What Is Neoliberalism? It’s Market Fundamentalism

Neoliberalism has had a titanic effect on the world, but it’s the worst-named political-economic doctrine there is. Robert Kuttner explains neoliberalism at length below (you can read the even longer original for free if you register at the New York Review of Books):

Beginning with the presidency of Jimmy Carter, a succession of Democratic presidents joined Republicans in turning away from the New Deal model of regulated capitalism toward what has come to be known as “neoliberalism”. The neoliberal credo claims that markets work efficiently and that government attempts to constrain them via regulation and public spending invariably fail, backfire, or are corrupted by politics. As public policy, neoliberalism has relied on deregulation, privatization, weakened trade unions, less progressive taxation, and new trade rules to reduce the capacity of national governments to manage capitalism. These shifts have resulted in widening inequality, diminished economic security, and reduced confidence in the ability of government to aid its citizens.

The Republican embrace of this doctrine is hardly surprising. Given the lessons learned about the necessity of government interventions following the 1929 stock market collapse and the success of the Roosevelt administration as a model for the Democratic Party, the allure of neoliberalism to many Democrats is a puzzle worth exploring.

The term “neoliberalism” itself is confusing, because for at least a century “liberalism” in the United States has meant moderate left, not free-market right.

Neoliberalism in its current economic sense draws on the older meaning of “liberalism”, which is still common in Europe and which holds that free markets are the counterpart of a free and democratic society. That was the claim of classical liberals like Adam Smith and Thomas Jefferson.

Only in the twentieth century, after the excesses of robber-baron capitalism, did modern liberals begin supporting extensive government intervention—the use of “Hamiltonian means” to carry out “Jeffersonian ends,” in the 1909 formulation of Herbert Croly, one of the founders of The New Republic.

This view defined the ideology of both presidents Roosevelt and was reinforced by the economics of John Maynard Keynes. In Britain, the counterpart in the same era was the “radical liberalism” of social reform put forth by the Liberal prime minister David Lloyd George.

The term “neoliberalism also gets muddled because some on the left use it as an all-purpose put-down of conservatism—to the point where one might wonder whether it is just an annoying buzzword. But neoliberalism does have a precise and useful meaning, as a reversion to the verities of classical economics, with government as guardian of unregulated markets.

In his new book, The Rise and Fall of the Neoliberal Order, Gary Gerstle, an American historian, … argues that neoliberalism needs to be understood as a “political order,” which he defines as an era in which a certain set of ideas and policies have become politically hegemonic. “A key attribute of a political order is the ability of its ideologically dominant party to bend the opposition party to its will,” he writes. “Thus, the Republican Party of Dwight D. Eisenhower acquiesced to the core principles of the New Deal order,” just as “the Democratic Party of Bill Clinton accepted the central principles of the neoliberal order in the 1990s.” Gerstle’s lens helps us appreciate the self-reinforcing power of neoliberalism. As government became a less dependable source of economic security, people were made to feel that they were on their own, thus internalizing an individualist rather than collectivist view of citizen and society.

What differentiates neoliberalism from the older ideal of laissez-faire is the recognition that a free market will not reemerge if the government simply gets out of the way. The neoliberal perspective, as first articulated in the 1930s by the Austrian economist Friedrich Hayek and by Henry Simons of the University of Chicago, holds that if we want entrepreneurs, financiers, and ordinary citizens to be liberated from state regulation, strong government rules must protect the market from the state. Milton Friedman, in a 1951 essay titled “Neo-Liberalism and Its Prospects,” agreed that this project went well beyond laissez-faire. Gerstle writes, “This strategy was built on a paradox: namely, that government intervention was necessary to free individuals from the encroachments of government.” The historian Quinn Slobodian, in his authoritative intellectual history of neoliberalism, Globalists (2018), goes further: “The neoliberal project was focused on designing institutions—not to liberate markets but to encase them, to inoculate capitalism against the threat of democracy.”

