Neoliberalism: Explaining the Dominant Ideology of Our Time | Sam Volkers
During the last 1.5 years, political pundits from all around the world have been claiming that the Covid-19 pandemic and the coming economic crisis will be the death of neoliberalism. They say that our current and future crises will be so bad that a new system will be needed. Although this all sounds very compelling – and is something I agree with – I doubt that if you would ask the average person in the street to define neoliberalism, you would get a clear answer. This is very odd of course, for an ideology that has been so dominant the last 40+ years to be so hard to define among most people. So what exactly is neoliberalism?
A Short History of Neoliberalism
First it is important to take a short look at the history of neoliberalism. Most scholars see 1938 as the year the idea of neoliberalism was born (Mellink and Oudenampsen 2019). That year, under the guidance of American journalist Walter Lippmann, the Colloque Walter Lippmann (an intellectual conference) was organized with the purpose of creating a new form of free-market liberalism to challenge both the old classical liberalism and ideologies such as socialism, fascism and everything else they considered as collectivism. This group would later inspire Friedrich Hayek (considered to be the father of modern neoliberalism) to create his own association of neoliberal thinkers called the Mont Pelerin Society in 1947. The goal of this group was similar to that of Colloque Walter Lippmann: to create and promote neoliberalism.
Their ideas however would not catch on quickly, as they were seen as outdated and anachronistic by most people. The Great Depression of the 1930s and World War II had both destroyed the public’s faith in unrestricted free-markets and shown the benefits of government planning. During the period between the end of the war in 1945 and the late 1970s – known as the Post-War Consensus – governments all across the West used Keynesian inspired policies such as deficit spending and forms of state planning in key sectors and regulations in the other sectors to keep the economy stable. This is also the period during which governments created a large number of welfare programs and made the labour unions a strong actor in economic affairs, much to the chagrin of neoliberals such as Hayek.
The Post-War Consensus would come to an end during the mid-late 1970s after two oil crises (in 1973 and 1979) caused stagflation, a combination of stagnation and inflation. Now suddenly the old Keynesian policies did not work as well as before. This combination of large scale stagnation and inflation was just the right situation for neoliberalism to take off. And take off it did, with the elections of Margaret Thatcher in the United Kingdom (1979) and Ronald Reagan in the United States (1980). Both Thatcher and Reagan implemented typical neoliberal policies such as de-regulation, tax cuts, austerity and a tighter control of the monetary supply (Roy and Steger 2010: 24–25). In addition to this, both Reagan and Thatcher also curbed the power of labour unions, reducing them to a shell of what they once were.
During the 1980s neoliberalism spread across the West, where the new generation of leaders implemented similar policies as those seen in the UK and US. After Thatcher and Reagan resigned from their respective offices, their policies were continued by other conservatives (John Major in the UK and George Bush in the US). During this period neoliberalism became the dominant ideology and spread all across the political spectrum. The centrist and centre-left politicians such as Bill Clinton in the United States, Tony Blair in the United Kingdom and Wim Kok in the Netherlands that replaced the conservatives, continued with the same neoliberal policies, albeit with some minor ideological tweaks.
This became the consensus until the Great Recession that started in 2008. During and after this recession, mainstream politicians failed to properly deal with the situation. Where Obama tried to combat the recession with government intervention, most European countries did it with harsh neoliberal austerity. Mainstream politics also failed to deal with the problems caused by another aspect of neoliberalism: rapid globalization that left many people behind. All this culminated in 2016 with two shock decisions: the Brexit referendum and the election of Donald Trump.
Now we come to 2020-2021. The Covid-19 pandemic again shows the fragility of our societies and economies and the dangers of countries being too dependent on each other. This very well could be the beginning of the end of neoliberalism, according to some.
What is Neoliberalism?
So what is neoliberalism then? Neoliberalism is a political ideology created by Friedrich Hayek and “perfected” by Milton Friedman. The philosophy behind neoliberalism is a worldview centered around freedom from government intervention and the wisdom of the market. It states that competition is the only viable way to order human activity (Metcalf 2017). In the eyes of most neoliberals, the world is nothing but one big market and countries are like stores with its citizens being consumers who only follow their own needs and interests, rather than people who all have their own role within their families, communities and society. It is no surprise then that during the era of neoliberalism, globalization sped up rapidly and aggressively with trade deals such as NAFTA and the creation of the EU Common Market.
The practical side of neoliberalism can best be explained by using Roy and Steger’s “D-L-P Formula” (Roy and Steger 2010: 14):
-D: Deregulation of the economy
-L: Liberalization of trade and industry
-P: Privatization of state-owned enterprises and government services
Examples of these policies are the removal of business regulations, tax cuts (especially for the rich and big business), removal of trade protections such as tariffs, and the curbing of power of labour unions.
