economic theory

I apologize for the length and somewhat arbitrary nature of the following, it is an accumulation of thoughts as I react to the notion expressed by an acquaintance that the term “neoliberalism” has little to no explanatory power for the development of American policy since the Johnson years …

1. I agree that the word/term neoliberalism has no clear technical definition.  This, however does not mean that people who called themselves, or thought of themselves, as neoliberal did not exist or have significant influence over public policy.  In their translation of the sparse notes taken at the 1938 Lippmann Colloquium Jurgen Reinhardt and Serge Audier begin by saying “Even the concept of ‘Neo-liberalism’ is far from being clear …”.  Those notes, however, offer decisive evidence that the attendees at the colloquium thought of themselves as united in a broad project intended to rehabilitate nineteenth century classical liberalism.  In particular they felt a need to distinguish a revitalized liberalism from what they saw as the morally inferior version that provided the framework for early twentieth century laissez-faire capitalism.  In order to accomplish this they adopted the word neoliberal without being precise about its meaning.  They intended to develop their ideas further towards such precision.

2. So, the 1938 colloquium is the formal starting point of the neoliberal project.  It is important to note, though, that those beginnings were heavily European.  Only two Americans attended the 1938 meeting and one of those was Lippmann himself.  The American influence and adaptation of neoliberalism only came after World War II.  The original colloquium established a research agenda and the intention had been to re-convene in 1939 to discuss the creation of a set of more formal principles under the banner of neoliberalism.  Obviously that did not take place.  It was left to Hayek, an original attendee who had subsequently been recruited into the Chicago school’s newly renovated research program, to instigate the renewal of the project, which he did when he formed the Mount Perelin Society, an organization that exists to this day.

3. Hayek’s agenda differed in many ways from that described by the debates in 1938.  This is one of the primary reasons that neoliberalism has a rather diffuse meaning.  One example would be the role of the state.  The original meeting attendees had in mind a state that provided a solid social safety net to offset the downsides of capitalist economic activity.  Hayek, in contrast, thought that this implied a larger state presence in the economy and was thus an anathema and offensive to liberty — hence his “Road to Serfdom”.  The continental European version of neoliberalism never quite shook off the original vision for the state, whereas the American version became more adamant through time that state activity was inherently counter-productive, intrusive, and limiting to growth.  

4. It is also important to note the contingency in this history.  American geopolitical pressures created a bias in postwar intellectual development towards the Hayek/libertarian position and away from the European alternative.  Indeed so striking was this bias, and so strong the postwar American cultural and political influence in the West, that the entire academic narrative of economics was bent towards a severe pro-market — and by implication anti-Soviet — territory.  Branco Milanovic has gone so far as to dub modern American dominated mainstream economics as “Cold War economics” precisely because of this development.

5. In sum: neoliberalism has no single formal definition; it manifests itself in various versions — for instance as Ordoliberalism in Europe; and it exists in America as a major influence on modern economics and especially strongly in the newer Chicago/Virginia tradition in the work of Hayek, Stigler, Friedman, Becker, Lucas, Fama, Buchanan, and Tullock.  [as opposed to the original more pluralistic Chicago School of people like Knight, Viner, and Simon].

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But our interest is more in the arena of broader public policy not just academic economics.  So we return to the larger story.

Hidden in the narrative above is the influence of private money.  For instance, the financial support for the re-modeling of the Chicago economics department in the aftermath of the war was through a series of substantial gifts designed to encourage and sponsor the influence of pro-market ideology.  The Walgreen family and the Volker foundation [under the leadership of Harold Luhnow] were prominent in this effort.  The objective was overt: to create an intellectual platform for the eventual destruction of the New Deal policy framework that had hindered private wealth creation and corporate profit making. 