Leftist theorists had long appreciated the role of the state in defining the market. As Karl Polanyi famously wrote, relishing the paradox, “laissez-faire was planned.” And indeed it was. To function at all, even “free” markets require extensive rules defining property itself, the terms of credit and debt, contracts, corporations, bankruptcy, rights and obligations of labor, and so on. The difference between the New Deal or social-democratic view of markets and the neoliberal ideal is that progressives want the government’s rules to act as democratic counterweights to the abuses of capitalism, while neoliberals want them to protect market freedoms. But both accept that capitalism requires rules.

As a dissenting remnant of pre-Keynesian economics, neoliberalism languished until the New Deal model faltered in the 1970s with the improbable combination of inflation and stagnation [“stagflation”]. Classical economic liberals like Friedman, who had been politically marginal, got a fresh hearing. Carter, never much of a Roosevelt liberal and facing political fallout from stagflation, hoped that deregulation and market competition might restrain prices. Reduced government intervention was congenial to the business elites who were again ascendant during the Reagan presidency. Neoliberalism became the ideological underpinning of a relentless turning away from a managed form of capitalism.

Gerstle explains how the cultural left also found the libertarian and antibureaucratic aspects of neoliberalism appealing, weakening the New Deal order and its political coalition in yet another way. In the culture wars of the 1960s, the New Left rejected corporate cold war liberalism and unresponsive big government in favor of a wished-for “participatory democracy.” Some of this entailed challenging public institutions. “Both left and right … shared a deep conviction,” Gerstle writes, that the bureaucratized system “was suffocating the human spirit.” A few years later, Ralph Nader became convinced that several regulatory agencies had become hopelessly captured by the industries that they regulated and helped persuade Carter that the remedy was deregulation.

Despite neoliberals’ embrace of economic liberties, they can be cavalier about political liberties. As theorists such as Isaiah Berlin appreciated, people depend on positive as well as negative rights. The freedom to get an education or receive medical care regardless of one’s income exists in the realm of citizenship. These are freedoms that markets don’t provide and that proponents of neoliberalism ignore….

Neoliberalism not only protects the market from the regulatory state; more radically, it expands market principles to realms thought to be partially social. Whereas Polanyi, for instance, warned about the tendency of a market society to relentlessly “commodify” social relations, neoliberal theorists embrace this as a virtue, arguing that market measures can be efficiently applied to value everything from human life to the environment.

In the neoliberal view, labor is better understood as “human capital,” a concept associated with Friedman’s University of Chicago colleague Gary Becker. According to Becker, markets pay workers precisely what they deserve, even though in some cases wages are insufficient to sustain a decent life. Conversely, even rapacious billionaires merit their earnings, by definition, because markets are presumed perfectly efficient when protected from government interference.

In the absence of counterweights such as government regulation and strong unions, these dynamics become more intense over time. Since labor is just another commodity, production can be offshored to countries where it is cheapest. More recently, with computer-aided innovations such as ride-sharing platforms like Uber, delivery services such as Instacart, and odd-jobs bidding sites like TaskRabbit, workers compete directly against one another as vendors in an open marketplace while being monitored minute by minute for efficiency. This was the sort of pure “spot market” in labor celebrated by Friedman and abhorred by Karl Marx.

Corporations, though creations of the democratic state, are said by neoliberal theorists to have no reciprocal responsibility to communities or employees, only to shareholders. Public education is not a public good but another marketplace with mechanisms such as vouchers, which give families money toward tuition at the school of their choice. In health care, cost disciplines are deemed to operate best with the use of market incentives and for-profit vendors. Retirement income is better served by private accounts rather than by public social security. Environmental goals are to be achieved with marketlike measures, such as auctioning the right to pollute, not “command and control” regulation. Taxation rates should be low and consistent across all income levels, rather than redistributive. Antitrust enforcement is gratuitous and even perverse, because markets police themselves through supply and demand.

Government’s role should be largely reduced to maintaining physical security and protecting markets from state interference—the “night-watchman state.”

