Excellent, easy to understand essay on the history of Neoliberalism and how to fix it.
As a university lecturer, I often find that my students take today’s dominant economic ideology – namely, neoliberalism – for granted as natural and inevitable. This is not entirely surprising given that most of them were born in the early 1990s, for neoliberalism is all that they have known. In the 1980s, Margaret Thatcher had to convince people that there was “no alternative” to neoliberalism. Today, this assumption comes ready-made; it’s in the water, part of the common-sense furniture of everyday life, and generally accepted as given by the Right and Left alike. But it has not always been this way. Neoliberalism has a specific history, and knowing that history is an important antidote to its hegemony, for it shows that the present order is not natural or inevitable, but rather that it is new, that it came from somewhere, and that it was designed by particular people with particular interests.
If an economist living in the 1950s had seriously proposed any of the ideas and policies in today’s standard neoliberal toolkit, they would have been laughed right off the stage. At that time pretty much everyone was a Keynesian, a social democrat, or some shade of Marxist. As Susan George has put it, “The idea that the market should be allowed to make major social and political decisions; the idea that the State should voluntarily reduce its role in the economy, or that corporations should be given total freedom, that trade unions should be curbed and citizens given less rather than more social protection – such ideas were utterly foreign to the spirit of the time.”
So how did things change? Where did neoliberalism come from? In the following paragraphs I offer a simple sketch of the historical trajectory that got us to where we are today. I demonstrate that neoliberal policy is directly responsible for declining economic growth and rapidly increasing rates of social inequality – both in the West and internationally – and I make a few suggestions for how to tackle these problems.
Neoliberalism in the Western Context
The story begins with the Great Depression in the 1930s, which was a consequence of what economists call a “crisis of overproduction.” Capitalism had been expanding by increasing productivity and decreasing wages, but this generated deep inequalities, gradually eroded people’s ability to consume, and created a glut of goods that could not find a market. To solve this crisis and prevent it recurring in the future, economists of the time – led by John Maynard Keynes – suggested that the state should get involved in regulating capitalism. They argued that by lowering unemployment, raising wages, and increasing consumer demand for goods, the state could guarantee continued economic growth and social well-being – a sort of class compromise between capital and labor that would forestall further instability.
This economic model is known as “embedded liberalism” – it was a form of capitalism that was embedded in society, constrained by political concerns, and devoted to social welfare. It sought to exchange a decent family wage for a docile, productive, middle-class workforce that would have the means to consume a mass-produced set of basic commodities. These principles were widely applied after World War II in the United States and Europe. Policymakers believed that they could use Keynesian principles to ensure economic stability and social welfare around the world, and thus prevent another world war. They developed the Bretton Woods Institutions (which would later become the World Bank, the IMF, and the WTO) toward this end, in order to smooth out balance of payment problems and to foster reconstruction and development in war-torn Europe.
Embedded liberalism delivered high growth rates through the 1950s and 1960s – mostly in the industrialized West, but also in many postcolonial nations. By the early 1970s, however, embedded liberalism was beginning to face a crisis of “stagflation”, which means a combination of high inflation and economic stagnation. In the US and Europe, inflation rates soared from about 3% in 1965 to about 12% ten years later. Economists debate the reasons for stagflation during this period. Progressive scholars such as Paul Krugman point to two factors. First, the high cost of the Vietnam War left the US with a balance-of-payments deficit – the first of the 20th century – to the point where worried international investors began to offload their dollars, which set inflation rates rising. Second, the oil crisis of 1973 drove prices up and caused production and economic growth to slow down, leading to stagnation. By contrast, conservative scholars hold that stagflation was a consequence of onerous taxes on the wealthy and too much economic regulation, claiming that it represented the inevitable endpoint of embedded liberalism and justified scrapping the whole system.