or even desirable, for a liberal society, and he argued that a set of traditions was absolutely necessary which allowed individuals to judge whether they would or would not be coerced. This body of tradition he notes as law and the use of this tradition the Rule of Law. In designing a liberal system of law, Hayek believed that two things were vitally important: the protection and delineation of the personal sphere and the prevention of fraud and deception, which could be maintained only by threat of coercion from the state. In delineating a personal sphere, individuals could know under what circumstances they would or would not be coerced, and could plan accordingly.
In designing such a system, Hayek believed that it could maintain a protected sphere by protecting against abuses by the ruling power, be it a monarch (e.g., Bill of Rights 1689), the will of the majority in a democracy (e.g., the US Constitution) or the administration (e.g. the Rechtsstaat). He believed that the most important features of such protections were equality before the law, and generality of the law. Equality meant that all should be equal before the law and therefore subject to it, even those decisions of a legislature or government administration. Generality meant that the law should be general and abstract, focusing not on ends or means, as a command would, but on general rules which, by their lack of specificity, could not be said to grant privileges, discriminate or compel any specific individual to an end. General laws could also be used to transmit knowledge and encourage spontaneous order in human societies (much like the use of Adam Smith's invisible hand in economics). He also stressed the importance of individuals being responsible for their actions in order to encourage others to respect the law.
Important practical tools for making these things work included separation of powers, the idea that those enforcing the law and those making it should be separate, to prevent the lawmakers from pursuing short-term ends and constitutionalism, the idea that lawmakers should be legally bound about the laws they could pass, thereby preventing absolute rule by the majority.
In the 1980s, a practical statement of neoliberal aims was codified in the Washington Consensus.
Classical neoliberalism's respect for tradition, combined with its pragmatic approach to progress, endeared it to conservative movements around the world looking for a way to adapt to the changing nature of the modern world. This saw it adopted by conservative movements, most famously in Chile under Pinochet, the United Kingdom under Margaret Thatcher and in the United States of America under Ronald Reagan.
The next important form of neoliberalism is economic neoliberalism. Economic neoliberalism stems out of the historical rift between classical liberalism and economic liberalism, and developed when the economically liberal minded co-opted the language and ideas of classical neoliberalism to place economic freedom at its heart, making it a right-wing ideology. Essentially, economic neoliberalism can be derived by taking the classical neoliberal definition above and taking the protected personal sphere to solely refer to property rights and contract. The liberal opposite of economic neoliberalism is modern liberalism, the corresponding left-wing ideology. The best known proponent of economic neoliberalism is Milton Friedman.
Economic neoliberalism is distinct from classical neoliberalism for many reasons. Hayek believed that certain elements that now make up modern economic neoliberal thought are too rationalist, relying on preconceived notions of human behaviour, such as the idea of homo economicus. Paul Treanor points out that it is too utopian, and therefore illiberal. David Harvey points out that economic neoliberalism is "theory of economic political practices", rather than a complete ideology, and therefore, no correlation or connection needs to exist between a favourable assessment of neoliberal economic practises and a commitment to liberalism proper. Likewise Anna-Maria Blomgren views neoliberalism as a continuum ranging from classical to economic liberalism. A broad and, it is hoped, clearer restatement of the above is to point out that classic liberals must be economic liberals, but economic liberals do not have to be classically liberal, and it is the latter group that makes up the "new liberalism" of economic neoliberalism.
Friedman's chief argument about neoliberalism can be described as a consequentialist libertarian one: that the reason for adopting minimal government interference in the economy is for its beneficial consequences, and not any ideological reason. At the heart of economic neoliberalism are various theories that prove the economic neoliberal ideology.
Neoliberal economics in the 1920s took the ideas of the great liberal economists, such as Adam Smith, and updated them for the modern world. Friedrich Hayek's ideas on information flow, present in classical neoliberalism, were codified in economic form under the Austrian School as the economic calculation problem. This problem of information flow implied that a decentralised system, in which information travelled freely and was freely determined at each localised point (Hayek called this catallaxy), would be much better than a central authority trying to do the same, even if it was completely efficient and was motivated to act in the public good. In this view, the free market is a perfect example of such a system in which the market determined prices act as the information signals flowing through the economy. Actors in the economy could make decent decisions for their own businesses factoring in all the complex factors that led to market prices without having to understand or be completely aware of all of those complex factors.