An important neoliberal theory is what some people call the “trickle-down economics”. The theory of trickle-down economics states that if the government cuts taxes for the rich and big business, this will spread (trickle down) to the rest of society. The idea behind this is that – according to proponents of the theory – tax cuts for the wealthy and big businesses will stimulate them to invest, innovate and expand , causing economic growth and job creation which will benefit the rest of society (Kenton 2020).
Another important aspect of neoliberalism is monetarism. Monetarism, whose best known proponent is Milton Friedman, states that it is important for the government to tightly control the money supply in order to curb inflation, with the intent of creating economic stability (Ganti 2019). This had as a downside that it mandated large cuts in government spending, especially welfare spending. The effect of this was that large segments of the populations across the West were left behind as inequality grew.
Neoliberalism in the West
So what were the effects of neoliberalism on Western countries in general? I would state that the effects were threefold:
-1: A change in the relation between the state and the economy
-2: A change of the economies itself
-3: A change of society in general
To start with the first point: neoliberalism has a deep faith in markets and a deep distrust of governments. This has translated into policies such as the de-regulation of the economy, privatization, tax cuts and austerity policies. Where the state used to be seen as a fatherly institution with the goal of enhancing the welfare of the people and steering the economy to make sure it is fair and stable, it is now seen as an institution that ensures that the market is as free as possible and which uses its power to neutralize obstacles to this market freedom (which is also what sets it apart from classic liberalism/laissez-faire economics). This decrease in government regulations and welfare spending led to harsh living situations for the poorer segments of Western societies and an increasing pressure on the middle-classes who now were cut off from a lot of the welfare programs they previously had access to. In a lot of cases this privatization of government services and the changes in the welfare states actually led to more bureaucracy, instead of less because governments now had to expand the already existing bureaucracies with new tasks such as supervising the newly privatized services. Another effect of the decrease in regulations was the rise of instability of capital markets, leading to a large increase in economic crises internationally (Furceri et al. 2016). The new economic policies did actually reach their goal of dealing with the inflation that had plagued the West in the 1970s, but they failed to bring growth back to the post-WWII levels with growth numbers reaching an average of only 1,4% yearly growth between 1990–2009 compared to 3,2% average yearly growth between 1960–1980 (Chang 2010: 79–80).
The second point has to do with the economies itself. Where most Western countries used to have their own strong manufacturing bases, they now mostly rely on finance, services and the design of high-quality products (the so-called “knowledge economy”). A good example of this financialization and de-industrialization of the economy can be seen in Thatcher’s UK. When Thatcher became prime minister, industry made up 17,62% of GDP. By the time she left office this had decreased to 15,18% GDP, but with the disappearance of entire industries (think of the coal mines in the north of the UK). This industrial decline continued under her successors with industry being only 9,68% of GDP in 2010 (Roger 2013). This decline of Western industries was caused by a combination of privatization projects, the cutting of subsidies and the removal of tariff protections, leading to Western companies having a harder time competing with those in Asia. This led to large-scale offshoring of jobs, leaving entire towns and areas out of work and those that did still have work with stagnating wages.
One of the worst excesses of neoliberalism however is the increase in power of big business and hedge funds leading to the monopolization of Western economies (think Amazon and “Big Tech”). These monopolies have made the market much less free, hence neoliberalism has done the opposite of what it promised. A good example of the predatory use of power by big business and hedge funds is so-called “vulture capitalism”. This strategy is used by hedge funds to make money profiting off smaller businesses that are in financial trouble. They buy up struggling businesses and strip them of their valuable assets to make a quick buck, at the cost of putting hundreds if not thousands of employees out of work and leaving entire towns to be swallowed by poverty and decline (Pettinger 2020).
But how can all these things be allowed to go through? Why do the people not protest? Well they do, just not enough of them. Most people do not seem to be aware of neoliberalism being the root cause of many of the problems of modern-day society. This is where point three comes in: because of the dominance of neoliberalism in the world over the past 40 years, many of its ideas and dogmas have become the new “normal”. They have been embedded into our thinking, without us realizing it.
This has caused a shift in social behavior among the people and the political elite. Neoliberalism, with its view of society as a big market and citizens as mere consumers, has caused a decline in the importance and power of families and communities. It has created a culture of extreme individualism and materialism. Another aspect of this cultural change is the view of the world as one big interconnected marketplace, where citizenship and countries have lost a lot of their importance with cosmopolitan ideas taking their place. This has created a schism between most ordinary people in society who still believe in a lot of values such as family, community and nation and the people in power, who tend to be more market-oriented and cosmopolitan minded.