This has indeed been the dominant set of beliefs behind the policies of the past four decades. Was it a success or a failure? That depends on who you are. For economic elites and the Republican Party, it has been a splendid success. For the Democratic Party, the neoliberal order has been a catastrophe, eviscerating the core claim of progressives since FDR that government can serve the common people. Neoliberalism has thus been both antidemocratic and anti-Democratic.

As economic policy, neoliberalism largely failed to improve economic performance. Growth rates were far higher between the 1940s and early 1970s, when the economy was governed by principles of managed capitalism. However, neoliberal policies did drastically increase income inequality, with virtually all economic growth benefiting the top few percent, while earnings and job security for most people stagnated or declined.

With concentrated wealth came concentrated political power to promote even more neoliberalism, as countervailing institutions such as labor unions were weakened and direct public programs like Medicare were partly privatized.

Notwithstanding the ubiquity of computers during the neoliberal era, productivity growth has been no better than it was in the postwar period. Health insurance became more costly and less reliable as both insurance companies and hospitals were increasingly transformed into for-profit institutions, avoiding unprofitable patients. Retirement security was weakened, as guaranteed pensions were shed by corporations in favor of marketized 401(k) accounts that shifted all the risk and most of the cost to workers. The deregulation of financial markets led to innovations, but they mainly served speculation by insiders and resulted in the financial collapse of 2008….

Why, then, did Democratic presidents embrace an economic credo that annihilated their own public philosophy and its appeal to the electorate? As Gerstle recounts, it was Bill Clinton who turned the Democrats to full-on neoliberalism. Clinton, who had been attracted to the New Left in his youth, began as more of an economic progressive, espousing New Deal–scale programs such as universal health insurance. The early Clinton presidency was a tug-of-war between more left-wing advisers … and free-market conservatives…

But Clinton was unable to get major progressive legislation through Congress, and Republicans became the congressional majority after 1994. A centerpiece of Clinton’s early program was NAFTA, a “free trade” initiative…. Clinton also made common cause with Republicans in Congress to “end welfare as we know it,” repealing the New Deal’s Aid to Families with Dependent Children program in favor of a stingier and more punitive alternative….. Budget balance, a core neoliberal principle, became an article of faith for Clinton….Federal spending [was reduced] to its lowest share of GDP in decades.

Gerstle characterizes these shifts as mainly opportunistic, and he’s not wrong. Neoliberalism also allowed Democrats to compete with Republicans for business support and campaign money. By the end of his two terms, Clinton … had sponsored more financial deregulation than Reagan or Bush, allowing the growth in speculative credit derivatives and subprime mortgages that set the economy up for a crash. Clinton also made budget balance the centerpiece of his economic program, at the expense of social spending and needed fiscal stimulus. Obama then pursued deficit reduction instead of economic recovery in 2010, when unemployment was still far too high….. As Gerstle observes, Obama was “a captive of the moment…. Obama would also prove captive to his own inexperience and resulting caution”….

The book’s lack of attention to globalization as both emblem and vector of neoliberalism [is a problem]…. The era between Roosevelt and Reagan was one in which capitalism was substantially national. This was a deliberate legacy of the Bretton Woods system, which was established in 1944 and provided for fixed exchange rates and controls on the movement of private capital. Those rules made it more feasible to regulate capitalism …because capitalists could not do an end run around the nation-state… Governments could pursue full employment without pressure from financial markets to pursue austerity—the favorite neoliberal remedy for loss of investor confidence….

In the 1980s and 1990s, … “hyper-globalization” became an important neoliberal instrument for weakening the nation-state in favor of a global market that would be much more difficult to control..Many forms of financial regulation were defined as improper barriers to free trade….

With the Biden presidency, we have seen a welcome turning away from neoliberal ideas more generally. His administration has sought to move back to something closer to the New Deal, with greater public investment, more regulation, progressive taxation, skepticism about free trade, and increased support for labor unions. But unlike FDR and LBJ, Biden does not have a working legislative majority. [There are other] obstacles to Biden’s success: the climate calamity, racial divisions that the right deftly exploits, the lingering political power of liberated finance, the continuing appeal of T____ism, and a gridlocked Congress.