In accepting the ideas of the Austrian School regarding information flow, economic neoliberals were forced to accept that free markets were artificial, and therefore would not arise spontaneously, but would have to be enforced, usually through the state and the rule of law. In this way, economic neoliberalism enshrines the role of the state and becomes distinct from libertarian thought. However, in accepting the ideas of self-regulating markets, neoliberals drastically restrict the role of the government to managing those forms of market failure that the neoliberal economics allowed: property rights and information asymmetry. This restricted the government to maintaining property rights by providing law and order through the police, maintaining an independent judiciary and maintaining the national defence, and basic regulation to guard against fraud. This made neoliberal economics distinct from Keynesian economics of the preceding decades.
These ideas were then developed further. Milton Friedman introduced the idea of adaptive expectations during the stagflation of the 1970s, which described why government interference (in the form of printing money) resulted in increasing inflation, as shop owners started to predict the rate of increase in the money supply, rendering the government action useless. This developed into the idea of rational expectations, which showed that all government interference useless and disruptive because the free market would predict and undermine the government's proposed action. At the same time, the efficient-market hypothesis assumed that, because of catallaxy, the market could not be informationally wrong. Or, to paraphrase the famous quote of Warren Buffett, "the market is there to inform you, not serve you". Combined with rational expectations, this showed that markets would be self-regulating, and that regulation was unnecessary and disruptive.
Additionally, many theories were developed which showed that the free market would produce the socially optimum equilibrium with regard to production of goods and services, such as the fundamental theorems of welfare economics and general equilibrium theory, which helped prove further that government intervention could only result in making society worse off (see Pareto efficient).
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The rise of neoliberalism in the 1970s as a practical system of government saw it implemented in various forms across the world. In some cases, the result was not anything that could be identified as neoliberalism, often with catastrophic results for the poor. This has resulted in many on the left claiming that this is a deliberate goal of neoliberalism, while those on the right defend the original goals of neoliberalism and insist otherwise, an argument that rages to this day, rendering this section highly controversial. This section attempts to provide an unbiased overview of this discussion, focusing on all the forms of neoliberalism that are not in any way neoliberal, but which have come to be associated with it, as well as the reasons for why this has happened.
One of the best and least controversial examples of "neoliberal" reform is in Russia, whose reforms in 1989 were justified under neoliberal economic policy but which lacked any of the basic features of a neoliberal state (e.g. the rule of law, free press) which could have justified the reforms.
General liberal failure
The least controversial aspect of neoliberalism has often been presented by modern economists critical of neoliberalism's role in the world economic system. Among these economists, the chief voices of dissent are Joseph Stiglitz and Paul Krugman.
Both use arguments about market failure to justify their views on neoliberalism. They argue that when markets are imperfect (which is to say all markets everywhere to some degree), then they can fail and may not work as neoliberals predict, resulting in some form of crony capitalism. The two chief modes of failure are usually due to imperfect property rights and due to imperfect information and correspond directly to Friedrich Hayek's assertion that classical liberalism will not work without protection of the private sphere and the prevention of fraud and deception.
The failure of property rights means that individuals can't protect ownership of their resources and control what happens to them, or prevent others from taking them away. This usually stifles free enterprise and results in preferential treatment for those who can.
The most blatant form of crony capitalism is the creation of a liberal economic system in which only some people ("cronies") are permitted property rights by the government in return for support for the regime, allowing supporters of the regime to expropriate any capital held by opponents. This is a useful method of control which is usually seen in its purest form in countries with dictatorships, where the regime can create a liberal system of markets and government without ceding any control of either. Such reforms can also be used to add a sprinkling of liberal legitimacy for the regime and open the country to external capital.
This form is useful to explain neoliberal reforms in countries where either the will or ability to enforce property rights is lacking, such as the problems of post Soviet Russia, in which reformist politicians colluded with politically connected business people. In return for backing democratic free market reforms, these business figures could expropriate resources in a country where ownership was not clear and sporadically enforced, leading to the rise of the Russian oligarchs.
