Neoliberalism

Overview

Upon its formation, neoliberalism was a philosophical idea without a commonly accepted philosophy. However, since the late twentieth century, it has been refined and redefined in such a way that it has become a distinct economic and political theory. As now commonly defined, neoliberalism focuses on developing free-market capitalism, where the control of the economy is in the hands of the private sector, with limited interference from restrictive government regulations or ownership. Although neoliberalists believe in a democratic government’s need to provide a safety net for those most vulnerable and add to the social good, the welfare state and government spending should be limited. The government’s main job is to reduce or eliminate barriers to entering the free market.

Classic liberalism dominated political and economic thought in the United States, as well as other countries, including the United Kingdom, Australia, and Canada, through much of the nineteenth century into the early part of the twentieth century. It is based on the ideas of thinkers such as John Locke, John Stuart Mill, and Thomas Malthus, who themselves drew on the ideas of Adam Smith and his book The Wealth of Nations. Classic liberalism espouses individual freedoms (for example, political freedom and freedom of speech) and laissez-faire economics. The basic principles of laissez-faire economics hold that the individual, the most basic unit in society, has a natural right to freedom, and the natural order is harmonious and self-regulating. As such, markets, which are naturally competitive, should be free of any intervention. Laissez-faire can be translated from French as “leave us alone” (literally “let us do”).

Leading up to World War I (1914–18), classic liberalism lost its hold on economic and political theory, and the Great Depression in the 1930s was basically a death knell for classic liberalism. Markets crashed, and the United States, among other countries, was thrown into a deep depression that caused untold social and economic damage. Many blamed strict laissez-faire policies, which resulted in a lack of (or inept) intervention by the US government.

In the aftermath of the Great Depression, liberalism was severely challenged by President Franklin D. Roosevelt’s New Deal policies. These policies placed the government squarely in the center of the economic and social sphere. For example, the Securities Act of 1933 created the US Security and Exchange Commission to regulate the buying and selling of stocks, and the Social Security Act of 1935 created the Social Security Administration, which developed social welfare as a safety net for citizens in need and elderly citizens.

Wanting to carve out a new kind of liberalism that better fit the emerging world of the late 1930s and 1940s, a group of twenty-six intellectuals gathered in Paris in August 1938. Known as the Walter Lippmann Colloquium, the meeting was organized by French philosopher Louis Rougier. During the meeting, German economist Alexander Rüstow coined the term neoliberalism (neo- means new or revived). The attendees began to lay out a new form of liberalism that confirmed the central liberal notion that markets controlled the economy. However, the new form, while rejecting collectivism and socialism, also rejected the laissez-faire economics of classic liberalism. In other words, the government, they argued, does have a place—albeit a limited one—in the economic and social realms.

Despite this early attempt to renew interest in liberalism in its newest form, World War II (1939–45) dominated the world’s attention for several years. In 1947, the Mont Pelerin Society was established by Friedrich Hayek, Milton Friedman, Karl Popper, George Stigler, and Ludwig von Mises. Like the Walter Lippmann Colloquium before it, the Mont Pelerin Society focused on working out a viable plan for returning to a stronger emphasis on individual and economic freedom but without the brutal austerity of a pure laissez-faire economy. Hayek, who wrote extensively on the subject, would later be referred to as the grandfather of neoliberalism.

Milton Friedman, one of the best-known economists of the twentieth century, suggested that while maintaining the fundamental principles of liberalism (personal and economic freedom), neoliberalism should replace its focus on laissez-faire economics with a goal of competitive order. According to Friedman, the government should intervene in the markets just enough to create an environment in which competition could thrive, such as overseeing a stable monetary policy and preventing monopolies. Although opposed to large, permanent governmental social programming, Friedman and other neoliberals conceded that public assistance for those in need was required for a well-kept society.

One of the first attempts to enact a neoliberal agenda at the national level came in the 1970s in Chile. A coup d’etat in 1973 brought dictator Augusto Pinochet into power. He instituted numerous neoliberal policies, which originated with a group of Chilean economists who had studied in Chicago under Friedman. In fact, Friedman gave lectures at the University of Chile and personally advised Pinochet on Chile’s economic policies on at least one occasion. Pinochet created an independent central bank; reduced taxes; cut tariffs (taxes on imports or exports); and privatized state-owned industries, banks, and the national pension system.

When Jimmy Carter assumed the US presidency in 1977, the country was in “stagnation,” characterized by high inflation (a high rate of price increase over a given time) and low economic growth. Wearied by the difficult economy, citizens voted Ronald Reagan into office, ousting Carter after just one term. Reagan, along with Margaret Thatcher, prime minister of the United Kingdom, became the stars of an emerging neoliberalist movement. Neoliberalism was still held onto by numerous intellectuals at various large universities and institutions. Of note, French philosopher Michel Foucault brought a renewed focus on neoliberalism in the mid-1980s.

However, Reagan was able to popularize neoliberal philosophy in simple messages that made sense to the public. He preached that government did not exist to solve society’s problems—it was the problem. People could only thrive if the government got out of their way. This notion translated into reduced taxes, elimination of government regulations, and free-market trade. Both Reagan and Thatcher couched their economic policies in a message of strong nationalism. Neoliberalism swept across the globe during the 1990s, and by the end of the twentieth century, neoliberalism was at its height of popularity.

