Neo-Liberal

For the school of international relations, see Neoliberalism in international relations.

Neoliberalism is 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.[1] The impetus for this development arose from a desire to avoid repeating the economic failures of the early 1930s which conventional wisdom of the time tended to blame on unfettered capitalism, and a simultaneous concern with avoiding the inhumanity of National Socialism. 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 sixties, usage of the term "neoliberal" heavily declined. When the term was reintroduced in the 1980s in connection with Pinochet’s regime the usage of the term Neoliberalism 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 Friedrich Hayek and Milton Friedman.[2] 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.[3] The term neoliberal is now used mainly by those who are critical of legislative initiatives that push for free trade, deregulation, enhanced privatization, and an overall reduction in government control of the economy.[4]

Terminology

The term "neoliberalism" was originally coined in 1938 by the German scholar Alexander Rüstow at the Colloque Walter Lippmann.[5][6][7] 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.”[8] To be "neoliberal" meant that a modern economic policy with State intervention is required.[9] Neoliberal State interventionism brought a clash with the opposite laissez-faire camp of classical liberals, like Ludwig von Mises.[10] While present-day scholars tend to identify Friedrich Hayek and Milton Friedman as the masterminds 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 fundamentalist stance. Friedman´s name essentially never appeared in connection with neoliberalism until the 1980s.[11] In the sixties, use of the term "neoliberal" heavily declined.[4]

Another movement, this time from the American left, that used the term Neoliberalism to describe its ideology was formed in the United States in the 1981.[12] 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[13] who in 1983 published "A Neoliberal's Manifesto."[14] Two of the most prominent neoliberal politicians were Al Gore and Bill Clinton of the Democratic Party of the United States.

During the military rule under Augusto Pinochet (1973–90) in Chile, opposition scholars took up the expression to describe the economic system implemented in Chile after 1973 and its proponents (the Chicago Boys).[15] 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.[3] 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 leftist critics of liberalizing economic tendencies. 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.[4]

According to Boas and Gans-Morse the term neoliberalism is nowadays used on the left as a pejorative for policies that deregulate the private sector and increase its role in the economy. Nowadays the most common use of the term neoliberalism refers to economic reform policies such as “eliminating price controls, deregulating capital markets and lowering trade barriers”, and reducing state influence on the economy especially by privatization and fiscal austerity.[4][16] 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.[17]

Early history

Colloque Walter Lippmann

In the 1930s, the mood was decidedly anti-liberal. To join forces 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 unrestricted liberty towards a market economy under the guidance and the rules of a strong state.[18] 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.[18]

At the Colloque Walter Lippmann, the differences between 'true neoliberals' around Rüstow and Lippmann on the one hand and old school liberals around Mises and Hayek on the other were already quite visible. There occurred fundamental differences. 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 the 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'.[18]

Michel Foucault uses the term in this sense in his famous 1978-79 lectures on "biopolitics".[19] 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" [20] 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."[21] 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."[22] 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.[23]

Post-WWII neo-liberal currents

Germany


In West Germany, neoliberal ideas were first implemented. 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.[18] 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 accepts this classification.[24]

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.[25] 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".[25]

Erhard had always emphasized that the market was inherently social and did not need to be made so.[18] 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.[26] Rüstow, who had coined the label "neoliberalism", criticized that development tendency and pressed for a more limited welfare programs.[18]

Hayek did not like the expression "social market economy", but he noticed 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.[27] 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".[28] 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.)".[29]

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.[18]

Chile

Further information: Crisis of 1982 and Miracle of Chile

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.[30]

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 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.[31]

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.[32] 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.[3]

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."[33] 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.[34]

Australia

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.[35]

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.[36] 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.[37] The admitting of domestic full fee paying students to public universities was stopped in 2009 by the Rudd Labor Government.[38]

Economic schools of thought

Austrian School of Economics

The Austrian School of economics is a school of economic thought which bases its study of economic phenomena on the interpretation and analysis of the purposeful actions of individuals.[39][40][41][42] 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.[43] 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.[44] 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.[45] 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.[46] For example, Fritz Machlup, Friedrich von Hayek, and others, did not take Mises' strong a priori approach to economics.[47]

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."[48] 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."[49] Republican U.S. congressman Ron Paul states that he adheres to Austrian School economics and has authored six books which refer to the subject.[50][51] Paul's former economic adviser, investment dealer Peter Schiff,[52] also calls himself an adherent of the Austrian School.[53] Jim Rogers, investor and financial commentator, also considers himself of the Austrian School of economics.[54] 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.[55] 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.

During the early 1950s, Murray Rothbard attended the seminar of Austrian economist Ludwig von Mises at New York University and was greatly influenced by Mises' book Human Action.[56][57] 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.[58]: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 at Auburn University in 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."[59]


Chicago School

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.

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). It is associated with neoclassical price theory and libertarianism and the rejection of Keynesianism in favor of monetarism until the 1980s, when it turned to rational expectations. The school has impacted the field of finance by the development of the efficient market hypothesis. In terms of methodology the stress is on "positive economics"– that is, empirically based studies using statistics to prove theory.

Expanded definition

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,[60] Milton Friedman, David Harvey[61] and Noam Chomsky[62] 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.[63] 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