Not all members of a society may have equal access to the law or to information, even when everyone is theoretically equal under the law, as in a liberal democracy. This is because access to the law and information is not free as liberals (such as Hayek) assume, but have associated costs. Therefore, in this context, it is sound to say that the wealthy have greater rights than the poor.
In some cases, the poor may have practically no rights at all if their income falls below the levels necessary to access the law and unbiased sources of information, while the very wealthy may have the ability to choose which rights and responsibilities they bear if they can move themselves and their property internationally, resulting in social stratification, also known as class. This alleged tendency to create and strengthen class has resulted in some (most famously David Harvey) claiming that neoliberalism is a class project, designed to impose class on society through liberalism.
Sociologist Loïc Wacquant argues that neoliberal policy for dealing with social instability among marginalized populations following the retrenchment of the social welfare state, increased gentrification of urban areas, and privatization of public functions is the criminalization of poverty followed by mass incarceration. By contrast, it is extremely lenient in dealing with those in the upper echelons of society, in particular when it comes to economic crimes of the privileged classes and corporations such as fraud, embezzlement, insider trading, credit and insurance fraud, money laundering, and violation of commerce and labor codes. According to Wacquant, neoliberalism doesn't shrink government but instead sets up a centaur state, with little governmental oversight for those at the top and strict control of those at the bottom. In expanding upon Wacquant's thesis, sociologist and political economist John L. Campbell of Dartmouth College suggests that through privatization, the prison system exemplifies the centaur state:
- On the one hand, it punishes the lower class, which populates the prisons; on the other hand, it profits the upper class, which owns the prisons, and it employs the middle class, which runs them.
In addition, he says the prison system benefits corporations through outsourcing, as the inmates are "slowly becoming a source of low-wage labor for some US corporations." Both through privatization and outsourcing, Campbell argues, the U.S. penal state reflects neoliberalism.
In practice, less developing nations have less developed rights and institutions, resulting in greater risk for international lenders and businesses. This means that developing countries usually have less privileged access to international markets than developed countries. Because of this effect, international lenders are also more likely to invest in foreign companies (i.e. multinational corporations) inside a country, rather than in local businesses, giving international firms an unfair competitive advantage. Also, speculative flows of capital may enter the country during a boom and leave during a recession, deepening economic crises and destabilizing the economy.
Both of these problems imply that developing countries should have greater protections against international markets than developed ones and greater barriers to trade. Despite such problems, IMF policy in response to crises, which is supposed to be guided by neoliberal ideas such as the Washington Consensus, is to increase liberalization of the economy and decrease barriers, allowing bigger capital flight and the chance for foreign firms to shore up their monopolies. Additionally, the IMF acts to increase moral hazard, since international involvement will usually result in an international bailout with foreign creditors being treated preferentially, leading international firms to discount the risks of doing business in less developed countries and forcing the government to pay for them instead.
The view of some that international involvement and the imposition of "neoliberal" policies usually serves to make things worse and acts against the interests of the country being "saved", has led some to argue that the policies have nothing to do with any form of liberalism, but hide some other purpose. The most common assertion given by opponents is that they are a form of neocolonialism, where the more developed countries can exploit the less developed countries. However, even opponents do not agree. For example, Stiglitz assumes that there is no neoimperial plot, but that the system is driven by a mixture of ideology and special interests, in which neoliberal fundamentalists, who do not believe that neoliberalism can fail, work with financial and other multinational corporations, who have the most to benefit from opening up foreign markets. David Harvey, on the other hand, argues that local elites exploit neoliberal reforms in order to impose reforms that benefit them at the cost of the poor, while transferring the blame onto the "evil imperialist" developed countries, citing the example of Argentina in 2001.
Neoliberalism seeks to transfer control of the economy from public to the private sector, under the belief that it will produce a more efficient government and improve the economic health of the nation. The definitive statement of the concrete policies advocated by neoliberalism is often taken to be John Williamson's "Washington Consensus." The Washington Consensus is a list of policy proposals that appeared to have gained consensus approval among the Washington-based international economic organizations (like the International Monetary Fund (IMF) and World Bank). Williamson's list included ten points:
- Fiscal policy Governments should not run large deficits that have to be paid back by future citizens, and such deficits can have only a short term effect on the level of employment in the economy. Constant deficits will lead to higher inflation and lower productivity, and should be avoided. Deficits should only be used for occasional stabilization purposes.