Furthermore: the shift at Chicago included a realization that the legal profession could be a conduit for the attack on the New Deal and thus needed to be channeled in a supportive direction.  That gave rise to the “law and economics” tradition spearheaded by the likes of Director and Posner whose interpretation of justice became inseparable from their conception of economic efficiency.  This opened the door to pro-market jurisprudence and became a major component of modern neoliberalism in America with particular impact on the execution of anti-trust law [but also in the definition of monopoly etc].  American neoliberalism was subsequently expressed not just in public policy formation, but also in the steady intrusion of pro-market thought into the courtroom. [contra Brandeis]

Concurrent with this effort was the steady politicization of business.  It took time for the business community to become more politically active.  It is in this context that the Powell memorandum has its significance — perhaps less for what it says than for what it encouraged, which was the rallying of the business community behind the need to influence public policy and shift it towards a more pro-business attitude.  Wrapped in patriotic language, the Cold War rhetoric that Powell employed to rally business to the anti-New Deal cause is a striking example of the evolution of neoliberal thought.  Prior to Powell the business community was remarkably apolitical, subsequently it became highly political.

This anti-New Deal and more pro-business platform is well illustrated in the careers of Ronald Reagan and Milton Friedman both of whom rose to public attention because they had significant corporate backing as they created their respective brands.  In the context of the Cold War both were able to present their pro-market views as [conveniently] also pro-American.  That those views were heavily influenced by Hayek and his interpretation of neoliberalism is clear.

So the emergence of modern neoliberal public policy has its origins in the convergence of three strands:

First was the academic effort to rescue classical liberalism from the debacle of the Great Depression and the associated inequities of laissez-faire.  This is the original 1938 -1947 emphasis.

Second was the desire of wealthy people and corporations to create a platform to undo the New Deal in order to re-assert their social and political status and to protect their wealth/profits.  This was the 1947 – 1970 emphasis.

Third was the geopolitical pressure within America to create an anti-Soviet narrative, and to build a set of values in stark contrast to the socialist perspective.  This was an emphasis continuing through to the collapse of the Soviet Union, and came to dominate the thought of American leadership on both sides of the political aisle subsequently.

Each of the three had different policy and intellectual implications.  They often overlapped.  But they also sometimes contradicted each other.  The convergence is, however, clear. The post Lyndon Johnson era was dominated by this convergence.  The inconsistencies  and contradictions that are evident in policy, and which contrasts it to any “pure” form of neoliberalism, are due entirely to differences of the outlooks and goals of the people within its three sources.  This jockeying for control of the neoliberal agenda is crucial to our understanding of its impact.

An example of this would be the advocacy of low taxes which clearly benefits the wealthy and corporate elite.  A true “Hayekian” neoliberal would consequently advocate a reduction in social spending to offset the reduced revenues. But that conflicts with the popularity of social spending.  So a “pure” neoliberal regime could never be fully executed.  The conflict of the neoliberal ideal of a low tax regime with the popularity of continued social spending produced not a public policy shift away from spending, but, rather, an acceptance of fiscal profligacy.  This profligacy was less an issue for the wealthy and corporate sector than it was for the academic wing of neoliberalism.  Its continuance indicates which had more power. [Besides, the rise in Federal debt instruments created an asset class eagerly held by the wealthy and helped entrench their financial and political power — not only did the wealthy enjoy lower taxes, but they earned a return on the debt issued to offset the lost revenue produced by those lower taxes.  Plus they began to wield power through the backdoor of the credit markets — as Clinton bemoaned.].

Another contrast is within the role of the state.  A purist neoliberal like Hayek wanted to reduce the social profile of the state — to minimize its provision of goods/services —  but, at the same time, he wanted the state to be powerful in its enforcement of pro-market policy.  His vision of strong state activity, though, was in contrast to the interests of business.  True neoliberals wanted to encourage competition.  Business wanted to restrict competition in order to extract rents i.e. what Warren Buffett famously called “moats”.  Practical business interests, especially post-Citizens United, overpowered the academic theorists and came to exert greater influence on how neoliberalism was actually manifested in action. 

Meanwhile, power struggles such as these between the different strands of neoliberalism thus contributed to the incoherent execution of it in policy.

