The Neoliberal Revolution

Masters of the Universe: Hayek, Friedman, and the Birth of
Neoliberal Politics, by Daniel Stedman Jones, Princeton University
Press, 424 pages, $35The 20th century saw two great economic revolutions: socialism
and neoliberalism.Socialist ideas were already floating around the democratic West
in the early 1900s, but they gained much greater popularity after
the Great Depression, which was widely seen as a failure of
capitalism. One part of this shift entailed a greater role for the
government in regulating or owning business enterprises. The second
part involved a major expansion of social insurance programs.Beginning in the late 1970s, there was a backlash against
excessive government intervention in the economy. This neoliberal
revolution involved privatization, deregulation, and cuts in
marginal tax rates, but it left most social insurance programs in
place.Daniel Stedman Jones, an independent historian (and barrister)
in London, has written a balanced and informative study of
neoliberal thinkers such as F.A. Hayek and Milton Friedman,
exploring their impact on policy making, particularly during
Margaret Thatcher’s administration in the United Kingdom and Ronald
Reagan’s in the United States. Jones suggests a policy revolution
that began in the 1970s drew on 30 years of neoliberal research and
advocacy, partly financed by businessmen hostile to Franklin
Roosevelt’s New Deal policies. Although Jones is skeptical of the
more radical elements of neoliberalism, he is mostly respectful of
the major neoliberal figures, despite the fact that his own
politics are clearly left of center.Jones traces the origins of neoliberalism to the mid-1940s,
specifically to the nearly simultaneous publication of Hayek’s
The Road to Serfdom (1944), Ludwig von Mises’
Bureaucracy (1944), and Karl Popper’s The Open Society
and Its Enemies (1945). The appearance of these highly
influential books was followed by the formation of the Mont Pelerin
Society, a group of American and European neoliberals who met
annually starting in 1947. Even within this group there were
important ideological differences, with Popper being much more
sympathetic to the democratic left than Mises. Early neoliberals
rejected complete laissez faire, which was widely seen as
discredited by the depression; they supported economic
interventions such as antitrust laws, the regulation of natural
monopolies, health and safety regulation, and government provision
of education and other social services.Over time the center of the neoliberal movement shifted from
Europe to America, especially the economics departments at the
University of Chicago, where Milton Friedman taught, and the
University of Virginia, where James Buchanan and Gordon Tullock
developed “public choice” theory, which aims to explain why
government policies often end up serving special interest groups.
At the same time, the ideology drew closer to laissez faire.
Neoliberal economists were less likely to endorse interventions
such as antitrust and more likely to support a radical program of
deregulation.Beginning in the late 1970s, neoliberal ideas began to have a
significant impact on policy in the U.S. and Britain. Under
President Jimmy Carter there was significant deregulation of
transportation, utilities, and banking, and capital gains taxes
were reduced. Deregulation continued in the 1980s under President
Reagan, who also slashed the top income tax rate from 70 percent to
28 percent. In Britain the Labour Party began to move away from
traditional Keynesian stimulus programs, as these policies were
widely blamed for the high rates of inflation during the 1970s.
Thatcher sped up that trend after taking office in 1979. Her Tory
government privatized state-owned firms and public housing,
deregulated the financial industry, weakened labor unions, and
sharply reduced the top income tax rate.My reservations about Jones’ study start with the term
neoliberal, which is often intended as an insult when used by
people on the left. Jones places neoliberalism within the framework
of modern conservatism. I see neoliberalism as exactly what the
name suggests, a new form of liberalism. It might be viewed as
classical liberalism with a welfare state added on, or
mid-20th-century liberalism without government ownership of
industry and without regulation of prices and market access.Jones is aware that the neoliberal revolution was often a
bipartisan affair. “Too often,” he writes, “the adoption of certain
key [neoliberal] policies by Labour or Democratic administrations
during the 1960s and 1970s is assumed by conservative commenters to
have been a sham, or by left or liberal commenters to be a source
of shame. These views miss important elements in the successes and
failures of the neoliberal political project.” But in the end Jones accepts the standard left-wing complaint
that neoliberalism eventually turned into what the Nobel laureate
economist Joseph Stiglitz has called “market fundamentalism.” In
Jones’ words, neoliberalism became the “elevation of the market to
an almost theological status.”There is a grain of truth in this charge, but Jones misses the
bigger picture for three reasons: He underestimates the extent to
which neoliberalism was built on impressive economic research, he
overstates the extent to which neoliberalism became associated with
modern conservatism, and he overstates the neoliberals’ opposition
to government. Most of the neoliberal critique was aimed at
specific statist policies, such as nationalization and regulation,
not at “big government” per se.Consider Jones’ description of neoliberalism’s evolution from
the late 1940s to the ’70s: “The early neoliberals were marked by
their desire to move beyond both laissez-faire economics and the
New Deal. Later neoliberals, defined by the Chicago emphasis on
unregulated markets, were less ambiguous in their opposition to the
welfare state and to the need for government intervention in the
economy.” In political practice, neoliberalism was not about abandoning
the welfare state. It was about deregulation, privatization, freer
trade, lower marginal tax rates, and keeping inflation under
control. Thatcher’s policies were viewed as a big neoliberal
success, despite the fact that government spending remained close
to 40 percent of GDP. There is far less regulation of investment,
trade, market access, and prices in developed countries today than
in the 1970s. Many state-owned enterprises have been sold to the
private sector, and inflation has been brought down to relatively
low levels. Virtually every developed country has sharply cut its
top income tax rate from the levels of the 1970s. Yet the welfare
state in those countries is roughly as large as it was four decades
ago.Nor was opposition to the welfare state ever a big part of the
academic side of neoliberalism. I studied economics at the
University of Chicago between 1977 and 1980, when the Chicago
school had reached its peak of influence. There was a heavy focus
on the failures of Keynesian demand-side macroeconomics as well as
the often counterproductive effects of regulation. But if the
welfare state ever came up, it was generally brushed aside with the
comment that the optimal policy would probably be to just give
money to the poor. 

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The Neoliberal Revolution

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