Gerstle’s title refers to the “fall” of neoliberalism. But … that characterization may be premature. Neoliberalism has indeed been discredited, as both theory and practice…. Yet because of the residual power of financial elites and their intellectual allies, the appeal of market fundamentalism is far from dead.

This political moment is not necessarily a turning point. It could be an inconclusive stalemate that will produce even more mass disaffection from democratic government and politics (and from the Democratic Party), along with more support for autocrats. As the Italian Marxist Antonio Gramsci wrote of an earlier period, “The crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear.”

Politics and Markets: The World’s Political-Economic Systems by Charles E. Lindblom

I began reading this book sometime around 1978. I finished it today. I don’t remember why I stopped reading it the first time. Through the years, I thought about picking it up again but never did. Until a few weeks ago.

Charles Lindblom (1917-2018) was a Yale professor of politics and economics. In Politics and Markets, he categorizes and analyzes the different ways nations are organized, concentrating on the relative roles played by governments and markets in countries ranging from the United States and United Kingdom on one end of the continuum to China, the Soviet Union and Cuba on the other. Since the book was published in 1977, he pays a lot more attention to communism than he would do today.

Reading this book is strange at times. Lindblom is describing something in great detail that you might feel you already know. Don’t we all understand how governments and markets work? Well, not as well as Prof. Lindblom did. (Still, if you had to teach relatively advanced students from another planet about the way governments and businesses operate on Earth, starting from scratch, Politics and Markets would make a very good text.)

The book left me with two main thoughts. The first is hardly a revelation: all countries, even Cuba circa 1976, are hybrids. All countries have governments, of course. But all of them also employ so-called “free markets” as well. No society is totally planned by the government, for good reasons. Even the most pervasive governments use markets for various purposes, as when money is paid to acquire consumer goods or to attract employees to better-paying jobs.

This makes China’s transition from a communist country to a leading participant in world markets easier to understand. The Chinese have retained the one-party control of communism while doing a better job at capitalism than many of their capitalist competitors. The issue is always what mechanisms (laws, regulations, civic education) should be used to insure that businesses are successful while serving the health and welfare of society. Neither total government control of the economy nor total freedom for business would make sense. 

The other thought is more surprising. We often hear that democracy and capitalism work well together. They say it’s something to do with freedom. Yet there is a serious conflict between democracy and big business. Lindblom explains how the people who run businesses must be encouraged or induced to keep the economy functioning. If government officials interfere too much (from the business perspective), companies can stop producing sufficient amounts of the goods and services the rest of us need, at prices we can afford. They can also decide to pay us to little to live on or employ too few of us. If business people don’t produce enough or raise prices too much, there’s inflation; if they don’t pay us enough or hire enough of us, there’s deflation.. 

Because big corporations are so important to the economic life of a nation, the unelected owners and managers of these firms wield great power. From the book’s final paragraphs:

. . . It is possible that the rise of the corporation has offset or more than offset the decline of class as an instrument of indoctrination. That the corporation is a powerful instrument for indoctrination we have documented earlier. That it has risen to prominence in society as class lines have muted is clear enough. That it creates a new core of wealth and power for a newly constructed upper class, as well an an overpowering loud voice, is also reasonably clear. 

The executive of the large corporation, is on, on many counts, the contemporary counterpart to the landed gentry of an earlier era, his voice amplified by the technology of mass communication. A single corporate voice on television, it has been estimated, can reach more minds in one evening than were reached from all the platforms of all the world’s meetings in the course of several centuries preceding broadcasting. More than class, the major specific institutional barrier to fuller democracy may therefore be the autonomy of the private corporation.