Friedman offers another example: his opposition to interference in market activity implied opposition to trade unions.  That allied him with business interests.  As did his vocal position on the role of business in society.  But he was a purist.  He also saw professional organizations such as the American Medical Association as impediments to the operation of markets and the achievement of market driven efficiency.  That won him few friends in the upper echelons of the ever more prosperous professional classes who were benefitting from the growing power of the corporate sector.  It was the rise in wealth of this class that provided an increasing portion of America’s top echelon of wealthy citizens.  More and more of the elite has been subsequently drawn from the ranks of private sector bureaucracy rather than from the older entrepreneurial or capitalist class.

Eventually, as indicated by some of my examples above, the three converging interests became dominated by its business element: the character of neoliberalism in its “actual existing” form was corporate rather than either the early 1938 or the later more “pure” Chicago versions.  Indeed, the original version faded into a more academic setting and provided the only occasional intellectual support for policy, while the Cold War version lingered on as justification for global trade governance and the implementation of American preferences on the world stage.

With regard to trade: Slobodian has documented how the early neoliberals such as Hayek were insistent upon the adoption of a worldwide governance regime to enforce rules regarding the flow of capital and goods between states.  This was the foundation for globalization and the increase in trade witnessed over the past few decades.  The neoliberal motivation for such a framework was that it restricted the role of individual states, some of whom might be too easily influenced by democratically driven domestic policies.  Such policies might harm trade.  They might also constrain profit.  

Again the contrasts are worth dwelling on.  Rigorous international governance [aka regulation] of trade and capital was acceptable.  But domestic regulation was not.  The neoliberals abhorred local or national interference in markets because of the implied loss of efficiency, and to make such interference less likely they wanted to tie the hands of national governments by enmeshing them in an international set of rules.  This is, perhaps, the best example of the neoliberal agenda and it origins at work: the early neoliberals had watched the degradation brought about by the populist driven slide into post World War I fascism.  They so feared a second such slide that any hint of democratic government was immediately interpreted as the onset of decline.  The world had to be wrapped in rules that prevented local outbreaks of popular government mucking with the free movement of capital, goods, and even of labor.

Note, though, that those international rules were not democratically established on the world stage.  They were promulgated from within the citadel of the largest economy in the world — they were an aspect of hegemony as much as a manifestation of enlightened global management.  They were, after all, called the “Washington Consensus” and not the “Helsinki” or “Beijing” consensus.

Ultimately those rules led not just to the protection of trade, but also to the recent popular dislike of globalization.  Trade has clearly benefited consumers everywhere.  There has been a cost in the form of a movement of work from high wage to low wage nations.  This loss of work was generally compensated for by adoption of offsetting domestic policies.  Neoliberalism at the national level — the “small state impulse — led to reduced safety nets [contra Lippmann!] rather than augmented safety nets,  because of the increased presence of the state in the labour market such support would require.  So globalized trade led to benefits diffused across the entire consumer population; concentrated losses among displaced worker populations; and increased profit for those corporations able to shift work abroad.  The uncompensated disruption inherent in this is part of the root cause of current populism

The possibility of popular politics with its potential to disrupt the market is the root cause of the firmly anti-democratic attitude of the neoliberals.  People like Hayek, but also people like Friedman and Stigler, had a healthy dislike for popular decision making.  Public choice theory is an offshoot of this attitude — it is an an attempt to discredit public policy makers.  They regarded democratic choice as ill-informed at best and decidedly destructive at worst.  The fear that a state could succumb to the popular will was a central feature of neoliberalism at its inception. And, going all the way back to the Lippmann Colloquium, the tumult of Europe between the wars provided ample demonstration to Hayek and the others that socially sensitive public policy was inevitably self-destructive.  Subsequently, Hayek and his followers were never able to distinguish between a democratically elected state and an authoritarian based state.  They simply saw the ”state” as a monolithic entity opposed to liberty and the freedom of the individual.  It was, in their view, inevitably corrupt and incompetent no matter how popular it might be.  

As an aside with respect to this view of the state.  A contradiction emerged between the rigorous all-knowing and hyper rational individual conceived as central to [Chicago school based] rational choice theory, and the supposedly gullible and easily misled voter inhabiting the shadows of public choice theory [based in Virginia, although Buchanan was a student of Stigler’s].  The slipshod acceptance of each conception simultaneously embodied in precisely the same people/voters/economic agents demonstrates how contingent theory became in pursuit of its ideologically driven goals.  Depending on what the current argument was, agents were either stupid or all-knowing.  If ever there was an indictment of modern economics as being entirely ideological rather than empirical, it is this unresolved paradox.