- Redirection of public spending from subsidies (especially what neoliberals call "indiscriminate subsidies") and other spending neoliberals deem wasteful toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment
- Tax reform – broadening the tax base and adopting moderate marginal tax rates to encourage innovation and efficiency;
- Interest rates that are market determined and positive (but moderate) in real terms;
- Floating exchange rates;
- Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs; thus encouraging competition and long term growth
- Liberalization of the "capital account" of the balance of payments, that is, allowing people the opportunity to invest funds overseas and allowing foreign funds to be invested in the home country
- Privatization of state enterprises; Promoting market provision of goods and services which the government cannot provide as effectively or efficiently, such as telecommunications, where having many service providers promotes choice and competition.
- Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions;
- Legal security for property rights;
Reach and effects
Effects in Latin American urbanization
Between the 1930s and the late 1970s most countries in Latin America used the import substitution industrialization model (ISI) to build industry and reduce the dependency on imports from foreign countries. The result of ISI in these countries included rapid urbanization of one or two major cities, a growing urban population of the working class, and frequent protests by trade unions and left-wing parties. In response to the economic crisis, the leaders of these countries quickly adopted and implemented new neoliberal policies.
A study based on the transformations of urban life and systems as a result of neoliberalism in six countries of Latin America was published by Alejandro Portes and Bryan Roberts. This comparative study included census data analysis, surveying, and fieldwork focused in Argentina, Brazil, Chile, Mexico, Peru, and Uruguay. Predictions of the neoliberalism were extended to these six countries in four areas: urban systems and primacy, urban unemployment and informal employment, urban inequality and poverty, and urban crime and victimization. Data collected support a relationship between the economic policies of neoliberalism and the resulting patterns of urbanization.
In the area of urban systems and primacy two tendencies were revealed in the data. The first was continuing growth in total size of urban populations while the second tendency was the decline in size of the principal city with decreased migration flows to these cities. Therefore, when calculating the urban growth rate each of these countries all showed minimal or a significant decline in growth. Portes and Roberts theorize that the changes are due to the “loss of attraction of major cities ... due to a complex set of factors, but is undoubtedly a related to the end of the ISI era”. Although the relationship between the open-market and the transformation of urban systems has not been proven to be a perfect one-to-one relationship, the evidence supports the acceleration or initiation of these two tendencies following neoliberal changes.
There was also a variation in the inequality and poverty in the six countries. While the majority of the population within these countries suffered from poverty, the "upper classes" received the benefits of the neoliberal system. According to Portes and Roberts, “the ‘privileged decile’ received average incomes equivalent to fourteen times the average Latin American poverty-line income”. According to the authors, a direct result of the income inequality is that each country struggled with increased crime and victimization in both urban and suburban settings. However, due to corruption within the police force it is not possible to accurately extrapolate a trend in the data of crime and victimization.
Effects on global health
The effect of neoliberalism on global health, particularly the aspect of international aid involves key players such as non-governmental organizations (NGOs), the International Monetary Fund (IMF), and the World Bank. Neoliberal emphasis has been placed on free markets and privatization which has been tied to the "new policy agenda", an agenda in which NGOs are viewed to provide better social welfare than that of a nation's government. International NGO's have been promoted to fill holes in public services created by the World Bank and IMF through their promotion of Structural Adjustment Programs (SAP's) which slash government health spending and are an unsustainable source of foreign aid. The reduced health spending and the gain of the public health sector by NGOs causes the local health system to become fragmented, undermines local control of health programs and contributes to local social inequality between NGO workers and local individuals.
Later, in his book Capitalism and Freedom (1962), Friedman developed the argument that economic freedom, while itself an extremely important component of total freedom, is also a necessary condition for political freedom. He commented that centralized control of economic activities was always accompanied with political repression.
In his view, the voluntary character of all transactions in an unregulated market economy and wide diversity that it permits are fundamental threats to repressive political leaders and greatly diminish power to coerce. Through elimination of centralized control of economic activities, economic power is separated from political power, and the one can serve as counterbalance to the other. Friedman feels that competitive capitalism is especially important to minority groups, since impersonal market forces protect people from discrimination in their economic activities for reasons unrelated to their productivity.
