What is neo-liberalism? Part II

Paul Sagar
June 10, 2015
Series ‘Belgravia’: Courtesy of Karen Knorr, Galerie Les Filles du Calvaire

In the first installment of this essay, I suggested that neither  the United States, nor the Eurozone, assist us in understanding the term  ‘neoliberalism’ in a meaningful sense, unless we are first willing to  abandon the idea that ‘neoliberalism’ is about political withdrawal and  the giving way to free market economic competition. Nonetheless, it  might reasonably be responded that even if what I have suggested is  true, it remains undeniable that something important changed from  the 1980s onwards, most especially in Britain and America, and to a  lesser extent the wider Western world. To pick particularly obvious  examples, under Ronald Reagan in the USA, and Margaret Thatcher in the  UK, decisive economic changes were introduced: in particular, financial  services were massively deregulated under claim that market competition  was both profitable and safe for the wider economy, and heavy emphasis  was put on privatization of services previously provided by the state.  The interfering activity of the state was ostensibly rolled back to  allow greater freedom for private enterprise, and a belief that  this was the correct path to follow, succeeded by policies to try and  implement that belief, perhaps stands as a plausible candidate for  getting a grip on what neo-liberalism might be.

At a certain level of generality this must be true. But how it might  add up to a coherent picture of something called neo-liberalism is much  harder to ascertain. We now know where financial deregulation led: the  mass rescue of private firms from oblivion, via state bailout. As Helen  Thompson emphasises in her China and the Mortgaging of America: Economic Interdependence and Domestic Politics (2010)  (see the first part of this essay), the death of the nation-state as  the primary locus of decision-making power has been greatly exaggerated.  Multinational corporations still operate in nation states and under  their laws (however much they do succeed in bullying lawmakers). When  some of the most important, powerful, and influential of those  corporations failed, it was states that rescued them, and in several  cases came to own them as a precondition of the entire modern economic  system continuing to exist. When it came to the crunch, the market did  not rule after all, and it was governments who proved the ultimate  sources of power and authority, and hence domestic and international  stability.

Similarly, although the mantra of privatization has dominated much  British political discourse for the past three decades, its operation in  practice is typically anything but the pure activity of private  enterprise in a competitive market, and typically continues to rest upon  enormous public subsidy in order to provide viable services. One need  only look (to cite the most notorious example) at the scandal of British  rail privatization: a putatively privatized system upheld at greater  state expense than under the old nationalized network, but generating  enormous private profits for state-backed monopolists, the gains for  whom are not reasonably returned to taxpayers. The truth is that  whatever rhetoric to the effect of promoting market competition has  typically been used to dress-up economic (and frequently, social)  policies in recent decades, this belies the truth that the state  continues to interfere heavily in those transactions that have been  putatively given over to the forces of the market. This is done in order  to ensure the provision of essential goods and services that citizens  demand as a condition of modern life, but which would fail to be  adequately provided for if genuinely left to the forces of market  allocation alone.

Nonetheless, it is important not to lose sight of the fact that rhetoric matters.  There can be no reasonable doubt that the key in which public debate is  conducted changed dramatically from the 1980s onwards. This tells us  something important about the way in which ideas were ostensibly  justified to those expected to live with their consequences, and hence  about what people could come to accept as comprehensible reasons for  changes in the way society was organised. Indeed, rhetoric matters most  especially when it is not just rhetoric, but expressive of some  genuine underlying belief. Thatcher and Reagan certainly seemed to  believe in the underlying ideological justification of the economic  doctrines that they adopted, in particular the political worldview of  state-minimalism that ostensibly accompanied them. Clinton’s  ‘Triangulation’ in America, and New Labour’s ‘Third Way’ in Britain,  signaled the fundamental acceptance by the centre-left of a changed  political landscape, one which adopted very different sorts of economic  policies from that which had been orthodoxy two decades previously, and  of the social role of government that went with it (roughly: increasing  withdrawal of the support offered to the most vulnerable, coupled with a  relaxation of the demands made via taxation upon the wealthiest).