This all played well to the ears of the wealthy and corporations desiring to restrict the state’s ability to constrain their activities.  

In the political realm neoliberalism expressed itself as the liberation of the “individual” from the oppression of the state.  That this ended up concentrating power in the hands of the wealthy and the corporate sector was coincidental.  But liberated individuals also had to be prevented from forming associations or expressing popular will through the state.  A purist neoliberal like Friedman was decisively anti-union for this reason — any collective action would restrict the efficiency of the market.  He also held the view that the ferocious competition of his ideal marketplace would prevent any corporate restriction on such efficiency.  Friedman was at least consistent.  Neoliberalism as it came to exist in most policy, however, was that of the corporate sector.  So policies that reduced union impact was enacted.  Policies that encouraged competition — especially anti-trust policies — were not.

“There is no such thing as society” was the inevitable political rallying cry necessitated by the need to square the liberation of the individual and the need to reduce dependency on the state.  By abolishing “society” as a policy-integrating concept the entitlements that might attach to citizenship could be devalued or eliminated.  

Hayek thought over-socialization was the biggest impediment to enduring prosperity.  As a result, the newly liberated individuals, who might realize that the risk they take as a cost of their freedom was too high a price — especially given the lack of compensation for that risk embodied in stagnant wages — had to be encouraged not to view their role as citizens having reciprocal value and to view the risk mitigation offered by the state as an intrusion into their private lives.   Jacob Hacker has documented this aspect of the neoliberal era well.  The well worn balance between risk and reward somehow fell from view as the steady drumbeat of individualism allowed corporations to develop what we now know as the “gig” economy.

Where does this leave us?

A summary so far would be that the intention of the neoliberals was to de-politicize politics.  Inter-war politics had shown them the terrors of fascism and the negative unintended consequences of socialism.  Politics needed to be kept under wraps.  The popular will had to be prevented from putting grit in the machinery of the market which was theorized as the best, and often only, assured generator of prosperity.  In other words, the market had to displace politics as the forum for decision making.  In this respect the neoliberals triumphed beyond their dreams: the current disconnection expressed by voters from their governments — especially in the US and UK, are a remarkable demonstration of how far ideas of society or civics have been eroded by the relentless embrace of all social activity within the market.  Levels of trust are at postwar lows, everything is a commodity, and corporate methods such as cost-benefit analysis have substituted for the social or moral foundation of policy making.  This was the neoliberal agenda — at least in its Cold War version as promoted in America and to a lesser degree in the UK.

So, yes, neoliberalism is incoherent as a formal body of thought.  Then again, so is classical liberalism.  So is socialism.  So is Marxism [perhaps most of all!]. Neoliberalism in 1938 was different from that of 1947 and different again from that of 1980.

This does not invalidate it as a lens through which to evaluate the arc of American political economy and public policy in the post-Johnson era.  Neoliberal thought left its imprint everywhere.  Indeed both major political parties became neoliberal in some form.  [Both Carter and Clinton showed more de-regulatory zeal than Reagan, and Clinton’s deregulation of the banks was both the boldest and most damaging expression of neoliberal thinking]

The three contributory elements of neoliberalism can be distinguished by their origins and the purposes underlying the advocacy of their proponents.  As the ideology evolved it was adapted to the context and the needs of its advocates.