It has been a curious feature of democratic thought that it has not faced up to the private corporation as a peculiar organization in an ostensible democracy. Enormously large, rich in resources, the big corporations, we have seen, command more resources than do most government units. They can also, over a broad range, insist that government meet their demands, even if these demands run counter to those of citizens expressed through their polyarchal [rule by the many] controls. Moreover, they do not disqualify themselves from playing the partisan role of a citizen — for the corporation is legally a person. And they exercise unusual veto powers. They are on all these counts disproportionately powerful, we have seen. The large private corporation fits oddly into democratic theory and vision. Indeed, it does not fit.

Lindblom doesn’t offer a solution, although he thinks more corporations might be treated like defense contractors or public utilities. The government would guarantee their profits while exerting significant control over their operations.

And with that, Charles Lindblom’s Politics and Markets can safely return to a bookcase to sit quietly for another 40 years. That’s if it escapes the recycling bin, or a natural disaster, since even excellent books don’t live forever.

Decisions, Decisions

Our mail-in ballots arrived today. I’m wondering if I should vote for the candidate who’s a decent person with a substantial record of government service? Or his opponent, a horrible person with a history of deceit and fraud? Further down the ballot, should I vote for candidates who will help the next president achieve his goals or the ones who will do everything possible to make him fail? Hmm.

One reason to vote for Biden and members of his party is that, despite what many think, Democratic presidents have a better record on the economy than Republican presidents. Paul Krugman of the City University of New York and the New York Times explains:

[On Monday night], Joe Biden claimed that his tax and spending plans would create millions of jobs and promote economic growth. Txxxx claimed that they would destroy the economy.

Well, everything we know suggests that Biden was right and Txxxx wrong. And I’m not the only one saying this. Nonpartisan analysts like Moody’s Analytics and the not-exactly-socialist economists at Goldman Sachs are remarkably high on Biden’s proposals. . . .

There’s a widespread perception that Republicans are better than Democrats at managing the economy. But that’s not at all what the record says.

Yes, Ronald Reagan presided over a long economic expansion; but so did Bill Clinton, and the Clinton boom was both longer and bigger. The economy did in fact add many jobs under Txxxx before the coronavirus struck, but this simply represented the continuation of an expansion that began under Barack Obama.

And those were the good stretches. Both Bushes presided over really poor economic performance.

Republicans also have a long history of claiming that progressive policies would lead to economic disaster. They’ve been wrong every time.

They’ve been wrong about tax hikes: When Clinton raised taxes in 1993, Republicans confidently predicted recession, but what actually happened was a huge boom. When California raised taxes under Jerry Brown, the right called it “economic suicide”; again, the economy boomed.

They’ve also been wrong about social programs. Obamacare, the G.O.P. insisted, would destroy millions of jobs. One of the dozens of attempts to repeal the Affordable Care Act was actually called the “Repealing the Job-Killing Health Care Law Act.” Yet in the six years after January 2014, when the act went into full effect, the economy added almost 15 million jobs.

And let’s not forget the flip side, the many, many times Republicans promised that cutting taxes on the rich would produce an economic miracle, promises that never came true. There’s a reason conservatives still go on and on about the Reagan boom, all those years ago; it’s the only example they have that even seems to support their economic ideology. (It doesn’t, but that’s another topic.)

But there’s a difference between saying that progressive policies are not the disaster conservatives claim and saying that Biden’s plan would actually promote growth. Why are Moody’s and Goldman Sachs so high on his proposals? Why do I share that optimism?

First, the background. Even before the coronavirus, good employment numbers could hide underlying economic weakness. For at least the past decade, we’ve been living in a world of excess savings: the amount the private sector saves persistently exceeds the amount it spends on real investments. This savings glut is reflected in low interest rates, even when the economy is strong.

Low interest rates, in turn, limit the ability of the Federal Reserve to fight downturns, which is why Jerome Powell, the Fed’s chairman, has been pleading for more fiscal stimulus.

In today’s world, then, we actually want the government to run budget deficits, because they put excess savings to use. But we also want those deficits to be productive — to boost investment, and strengthen the economy in the long run.

The 2017 Txxxx tax cut flunked that test. It increased the budget deficit, but the main driver of that red ink — a huge cut in corporate taxes — utterly failed to yield the promised surge in business investment.