Ampflifying Friedman's argument, it has often been pointed out that increasing economic freedoms tend to rise expectations on political freedoms, eventually leading to democracy. Other scholars see the existence of non-democratic yet market-liberal regimes and the undermining of democratic control by market processes as strong evidence that such a general, ahistorical nexus cannot be upheld. Contemporary discussion on the relationship between neoliberalism and democracy shifted to a more historical perspective, studying extent and circumstances of how much the two are mutually dependent, contradictory or incompatible.
Opponents of neoliberalism commonly argue these following points:
- Globalization can subvert nations' ability for self-determination.
- Accountability to the stakeholders, who depend upon the service provided by the privatised entity, is lost as a consequence of business secrecy, a practice that is normally adopted by private investors.
- The replacement of a government-owned monopoly with private companies, each supposedly trying to provide the consumer with better value service than all of its private competitors, removes the efficiency that can be gained from the economy of scale.
- Even if it could be shown that neoliberal capitalism increases productivity, it erodes the conditions in which production occurs long term, i.e., resources/nature, requiring expansion into new areas. It is therefore not sustainable within the world's limited geographical space.
- Exploitation: critics consider neo-liberal economics to promote exploitation and social injustice.
- Negative economic consequences: Critics argue that neo-liberal policies produce inequality.
- Increase in corporate power: some organizations and economists believe neoliberalism, unlike liberalism, changes economic and government policies to increase the power of corporations, and a shift to benefit the upper classes.
- There are terrains of struggles for neoliberalism locally and socially. Urban citizens are increasingly deprived of the power to shape the basic conditions of daily life.
- Trade-led, unregulated economic activity and lax state regulation of pollution lead to environmental impacts or degradation.
- Deregulation of the labor market produces flexibilization and casualization of labor, greater informal employment, and a considerable increase in industrial accidents and occupational diseases.
Critics sometimes refer to neoliberalism as the "American Model," and make the claim that it promotes low wages and high inequality. According to the economists Howell and Diallo (2007), neoliberal policies have contributed to a U.S. economy in which 30% of workers earn low wages (less than two-thirds the median wage for full-time workers), and 35% of the labor force is underemployed; only 40% of the working-age population in the U.S. is adequately employed. The Center for Economic Policy Research's (CEPR) Dean Baker (2006) argued that the driving force behind rising inequality in the U.S. has been a series of deliberate, neoliberal policy choices including anti-inflationary bias, anti-unionism, and profiteering in the health industry. However, countries have applied neoliberal policies at varying levels of intensity; for example, the OECD (Organisation for Economic Cooperation and Development) has calculated that only 6% of Swedish workers are beset with wages it considers low, and that Swedish wages are overall lower due to their lack of neoliberal policies Others argue that Sweden's adoption of neoliberal reforms, in particular the privatization of public services and reduced state benefits, has resulted in income inequality growing faster in Sweden than any other OECD nation. John Schmitt and Ben Zipperer (2006) of the CEPR have analyzed the effects of intensive Anglo-American neoliberal policies in comparison to continental European neoliberalism, concluding "The U.S. economic and social model is associated with substantial levels of social exclusion, including high levels of income inequality, high relative and absolute poverty rates, poor and unequal educational outcomes, poor health outcomes, and high rates of crime and incarceration. At the same time, the available evidence provides little support for the view that U.S.-style labor-market flexibility dramatically improves labor-market outcomes. Despite popular prejudices to the contrary, the U.S. economy consistently affords a lower level of economic mobility than all the continental European countries for which data is available."