Eventually, it became a combination of a heavily Americanized worldview, a pro-market view, with an emphasis on technocratic efficiency, and acted as a vehicle for the downplay of democratic or socially aware action.  Most of all, and crucially, it was a repurposed as a vehicle for the recapture of political power by an elite threatened by the New Deal [and other similar policies elsewhere]

Its deregulatory aspect led to the financial disasters of 2008/2009.  Its low tax aspect led to fiscal profligacy because it is impossible to square with the popularity of social spending.  It also led to the re-emergence of income and wealth inequality at levels similar to those of the 1920/30s.  Its infection of academic economics led to the sidelining of Keynes and an inability of the discipline to develop theories of growth leading, in turn, to the effective abandonment of macro theorizing and the prioritizing of micro-based thought [the Lucasian “micro-foundations” doctrine].  Its insistence on the individual undermined social cohesion and empathy.  And its co-option by the corporate sector allowed the wage stagnation, shift towards profit, fissuring of the workplace, and movement of work abroad that resulted in a concentration of corporate power, excessive rent-seeking, and a slowdown in innovation.

The Mount Perelin Society still exists and includes amongst its membership an enviable bevy of central bankers and leading politicians from around the world.  Neoliberalism, thus continues to exert influence.  That it slowly emerged as a distinctly pro-corporate [rather than pro-market] perspective is simply a consequence of the funding that flowed into the several think tanks and academic departments where it most flourished.    It is possible to argue that the final version of neoliberalism — that extant prior to the collapse of 2008/2009 — was a corruption of the 1938 version.  All ideologies suffer that fate when they come into contact with the realities of real world power.  But, nonetheless, the arc of American economy development, public policy development, legal philosophy, and corporate management all show the indelible imprint of neoliberal thought.  

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Further comments:

1. Deregulation of industries such as the airlines has — in general — led to industry concentration.  The social cost has been to reduce innovation and to reduce the power of the consumer.  [The speed of air travel peaked in the mid 1950s].  Recent research suggests that it had a non-negligible impact on slowing economic growth, but that, overall it remains an insignificant factor in our recent slowdown.  It did, however, contribute to the shift in national income towards profits and away from wages.

2. Trade liberalization was always a major goal of the neoliberals.  As mentioned above consumers have benefitted from increased trade.  But the social costs of the export of work and the hidden benefit of the importation of deflation [via lower costs] weigh heavily on the economy.  Research shows that the movement of workers displaced by the export of work — which ought to have improved domestic productivity [we assume the exported work was mainly in low productive business] — had the opposite effect.  Since exported work was predominantly in manufacturing and displaced workers were predominantly re-hired into the service sector [which is generally much less productive] overall domestic productivity fell and thus pulled down GDP growth rates.  So the consumption benefit was at least in part offset by the loss of productivity.

3. Capital market deregulation is a classic example of the impact of neoliberal thought.  New Deal era regulations had prevented major bank runs successfully for several decades.  The industry chaffed under those regulations especially as the non-bank financial sector flourished [e.g. the creation of the commercial paper market].  The deregulation of the S&L industry led almost immediately to its collapse because of undue risk taking required to boost profits towards an market-acceptable ROE.  Similarly the abolition of the distinction between investment and commercial banking led directly both to industry concentration and to excessive risk taking and, eventually, to the financial crisis of 2008.  It also led to the over-reliance on the finance sector generally — resources that might have been channelled into the real economy could find a higher return in finance [especially in the derivatives market].  Additionally, the concentration of power in the ever larger banks allowed them to bully/defy the regulators — the best example being the infamous Citi/Travelers merger which was against the law but was executed nonetheless and contributed to the change in regulation.  The abolition of the McFadden Act was supposed to benefit consumers by allowing larger banks to cross state lines — but it mainly manifested itself, not in the creation of greater competition, but in spate of mergers [in which I was involved!!].  All told it is highly debatable whether capital market deregulation produced any lasting social benefit.  It was, however immensely profitable for bank shareholders and executives.