Biden’s plan would roll back that corporate tax cut, replacing it with spending programs likely to yield much more bang for the buck. In particular, much of the spending would be on infrastructure and education — that is, outlays aimed at strengthening the economy in the long run, as well as boosting it over the next few years.

When Moody’s ran this program through their model, it concluded that by the end of 2024, real gross domestic product would be 4.5 percent higher than under a continuation of Txxxx’s policies, translating into an additional 7 million jobs. Goldman Sach’s estimates are similar: a 3.7 percent gain in G.D.P.

Now, a model is only a model, and economists’ predictions are often wrong (although some of us are willing to acknowledge error and learn from our mistakes).

But if you’re trying to assess the candidates’ economic claims, you should know that Txxxx’s predictions of a Biden bust lack credibility, not just because Txxxx lies about everything, but because Republicans always predict disaster from progressive policy, and have never yet been right.

And you should also know that Biden’s assertions that his plan would give the economy a significant boost are well grounded in mainstream economics and supported by independent, nonpartisan analyses. . . .

Unquote.

There’s a simple reason why Democrats do better. They believe in sharing the wealth. Republicans don’t.

Hmm. I think we should go with the Democrats.

Adam Smith: Father of Economics by Jesse Norman

I’m very glad I read this. I mainly knew of Smith that he wrote The Wealth of Nations and a rarely read book called The Theory of Moral Sentiments; that he explained how productive a division of labor can be; that he was a very good friend of David Hume; and that he is viewed as a champion of “the free market”, especially by libertarians and so-called “conservatives” (who sometimes wear Adam Smith ties around their right-wing necks). The most important thing I learned about Smith was that he wasn’t a libertarian at all. He understood that a market economy cannot work properly without government regulation. He also knew that economic decisions cannot be divorced from politics or morality.

I’ll quote from the book’s last chapter, “Why It Matters”:

How can the benefits of markets be safeguarded and extended, and their ill-effects contained?… We need a new master-narrative for our times. We need better frameworks of public understanding, better explanations … through which we can come to terms with these issues. But to create them, we must return to the dawn of our economic modernity and to Adam Smith himself. Not to Smith the caricature one-note libertarian alternately celebrated by his partisans and denounced by his detractors, but to what Smith actually thought, across all his writings, from ethics to jurisprudence to political economy…

The real Smith was not an intellectual turncoat who switched from altruism in The Theory of Moral Sentiments to egoism in The Wealth of Nations. He was not a market fundamentalist, an economic libertarian, or in that strong sense a laissez-faire economist. He was not an advocate of selfishness, … the creator of homo economicus or the founder of predatory capitalism… He is rightly called the father of economics, conceptually because he was the first to put markets squarely at the center of economic thought, and practically because there are few if any economists … who do not stand in his intellectual debt….But his political economy ranges far wider that economics alone, and he could with equal justice be considered one of the founding father of sociology….

For many people, Smith’s political economy will always hold center stage; both as a model of economic analysis and for his specific insights into human behavior, markets, trade, specialization and the division of labor, taxation and the negative effect of subsidies, bounties and protection. Others will admire his moral egalitarianism, his feeling for the underdog, his belief in the importance of dignity and respectability to people’s status and sense of self, the way he minimizes inequality within his “natural system of liberty”, his devastating attack on crony capitalism, his … theory of human development, his historical analysis of the supersession of feudalism by commerce and his extremely subtle exploration and defense of commercial society… Still others will recognize the foundational importance of his theory of moral and social norms….

We have a president who ignores moral and social norms, whose greed is without limit and who fully embraces crony capitalism. But he’s a Republican, so most people would say he’s following in Adam Smith’s footsteps. That does Smith a disservice. The truth is that a progressive Democrat like Senator Elizabeth Warren is much closer to Smith. She believes in capitalism but understands that the government has a crucial role in making sure markets work for the benefit of society as a whole. That is pure Adam Smith.