Notable critics of neoliberalism in theory or practice include economists Joseph Stiglitz, Amartya Sen, Michael Hudson, Robert Pollin, and Richard D. Wolff, linguist Noam Chomsky, geographer David Harvey, Marxist feminist Gail Dines, American scholar and cultural critic Henry Giroux, journalist and environmental activist George Monbiot, Belgian Psychologist Paul Verhaeghe and the alter-globalization movement in general, including groups such as ATTAC. Critics of neoliberalism argue that not only is neoliberalism's critique of socialism (as unfreedom) wrong, but neoliberalism cannot deliver the liberty that is supposed to be one of its strong points. Daniel Brook's "The Trap" (2007), Robert Frank's "Falling Behind" (2007), Robert Chernomas and Ian Hudson's "Social Murder" (2007), and Richard G. Wilkinson's "The Impact of Inequality" (2005) all claim high inequality is spurred by neoliberal policies and produces profound political, social, economic, health, and environmental constraints and problems. The economists and policy analysts at the Canadian Centre for Policy Alternatives (CCPA) offer inequality-reducing social democratic policy alternatives to neoliberal policies.
Critics allege that neoliberalism holds that market forces should organize every facet of society, including economic and social life, and promotes a social darwinist ethic which elevates self-interest over social needs. Santa Cruz History of Consciousness professor Angela Davis and Princeton sociologist Bruce Western have claimed that the high rate (compared to Europe) of incarceration in the U.S. – specifically 1 in 37 American adults is in the prison system – heavily promoted by the Clinton administration, is the neoliberal U.S. policy tool for keeping unemployment statistics low, while stimulating economic growth through the maintenance of a contemporary slave population and the promotion of prison construction and "militarized policing." David McNally, Professor of Political Science at York University, argues that while expenditures on social welfare programs have been cut, expenditures on prison construction have increased significantly during the neoliberal era, with California having "the largest prison-building program in the history of the world." The Clinton Administration also embraced neoliberalism by pursuing international trade agreements that would benefit the corporate sector globally (normalization of trade with China for example). Domestically, Clinton fostered such neoliberal reforms as the corporate takeover of health care in the form of the HMO, the reduction of welfare subsidies, and the implementation of "Workfare".
Neoliberal policies advanced by supranational organizations have come under criticism, from both socialist and libertarian writers, for advancing a corporatist agenda. Rajesh Makwana, on the left, writes that "the World Bank and IMF, are major exponents of the neoliberal agenda" advancing corporate interests. Sheldon Richman, editor of the libertarian journal The Freeman, also sees the IMF imposing "corporatist-flavored 'neoliberalism' on the troubled countries of the world." The policies of spending cuts coupled with tax increases give "real market reform a bad name and set back the cause of genuine liberalism." Paternalistic supranational bureaucrats foster "long-term dependency, perpetual indebtedness, moral hazard, and politicization, while discrediting market reform and forestalling revolutionary liberal change." Free market economist Richard M. Salsman goes further and argues the IMF “is a destructive, crisis-generating global welfare agency that should be abolished." "In return for bailouts, countries must enact such measures as new taxes, high interest rates, nationalizations, deportations, and price controls." Writing in Forbes, E. D. Kain sees the IMF as "paving the way for international corporations entrance into various developing nations" and creating dependency. He quotes Donald J. Boudreaux on the need to abolish the IMF.
In a dramatic act of defiance against neoliberal globalization, South Korean farmer and former president of the Korean Advanced Farmers Federation Lee Kyung-hae committed suicide by stabbing himself in the heart during a meeting of the WTO in Cancun, Mexico. Prior to his death he expressed his concerns in broken English:
- My warning goes out to the all citizens that human beings are in an endangered situation that uncontrolled multinational corporations and a small number of bit WTO members officials are leading an undesirable globalization of inhuman, environment-distorting, farmer-killing, and undemocratic. It should be stopped immediately otherwise the failed logic of the neo-liberalism will perish the diversities of agriculture and disastrously to all human being.
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- http://folk.uio.no/daget/What%20is%20Neo-Liberalism%20FINAL.pdf : This article makes this point rather well, and shows how these problems influence neoliberalism
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- The Constitution of Liberty, chapter 4, section 9
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- The Constitution of Liberty, chapter 4
- The Constitution of Liberty, chapters 1 and 9
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- The Constitution of Liberty, chapter 9: first half
- The Constitution of Liberty, chapter 9: second half
- The Constitution of Liberty, chapter 9: section 8
- The Constitution of Liberty, chapter 7
- The Constitution of Liberty, chapter 12
- The Constitution of Liberty, chapter 13
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- The Constitution of Liberty, chapter 10: second half
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- See the David Harvey and Noam Chomsky resources on this page as an entry point on these views
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