Neoliberalism outside of the West
Outside of the West, in the ex-communist countries and the countries that belong to what is known as the Global South (most of Africa, Asia, Latin America and the Middle East), neoliberalism took a different form: the Washington Consensus. This Washington Consensus can be seen as a set of ten general policies that are to be implemented by developing countries to create what is seen by neoliberal economists and Western institutions as “proper” economic development. The implementation of these policies by developing countries is often mandated by institutions such as the IMF and the World Bank if they want to be eligible for loans or other means of support (Roy and Steger 2010: 19). Most of these policies are aimed at trade liberalization and creating a friendlier environment for (mostly foreign) businesses.
These ten main policies can be defined as (Roy and Steger 2010: 19–20):
-1: Guaranteeing fiscal discipline and curbing budget deficit
-2: Cuts to public spending (especially in areas such as defense and public administration)
-3: Tax reforms, to make taxes more efficient and business friendly
-4: Financial liberalization
-5: Competitive exchange rates
-6: Trade liberalization, with an emphasis on the reduction of tariffs and import licensing
-7: Promotion of FDI (foreign direct investment)
-8: Privatization of state-owned enterprises
-9: De-regulation of the economy
-10: Protection of property rights
Neoliberalism and globalization have had mixed results in Latin America, the Caribbean and Sub-Saharan Africa in particular. In the years between 1960–1980, during which industrial policy and government intervention in the economy were common in countries in these areas, average yearly GDP per capita growth was at 3,1% in Latin America and the Caribbean and 1,6% for Sub-Saharan Africa. This number declined dramatically in the years between 1980–2010, from 3,1% to 0,8% per year for Latin America and the Caribbean and from 1,6% to 0,2% per year for Sub-Saharan Africa (Chang 2019).
A well-known example of neoliberalism outside of the West is Chile under Pinochet. After coming to power in 1973 via a military coup, Pinochet ruthlessly cracked down on any left-wing sentiment, both in politics and the economy. It is estimated that under his rule more than 40,000 suspected political dissidents were killed, tortured or imprisoned (cbc.ca 2011). In the economy Pinochet removed most policies left over by the left-wing government of previous president Salvador Allende and replaced them with neoliberal policies such as privatization, spending cuts, trade liberalizations and austerity. In this he was advised by a group known as the “Chicago Boys” (Chilean international students who were taught by Milton Friedman at the University of Chicago), who helped Pinochet create what is now known as “the miracle of Chile”: the curbing of inflation and an average economic growth of 7% per year between 1985–1997 (Davies 2019). This economic growth did not trickle down evenly however, with Chile’s richest 10% benefitting most, while the poorest in society only benefitted marginally (Roy and Steger 2010: 100–101).
End of Neoliberalism?
So now that we know what neoliberalism is and what it’s effects have been on the world we can ask ourselves the question: will the Covid-19 crisis be the end of global neoliberalism? I personally doubt it. Although most political parties in the West seem to have abandoned (most of) their neoliberal ideas, it is still unclear if it is all just a show for the upcoming elections or a genuine shared sentiment. And even if the neoliberal school of thought is quickly dying, what will follow it? Should we follow the path of the social-democrats, with their new old love for extensive welfare programs and a re-introduction of Keynesian government planning, or should we follow the christian-democratic way, with a strong focus on family and community? Or should we follow the economic nationalist school with its focus on protectionism, industrial policy and local businesses; a school of thought which has slowly become more popular recently with candidates on the right (Trump and his America First-plans), centre (Biden with his “Made in America” economic policy) and left (for example Jean-Luc Mélenchon in France)?
I would argue that the best way forward would be to embrace a synthesis of these ideas, since they all correct one of the three changes caused by neoliberalism which I described above, with the social-democratic solution correcting the balance between the government and the market, the economic nationalist school correcting the changes in the economy itself and the christian-democratic way correcting some of the more harmful social and cultural changes caused by neoliberalism.
We should build an economy and society in which our families and communities play a central role. We should expand our welfare programs to alleviate the worst problems in society and rebuild a strong and capable state that is able to use efficient planning in key sectors to stabilize the economy and steer it towards the achievement of important national goals (for example achieving full-employment, rebuilding our military, solving the housing crisis etc.). To create a fertile ground for this change, we should also seek to again embrace a form of industrial policy in order to rebuild our declining domestic manufacturing base to become more self-reliant and bring back prosperity for all.