Colombo Telegraph

The Origins Of Neoliberalism

By Kumar David

Prof Kumar David

Masters of the Universe by Daniel Steadman Jones. Princeton University Press, 418 pages, 2011- Book Review

Many people are not clear about the difference between classical economics and neoliberalism; to put it starkly, neoliberalism is classical economics plus a political ideology. While the original version (Smith, Ricardo, Mill, Marshall and Walras) was focussed on economic theory – liaises faire, production & value, exchange & trade, marginal utility – and only a little involved in politics, for neoliberals the principal task is a political crusade to save the world from collectivism – Nazism, Soviet Communism, socialism, Keynesianism, British social democracy and American New Deal liberalism. After the war, to this list of evils was added third world populism and state intervention. Neoliberalism is politics plus an obsessive emphasis on free-markets stirred into classical economics; it makes no theoretical or conceptual breakthroughs or innovations of its own.

In economic theory there is little, just one and a half items, that neoliberalism brings to classical theory; monetarism gets one mark, and the half-mark is for rational-choice theory where market clearing concepts are carried into other domains such as government. Separating neoliberalism from its classical ancestor is an obsessive preoccupation with free-markets. While classical economics created the theory of markets, market clearing, marginal utility and equilibrium theory, and also examined the effects of market distortion (monopoly), it did not suffer from a maniacal obsession with liassez-faire. This is a trademark of neoliberalism since it is a crucial political weapon in the crusade against collectivism and socialism, which are deemed to be mortal enemies of individualism and hence the antithesis of freedom, democracy and Western civilisation.

The birth of neoliberalism

Neoliberalism, in its early days in the 1930s and 1940s was a political ideology and a philosophy; the side that later came to the fore as neoliberal economics was then a junior partner. The founding fathers were Ludwig von Mises (1881-1973), Freidrich  Hayek (1889-1992) and Karl Popper (1902-1994), all Austrians and all exiles from Nazism. They saw in Nazism, Soviet Communism and Mussolini’s fascism the evil face of collectivism trampling individual freedoms. After the war their critique of collectivism extended to the Beveridge Report (1942) advocating social welfare, Clement Atlee’s (prime minister 1945-51) far reaching social democracy and nationalisations, and Aneurian Bevan’s National Health Service (1948). Their theoretical targets were the paradigms underpinning British social democracy and American liberalism from 1945 to the 1970s, Keynesian economics.

Masters of the Universe by Daniel Steadman Jones. Princeton University Press, 418 pages, 2011.

In America they saw a similar danger to liberty in the collectivism built into Roosevelt’s New Deal in several Acts promoting public expenditure, labour unions, social security and fair wages, and later in Johnson’s Great Society and the Civil Rights Movement. War kept them in harness, but afterwards they issued three manifestos – von Mises’ The Road to Serfdom (1944), Hayek’s Bureaucracy (1944), and Popper’s Open Society and its Enemies (1945). Thus was launched the essential standpoint of neoliberal philosophy. Crass neoliberal economics of the IMF-World Bank type of the 1970s, the political highpoint in the Regan-Thatcher era, and the gory glory of finance capital in the 1990s, came later; philosophically, these were but crude caricatures of the original discourse.

Masters of the Universe

I had the good fortune to have a copy of Steadman Jones’ book passed to me by a gentleman who lives down my road; he also said it’s the only copy currently in Lanka. This motivated me to add my two-cents worth, pass it off as a review, and share with readers aspects that may not be so well known. The book can be partitioned into two for this purpose; the first four chapters on the origin and spread of neoliberalism as a school of thought, and chapters 6 and 7 on the neoliberal “breakthrough” in the 1970s and the high Regan-Thatcher 1980s. The book does not deal with the defeat and collapse of neoliberal economics, first in the developing countries in the early 2000s, and then in the West as a New Depression originating in 2008. Though mortally wounded, neoliberalism is not yet dead and buried; it convulses and survives in the shape of a finance industry on a cocktail of wealth, power and fictitious services.

Chapter 5 on Keynesianism and Monetarism is a bridging chapter between my notional partitions. I intend to deal with the early period only in this essay and to devote a few paragraphs to chapter 5. The recent period, neoliberal economics, the Washington Accord and loathed structural adjustment are known and reviled in the developing world. Regan-Thatcher politics and economics are also fresh in the mind and equally hated on the left. My reason for focusing on origins is that readers are less familiar with it.

Popper’s Open Society is a comprehensive historical critique. He begins by taking aim at Plato and works his way through Hegel and Marx to Keynes. Plato’s unforgivable fault was undermining individualism; he built an ideal society, he proposed the philosopher king to encompass rule by wise men, he was the originator of social system building. His outlook was what, in modern parlance, we would call statist, as opposed to the atomism of individuals cooperating in a free and unfettered market place, each seeking his own gain. Once Popper started off like this the obvious next target was Hegel; the great system builder, the universal captain of knowledge who Marx once called a “mighty thinker”.