How did this revolution in beliefs come about? It may turn out that answering this question puts us on a better track in attempting to understand what neo-liberalism is. That is, in tracing the intellectual history  of views which by the mid-1990s had become political and economic  orthodoxy, we will likely gain more insight than if we attempt to deal  with the miasma of current political and economic practices head-on,  without the benefit of critical distance. Fortunately, a valuable  contribution in this direction is made by James Forder’s Macroeconomics and the Phillips Curve Myth  (2014), which sets itself directly against what has come to constitute  the conventional wisdom about why Britain and American in the 1980s  adopted economic policies which put these countries on the path to where  they are today.

That conventional wisdom is that economic ‘monetarism’ –  concentrating on interest rates and the money supply – was a necessary  policy response to the intellectual and practical failures of  ‘Keynesian’ economics (using tax and spend policies to purposefully  direct the economy). Whether monetarism itself was a success is a separate question,  but there can be little doubt that it was under the auspices of  monetarist economic policy that much of the radical reform Thatcher and  Reagan oversaw took place. Martin Wolf, as it happens, provides a  conventional history to go with the conventional wisdom as to why  monetarism was adopted by policymakers in the 1980s:

Monetarism’s great successes were in the 1960s and 1970s  when naïve Keynesianism blew up because it underplayed inflationary  expectations and believed too confidently in macroeconomic fine-tuning.  The assumed trade-off between unemployment and inflation broke down,  whereupon Keynesian fine-tuning of the real economy, via active fiscal  and monetary policies, became largely discredited and was subsequently  abandoned…[A]s a matter of historical fact, the Keynesians of the 1960s  mostly downplayed inflation expectations and largely believed in  fine-tuning. This opened up a vulnerable intellectual wing to the  monetarist counter-attack, which combined the role of expectations, the  centrality of money, and the difficulties inherent in discretionary  macroeconomic fine-tuning.

Yet Forder shows just how wrong this conventional history is.

According to the received version of economic intellectual history  now believed in by virtually all contemporary economists, a seminal  paper of 1958 by A.W.H. Phillips claimed to establish a stable and  permanent relationship between inflation and unemployment. This was the  origin of the so-called “Phillips Curve”, which held that unemployment  was inversely related to inflation. This finding (the conventional story  goes) was then refined in a 1960 paper by Paul Samuelson and Robert  Solow, which established a ‘menu’ of policy options for governments, who  could trade-off unemployment against inflation. ‘Full-employment’  policy under Keynesian economic management could be achieved at the cost  of inflation – which Samuelson and Solow allegedly advocated. Fellow  contemporary economists were supposed to have widely endorsed this  trade-off, and policymakers followed suit. However at the end of the  1960s and early 1970s, Milton Friedman and Edmund Phelps exposed earlier  Keynesian economics as based on naïve assumptions regarding  expectations of future price-level changes. This in turn dismantled the  intellectual credibility of Keynesian economics predicated upon  ‘exploitation’ of a Phillips Curve—a law that Friedman and Phelps  claimed was itself an intellectual fallacy. In the 1970s, when so-called  ‘stagflation’ (rising unemployment with simultaneous inflation) hit  western economies, Friedman and Phelps were vindicated and their  alternative monetarist theories of macroeconomic management were  eventually adopted by policymakers, with Keynesian demand-management  left behind.

Despite this story being widely believed, Forder conclusively  demonstrates that none of it is true. The original Phillips paper  purported to establish a stable, unchanging, universal relationship  between wage (not price) levels and unemployment – and was  roundly rejected by contemporaries as an unrealistic account of labour  and industrial economics, because it ignored the irreducibly political  nature of wage-bargaining, which was contingently organised in every  society. Phillips’s paper was a shoddily assembled and data-poor effort,  produced over a ‘wet weekend’ and rushed into print without proper peer  review. The suggestion that it formed the basis of a decade and more of  economic research and policy-making is simply false. As for Samuelson  and Solow, they did draw on Phillips to a limited extent, but they  certainly did not claim that there was a stable relationship between  unemployment and inflation, that policymakers could straightforwardly  pick and choose between different points on a trade-off curve, or that  governments ought to permit inflation so as to artificially maintain  high levels of employment. Indeed, although a large body of literature  in the 1960s examined the relationship between employment and price  levels, it is simply false to believe that there was a consensus around  pro-inflationary policy as a trade-off for stable high employment.  Furthermore, there is no evidence that policymakers were acting  on any such belief in a stable trade-off, or were themselves unworried  about price stability in the name of securing jobs. What Forder calls  the Phillips Curve myth thus incorporates both the collective false  memory of academic economics, and concomitant claims regarding the  relationship between academic economics and real-world policy-making in  the post-war period.