Neoliberalism dominated as a political and economic theory until the Great Recession of 2008. Access to cheap credit (low interest rates) and lax lending standards (lack of government regulation of the banking industry) allowed many who would normally not qualify for a loan the means to buy a house. Home purchases surged in the years leading up to the recession. However, when the housing bubble burst, banks were holding trillions of dollars in worthless loans. Alan Greenspan, chairperson of the Federal Reserve at the time and a proponent of neoliberal policies, admitted in testimony before Congress that his ideology was flawed.

Perhaps the final death knoll for neoliberalism was the COVID-19 pandemic that began in 2020. In the end, governments, not the markets, came to the rescue. However, neoliberalism has suffered numerous deaths over its nearly one-hundred-year history, only to be successfully resuscitated. Others argue that neoliberalism is not dead at all. The state response to address public health and boost flailing economies was cheered by many, including neoliberals. However, those who argue yet another emergence of neoliberalism is on the horizon believe the ideology of a free and uninhibited market leading to prosperity is not going anywhere any time soon.

Further Insights

The term neoliberalism, although coined in the 1930s, did not come into widespread use until the 1980s during the Reagan and Thatcher administrations. It was mostly used as a slur by opponents of the economic theory. The term itself can be confusing because, in the United States in the twenty-first century, the word liberal is associated with someone who is left of center on the political spectrum and tends to favor more government intervention to secure social welfare and the public good. However, neoliberalism refers to classic economic liberalism, which itself refers to free-market economics and a substantially lower level of government involvement in society and the economy. Thus, those politically right of center, or conservatives, are mainly aligned with economic neoliberalism. However, many choose to use other terms for it, such as economic conservatism or free-market conservatism.

As most prominently defined by Friedman, Hayek, and James Buchanan, neoliberalism is focused on individual freedom or the freedom of small social groups—particularly, the family. No one, including the government, should impede on the rights of another, which is referred to as coercive power. Coercive power is controlled by limiting the government’s invasion of the private sphere and reducing its role to a legal structure that enables the free market to operate. The individual participates in the market by supplying and consuming goods. In other words, if left to its own devices, the market will effectively govern supply and demand, prices, and the distribution of wealth.

According to neoliberalism, capitalism, in which goods and services are dictated by natural supply and demand, has no moral pinnings. Unlike the thinking that anyone can pull themselves up by their bootstraps if they try hard enough and the failure to succeed in the economy is considered a personal fault, Hayek, in particular, recognized that the market has no moral compass. Some who are morally undeserving may achieve wealth (succeed in the market), whereas others who are deserving may fail.

The main opponent of neoliberalism and the ideas of Friedman, Hayek, and Buchanan was British economist John Maynard Keynes. Keynes argued that government plays a key role in stabilizing the economy. According to what became known as Keynesian economics, the most important dictator of the economy is total demand—the combined spending of households, businesses, and government. Demand comes from four sources: consumption, investment, government spending, and net exports (how much more a country exports than it imports). As such, if demand goes down in one or more areas, increased government spending leads to an increase in economic growth. Many of the writings of Friedman, Hayek, and Buchanan are, in some part, an attempt to refute Keynes’s ideas.

Viewpoints

Despite its importance in economies around the world, neoliberalism has come under heavy criticism. This criticism is based on the understanding of neoliberalism itself and the outcome of neoliberal policies. The main points of contention are the amoral nature of the economic theory and the prevalence of economic inequality, including the assumption of trickle-down economics, and negative effects on both democracy and the climate.

One of the main criticisms of neoliberalism is its definition of the market as the most basic form of meaning instead of the polis, or civic society. Neoliberalism reduces human existence to an economic transaction. That is, society is itself a type of universal market, and if meaning is given, it is ascribed to one’s ability to contribute to the economy. Value is disassociated from morals, community, or social meaning. Individual rights predominate.

The other criticism of neoliberalism is the failed policies left in its wake, primarily due to deregulation, which has greatly increased economic inequality around the world. In the United States, between 1979 and 2019, when neoliberalism held sway, wealth inequality grew rapidly. In 1979, the top 0.1 percent held 8.5 percent of the wealth; in the first quarter of 2023, the top 0.1 percent in the United States accounted for more than 31 percent of the nation’s wealth. The top 10 percent accounted for almost 70 percent of wealth, and the bottom 90 percent claimed just over 30 percent. Globally, 10 percent of the world’s population holds 70 percent of wealth.

Deregulation of the electricity and phone companies led to the monopolization of power, with little advantage for consumers to “shop around.” The deregulation of the airlines in 1978 bankrupted numerous airlines, which returned with much steeper penalties, lower service, smaller seats, and a chaos of interconnecting flights and ever-changing fares. Similarly, the privatization of prisons has led to significant problems, where most contracts have gone to a few contract holders with numerous reported problems in quality and services. As previously noted, the deregulation of the banking system was one of the main factors that led to the Great Recession of 2008.

In addition, although Friedman, Hayek, and Buchanan would not use the language of trickle-down economics, it is often an implied part of neoliberalism. That is, when unregulated businesses are allowed to operate freely in the market, the wealth they generate would “trickle down” to others. The increasing disparities in wealth suggest that the market does not self-regulate to create a stable economy. This increased wealth disparity is also a challenge to democracy, as the power of wealth circumvents the power of society.

Neoliberalism has also been criticized for many of the effects of climate change, as the deregulation of industries has led to increasing pollution and emissions. The world’s richest 10 percent were responsible for more than half of all emissions. The bottom 10 percent accounted for just 0.2 percent.

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