Marx is rejected because of historicism, economism and a-pox-upon-it socialism. He had argued that history is made by the movement of social forces and had theorised that the way in which men create their material lives profoundly influences their social and culture ethos. This to Popper was a dangerous attack on individualism and freedom. [Popper’s ‘falsifiability’ thesis, central to the philosophy of science, appeared in his previous book, Logic of Scientific Discovery, 1934. He is a major figure in the philosophy science and his work in that field is universally recognised, unlike his meddling in neoliberalism].

Hayek was the most accomplished economist (Nobel Prize in Economics 1974) of the three. I will try and get his frame of mind across with just one quotation from Road to Serfdom. “We have progressively abandoned freedom in economic affairs without which personal and political freedom has never existed . . . we are rapidly abandoning . . . the salient characteristics of Western Civilisation as it has grown from the foundations laid by Christianity and the Greeks and Romans”.  His philosophical standpoint is crystal clear.

Popper sought to include in what he called the “humanitarian camp”, some socialists, liberals of the common or garden variety and ‘progressives’ (oh that horrible breed), but Hayek opposed it on the grounds of diluting pristine neoliberalism. He was opposed to any sate involvement in the economy and held that economic inequality was a good thing because it encouraged everyone to strive harder. The role of the state, he said, should be limited to law and order and ensuring implementation of regulations.

If Hayek stood to the right of Popper, von Mises stood to the right of both; he was the archest reactionary of them all. He was also the oldest and had been a student of Carl Menger, the founder of the Austrian School and taken lectures from Bohm-Bawerk, another leading Austrian School economist. His seminal work, Bureaucracy, however has a narrow focus, the state. It describes the state not simply as a bad if it intervened in the economy, but he went further and termed the state inherently bad. Bureaucracy was bad because it did not answer to consumers, that is, the people; it answered only to political power or to no one but its own upper echelons. The bureaucracy (state) was an unavoidable menace, but it had to be pruned to a bare minimum. All today’s talk of small government is an old hat!

The neoliberal consensus was established in the Mont Perlin Society which held its founding conference in an eponymous town in Switzerland in 1947. The society’s membership was a star-studded galaxy of intellectuals of the day: von Mises, Hayek, Popper, the Hungarian-British polymath Michael Polyani, Raymond Aron from France, future German Chancellor Ludwig Erhard, future LSE head Lionel Robbins, and a contingent of rising stars from America, including future (1976) Nobel prize winner Milton Friedman, George Stigler and Aron Director. The rational-choice Virginia school and its leading theorists James Buchanan and Gordon Tullock should also be counted as part of the neoliberal camp.

Neoliberalism was a transatlantic phenomenon, intellectually from the 1940s and later as a world economic force. But the foundations of a transatlantic alliance were laid in pre-war convergence of New Deal economics and European social democracy. It was consolidated in the Bretton Woods system jointly navigated in 1944 by Keynes and Henry Dexter White, a senior treasury official in the Roosevelt and Truman Administrations. (Post Berlin Wall revelations confirm that White was a Soviet spy).

Shadow boxing and global power

The boom period of post war capitalism lasted from 1945 to the early 1970s. It was cemented by a social contract between the peoples of America and Western Europe and capitalism. In exchange for welfare, improved education and social services and rising incomes, capitalism won industrial peace, political stability, mass enthusiasm for the ideology of the day, and backing in the Cold War. The contract wore thin when the boom petered out as is inevitable in the lifecycle dynamics of capitalist. Extraneous events expedited crisis; the oil shocks of 1973 and 1978. They were not the cause of the tight corner capitalism had been pressed; crisis was brewing and stagflation had raised its ugly head before the 1970s – British Chancellor of the Exchequer Iain Macleod coined the term in 1965. The social contract came to an end; Keynesian state guaranteed supply-push demand-pull economics had run its course.

The neoliberals arrayed around Friedman in the Chicago School proposed an entirely different solution. The problem they said lay in the money supply, wrong monetary policy. A sharp tightening of money supply which would bring down inflation was advocated and the consequences unavoidable; break the social contract, roll back the welfare state, privatise state-owned assets, take on the unions and eventually smash the working class. Classic class struggle, like a lurid page out of a febrile Marxist text! The first shot was fired in far away Chile in 1973 and the neoliberals of the Chicago School and the IMF were the first on the ground to redesign an economic system for the butcher of Santiago. This was the first course, the main course, Regan-Thatcher, followed in the 1980s; the Masters of the Universe had surfaced for a while.

I will close by emphasising that neoliberalism was not a school of thought that gradually won converts and came to rule the world. Quite the opposite; when capitalism arrived at a near catastrophic road-block, crass neoliberal economics was born as a bastard child out of rarefied neoliberal philosophy. No longer were intellectuals needed; it was time for butchers.

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