Series ‘Belgravia’: Courtesy of Karen Knorr, Galerie Les Filles du Calvaire

During the mid 1970s, it suddenly (and somewhat unexpectedly) became  received wisdom amongst economists that trade-offs based on a Philips  Curve had been widely believed in by previous generations. The previous  existence and domination of this “orthodoxy” was in turn incorporated  into the folk-wisdom of economics, especially through the rapid  appearance of this imagined past in textbooks of the late 1970s. (Forder  dedicates a chapter to the difficult task of explaining just how this  rapid and fundamental change came about.) The culmination of the sudden  emergence of the Phillips Curve myth, and its entrenchment in subsequent  collective belief, was Milton Friedman’s 1977 Nobel Prize speech. He  there deployed the conventional story – with himself and Phelps in the  role of gimlet-eyed revolutionaries shaking off the dogmas of the past –  and indeed gave it much of the shape that it now possesses. Thus what  Forder describes as “more or less the only piece of the history of  economic thought” modern students of economics now learn, turns out to  be a fable without any significant basis in reality.

Yet the consequences of this discovery go far beyond a quirk of  academic self-imagining. In his 1977 lecture Friedman was quite  consciously presenting his school of economic thought as representative  of a true economic science, one that was displacing an earlier,  sub-scientific approach that failed to appreciate the fundamental laws  that govern economies. But what Forder demonstrates is that the economic  thinking of the 1950s and 1960s was not naïve, nor based on  embarrassing “intellectual blunders”, as the conventional story now  maintains. Earlier approaches may not have conceived of economics as a  ‘science’ in the way Friedman wished to characterize his own approach  (and in which he has been mostly followed by professional economists  since), but this is a question quite separate from whether it was  therefore bad economic theory. The belief in the inadequacy of pre-monetarist macroeconomic theory, insofar as it failed to be properly economic  theory, is itself partly a product of the Philips Curve myth. This has  major consequences, because by ‘discrediting’ belief in an exploitable  Philips Curve, what really occurred was the subsequent intellectual  discrediting of Keynesian economics tout court. That is, the  alleged intellectual victory of monetarism in the 1970s, and its  political adoption in the 1980s, cannot be explained simply in terms of  the essential intellectual inadequacy of its main rival. Rather that  victory was partly, but to an important degree, ideological:  based on the retroactive, but very rapid, misrepresenting of the nature  and sophistication of alternative accounts of macroeconomic – and hence,  social and political – reality.

This is important because as a matter of historical fact Keynesianism  has long been married to a broadly leftist social, political, and  economic outlook. The Keynesian view of an active state, which corrects  for the fluctuating instabilities of market forces, has a natural  attraction for political actors who wish to use the agencies of the  state to engage in social programmes of welfare relief and  state-generated employment. However these are (broadly speaking) policy  goals that are antithetical to many on the political right. The  ideological victory of monetarism was thus multifaceted: it allowed its  natural allies on the political right to paint Keynesian economics as  sub-scientific and thus discredited, and by extension removed both the  putative policy tools, and the intellectual credibility, of economic  policies geared towards social democratic goals. Reagan and Thatcher’s  embracing of at least the rhetoric of monetarist economic theory  accordingly also had multifaceted purposes, one in particular being the  intellectual justification for the view that not only had the old  economic policies failed, but they had failed because they were without  intellectual foundation.

One must be careful not to overstate Reagan and Thatcher’s interest  in the relative merits and truths of economic theories. It was more the  case that the ideology of the New Right of the 1980s happily exploited  the economic theories of monetarism, than that the Chicago School of economics  gave life to new political movements. (The importance of Hayek’s  political philosophy to Thatcherism’s origins should not be discounted,  and Hayek’s ‘Austrian’ economic theory of free-market liberalisation is  in many ways deeply antagonistic to Friedmanite monetarism.) But as  Keynes himself famously wrote in the final chapter of the General Theory of Employment, Interest and Money (1936):

‘The ideas of economists and political philosophers, both when they  are right and when they are wrong, are more powerful than is commonly  understood. Indeed the world is ruled by little else. Practical men, who  believe themselves to be quite exempt from any intellectual influence,  are usually the slaves of some defunct economist.’