4. The number of Federal employees is roughly the same as it was in the early 1950s.  It increases temporarily every ten years because of the census.  The increase in government employment generally has all been at the state and local level and mostly reflects higher employment in health, education, police, and fire departments.  The cost of regulation has risen steadily because of excessive rule-making and micro-management by Congress and at various state levels.  The effort to lower costs during the Clinton era led to the outsourcing of most major IT efforts within the major non-defense departments.   This had the effect of making it difficult to execute major reforms, keep up to date, and roll out new programs [e.g. Obamacare].  As noted above, the neoliberal goal to “shrink the state” foundered on the popularity of social programs such as Social Security.  The failure to enact the hoped-for reduction in government led directly to fiscal profligacy — which is distinctly not a neoliberal position [but is OK with business]

5. The reduction/abolition of price controls was an incidental and contingent goal of neoliberal policy associated with the desire to eliminate most, if not all, regulation of market [aka business] activity.  But, since America has remarkably few Federally imposed price controls to begin with [outside of wartime], it has not been a major component of neoliberal activity in the US.  Contrast that with the steady drumbeat calling for the abolition of environmental and product safety regulations that inhibit freedom in the market.  Friedman’s position that the market will sort out everything —product safety and all — is incredibly naive when compared with actual corporate activity.  That naivety is often used as a veil behind which economists hide — they avoid the social consequences of their theories by talking about various market “failures”.  Such things are not failures at all but realities of power that economists prefer to avoid because they might complicate their theorizing by introducing aspects of sociology or political theory into consideration.  

6. Tax cuts were a component of neoliberal thought — in association with the reduction of government.  Defunding government in order to create a crisis in which services would have to be cut was a policy tool used effectively [“starve the beast”] during the post-financial crisis years.

7. The creation of “independent” central banks was also a major policy goal of the neoliberals [although some wanted to go further and abolish central banks altogether].  The premiss being to eliminate democratic [aka popular] influence over the financial system. The long Alan Greenspan era [any conversation with Greenspan would immediately show that neoliberalism was a real “thing”!] coincided with the neoliberal deregulation of the capital markets.  It also led to a relaxation in bank oversight and an unwillingness to consider the regulation of the [then] emerging derivative markets.  Further, the development of the 2% inflation target, and the monetary policy set to go along with it, were driven by neoliberal thought — the long tradition of stable money and non-interference in monetary policy sit well in the Friedman tradition [his history of American monetary policy and re-examination — co-authored with Anna Schwartz — of the role of the Fed during the Great Depression being iconic]. [Caveat: since my wife works at the Fed. I will say no more!]

8. The reduction in world poverty is a major postwar success.  The association of that with Washington consensus style policies is more contentious.  Global trade was a more important factor in lifting poorly developed nations up, although the record remains spotty [compare, for instance, South Korea with Nigeria] — resource base development was less successful than a broader based approach.  Plus, as mentioned above, the benefit to poorer nations has been partly offset by the slowing of growth and standards of living in the more established economies — lower consumer prices notwithstanding.  Recently, there is a growing concern among lesser-developed nations that the rules-based regime established postwar [and cherished by neoliberals] has served Western and particularly American interests well and, perhaps, the rest of the world less well.  Disputes at the WTO, for instance, have become more contentious, and under Trump America declined even to allow the staffing on its operations — because of American claims of “unfair trade”.  This didn’t seem to be a problem when other nations thought trade was “unfair”.  The original intent of the neoliberals vis the implementation of trade rules was, as mentioned earlier, to limit the influence of individual nations who might be tempted to pursue more popular [democratic?] policies including restrictions on capital movement or the imposition of tariffs.  

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Conclusion:

Neoliberalism is a valid lens through which to view American policy making since the 1960s.  Its various proponents have left a strong impression.  Its major themes still frame most discussion — even post 2007/2009.  Even though it is now in disrepair it maintains a strong hold over intellectual and policy elites, and has left a particular impact on the business community — perhaps most of all.  As a body of thought it was, and remains, incoherent and sometimes contradictory — most ideologies suffer the same malady.  As a reconstruction of classical liberalism it was failure because it failed to match modern socio-economic conditions with the liberties attaching to the classic version.  The modern world is far too complex for the simplicity of an radical individual-based philosophy to apply.  The state is essential — as attested by the popularity of its risk mitigation policies.  The neoliberals never could adjust to the concepts of the model democratic state — their vision of a state was an antique even by 1938.  Their insistence, therefore, on pro-market alternatives to the state’s provision of certain services flew in the face of economic reality and called into question their true objective:  was it the pursuit of efficiency?  Or was it the pursuit of status and power?  

They told us it was the former.  In reality it became the latter.