If this is even half true, the evolution of macroeconomic theory in  the post-war era matters to our present political possibilities and  predicaments.

Modern macroeconomic theory is now overwhelmingly dominated by the  view that economics is a form of science, one that ought to take the  natural sciences, in particular physics, as its model. Underlying this  view is the folk-wisdom of modern economic science as born from the  errors of an embarrassing pre-theoretical age, most painfully revealed  with the practical failure of Philips Curve-exploiting Keynesian  economics in the 1970s. That self-image is in large measure based on the  outcome not of anything that resembles scientific progress, but on  ideological victory and retrospective rewriting of history by the  victors. The economists of the 1950s and 1960s were not naïve, and their  theories were not useless parts of a prehistory that can be safely  ignored by the modern theorist. By ignoring the history of economic  thought, Forder implies, we deprive ourselves of crucial resources for  understanding not only how the world is, but how it might be – and  therefore of how we might make it better. In any case, we can at least  identify another thing that neoliberalism is not. It is not the  political implementation of a science grown from the ashes of a defunct  alternative, even if it is the very the belief in economics as a science that plays a crucial role in explaining the intellectual backstory of how we got to where we are today.


It can be tempting to suggest that ‘neoliberalism’ is simply a label  used by those on the left to refer to all of the policies that they do  not like, yet which have been enacted by Western governments of the last  35 years. In which case it is not surprising that it lacks any coherent  content upon inspection, because it never really had any in the first  place. But this cannot be enough, for the reason that important things did  change during the 1970s and 1980s, and our present state of affairs is a  direct consequence of that. If neoliberalism is not simply the  increased reign of markets and the concomitant withdrawal of politics,  one thing we can apparently nonetheless say is that it is an ideological  victory which has something to do with the defeat of recent intellectual  rivals, to the point where alternative ways of thinking about the world  are forced out, and cannot sustain any priority in the minds of  policymakers.

This seems confirmed and illustrated by policy responses to the 2008  crisis. As Wolf recounts, the immediate response to potentially  cataclysmic downturns in the ‘real’ economy was staunchly Keynesian.  Governments first rescued banks and nationalized failing institutions,  and then employed large fiscal stimulus packages to keep economies from  collapsing. Thankfully, the western world had learned the lessons of the  1930s, and was able to avoid another Great Depression. But that  support, Wolf argues, was withdrawn far too soon under the mantra of  “austerity” – a nakedly ideological attempt to reconfigure the role of  the social state under the specious pretext of debt-control, at a time  when sound economic policy, and the well-being of ordinary citizens,  demanded a very different pro-active response. What was achieved instead  of a Great Depression was a Great Recession.

Historically speaking, this is progress. But it is progress of a  bitter kind, for it did not need to be this way. Yet what is remarkable  is the extent to which policymakers uniformly acted as though it did: as  though austerity and retrenchment were the only possibility.  Neoliberalism, then, must in some sense be understood in relation to how  the horizons of economic possibility have been narrowed so dramatically  in the minds of decision-makers. This is not a product of the march of  economics as a science, but at least in part the march of an ideology of  economics married to a particular vision of politics, one which is  deeply hostile to the social-democratic inheritance of the post-war  world. Frustratingly, however, this conclusion only seems to land us in a  circle: neoliberalism is a configuration of politics’ subordination of  economics, and our present political subordination of economics is  neoliberalism. We seem, after all, no closer to an answer than when we  started.

Perhaps, though, we should not feel too frustrated. In Plato’s dialogue The Meno,  Socrates argues his young interlocutor into a state of desperate  bewilderment. Meno had thought that he knew what virtue was, but  Socrates’s careful probing exposes all of Meno’s beliefs as false,  leaving him with no sense that he knows anything about virtue at all.  Meno complains that Socrates has numbed him “like a stingray”, leaving  him in a state of useless intellectual paralysis. But Plato implies to  his readers that Socrates has in fact done Meno a favour. By eliminating  previous false beliefs and complacencies, Meno can begin to build on a  solid foundation, and perhaps find his way to a true understanding.  Finding out what something is sometimes requires first finding out what  it is not. We are in something of the same position with  ‘neoliberalism’: after decades of accreted confusions and  misunderstandings, what we need is to sting ourselves into seeing what  is false, so that we might in turn begin to see what is true.


All by
Paul Sagar