The Myth of Neoliberalism

Neoliberalism is a myth. It’s a pervasive myth on one side of politics – the left. But it is nevertheless a myth.

Let’s start with one simple and obvious fact – no-one claims to be a neoliberal.

[NB since this was written, and partly provoked by the controversy it threw up, the Adam Smith Insitute (UK) has declared itself to be “neoliberal”].

This is rather odd.

Of course, in politics, people often accuse other people or parties of holding views they think are repugnant. Nazi, socialist, racist, liberal, Stalinist, are all terms of abuse hurled at opponents.

They are often wrong, but oddly there is almost always someone who is happy to claim the label. There are parties and groups happy to adopt each of the labels mentioned.

But oddly, no-one calls themselves a neoliberal. Only critics of this supposed doctrine use this label. Why?

Let’s start with what is most often described as neoliberal doctrine.

According to one of the most prolific chroniclers of “neoliberalism”:

“Neoliberalism is in the first instance a theory of political economic practices that proposes that human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterized by strong private property rights, free markets, and free trade.

The role of the state is to create and preserve an institutional framework appropriate to such practices. The state has to guarantee, for example, the quality and integrity of money. It must also set up those military, defence, police, and legal structures and function required to secure private property rights and to guarantee, by force if need be, the proper functioning of markets. Furthermore, if markets do not exist (in areas such as land, water, education, health care, social security, or environmental pollution) then they must be created, by state action if necessary. But beyond these tasks the state should not venture. State interventions in markets (once created) must be kept to a bare minimum because, according to the theory, the state cannot possibly possess enough information to second-guess market signals (prices) and because powerful interest groups will inevitably distort and bias state interventions (particularly in democracies) for their own benefit.”

David Harvey (2005) A Brief History of Neoliberalism, Oxford.

Let us be clear what this means in concrete terms. It would be a reversion to roughly what the state did in the middle to late part of the 19^th century in what is now the “OECD” countries. It would be what has often been called the “Night Watchman” state. Providing for property rights, contracts, markets and personal and national security and not much else.

This meant, in the latter part of the 19^th century, the state collected through taxes and spent on public activities less than 10% of national wealth creation (GDP). Even less was spent on what might be called ‘social protection’ or ‘welfare’, public employment (except for the military) was minimal and regulation scant.

The Strange Inversion of Neo-Liberalism

The idea that this is what is meant by ‘neoliberalism’ is odd in several ways.

The first concerns the origins of the term ‘neoliberal’ itself. It originated in the 1930s in Germany as a counterpoint to classical ‘Night Watchman’ liberalism that espoused only free markets, free trade and (sometimes but not always) more democratic rights.

Neoliberalism was precisely ‘new’ in that it embraced social as well as political and economic rights. It recognized that social protection, workers rights, public health, education, and other ‘welfare’ provisions were both progressive and would actually be helpful to the development of capitalist society.

In a somewhat bizarre twist of fate the term ‘neoliberalism’ was inverted in Latin America in the post-Chile coup (1972) era to mean almost the opposite of its origins in the 1930s. Instead of enhanced social protection and placing boundaries on markets, it came to mean exactly the opposite – a reversion (in theory at least) to 19^th century free market liberalism and it even removed the 19^th century commitment to political liberalism.

From Liberalism to Liberal Social Democracy?

Before the end of the 18th century no state devoted more than 3% of national product to ‘redistributive social programs’ or ‘welfare’ (Lindert).

Even by the late 19^th century government and the state in ‘advanced’ countries were still small. One estimate is that around 1870 the average advanced countries public spending amounted to about one-tenth of GDP. The UK (9.4), USA (7.3) Sweden (5.7), Norway (5.9) were at the lower end of the spectrum. Australia (18.3), France (12.6), Italy (13.7) and Switzerland (16.5) were at the upper end. Germany (10.0) sat more or less in the middle (Tanzi & Schuknecht).

Between 1870 and the start of the First World War the state grew slightly more – to around 13% of GDP – but was still quite small by present standards. WWI produced a step change – by 1920 the average size grew to almost 20% and thereafter grew slowly until by the end of the inter-war period it had reached 23% of GDP.

Given the Industrial Revolution is usually dated between roughly mid-18^th and mid-19^th centuries, the expansion of the state and welfare didn’t start until after capitalist industrialism was well established. There were clearly other forces at play including democratization, mass political movements, the exigencies of war and economic crisis. Coupled with the need of capitalist industrial societies for educated and healthy workers the state had, by the outbreak of WWII, already expanded far beyond the ‘night watchman’ state of the early 19^thC and was more than double the size it had been in the late 19^thC.

The next big expansion took place in the aftermath of WWII and by 1960 the average size had risen to nearly 30% of GDP. The next two decades saw a further leap to over 40% in 1980 – usually given as the start of the supposed ‘neoliberal era’.

So at the start of ‘neoliberalism’ – usually marked by the elections of Margaret Thatcher (1979) and Ronald Reagan (1980) – the state was more than four times the size it had been in 1870. Even in supposedly ‘liberal market democracies’ like the USA public spending was around a third of GDP.

(There is a good case for calling all OECD states at this time “liberal social democratic” but that is for another debate).

Neo-Liberalism as Talk, but not Decisions or Actions

Certainly in rhetoric the 1980s saw a dramatic shift in tone from conservative politicians, fed by ideas from right-wing free-market think-tanks. Thatcher famously declared her intention to ‘roll back the frontiers of the state’ and Reagan that ‘government wasn’t the answer, it was the problem’.

(Initially this phenomenon was simply called the ‘New Right’ to distinguish it from the conservatives of the post WWII period who had largely accepted and even in many cases promoted the grow of the state and social welfare).

But re-read the David Harvey quote above – it clearly suggests that ‘neoliberalism’ was supposedly committed to a really radical ‘rolling back of the state’ to something more like the pre WWI ‘small government’. Indeed Harvey goes on to say:

“There has everywhere been an emphatic turn towards neoliberalism in political-economic practices and thinking since the 1970s. Deregulation, privatization, and withdrawal of the state from many areas of social provision have been all too common.”

Now it is true some of these things began to happen, but on a far smaller scale than a real ‘neoliberal’ agenda would suggest. In most OECD countries public spending at most stabilized and in some cases continued to grow as a proportion of GDP from 1980 onwards. The OECD itself says that public spending averaged 40.5% of GDP in 1986. A decade of ‘neoliberalism’ later and it was 42.1% of GDP. By 2005 it was 40.1%.

Public spending (and raising taxes to pay for it) is of course not the only way to measure the ‘size of government’. Governments also employ people – but public employment as a proportion of all employment also hardly shifted at all. This is true despite the widespread privatizations and ‘outsourcing’ over the period since 1980.

There is only one area where there has been a dramatic change – and that was regulation. Here the state in most OECD countries did withdraw substantially from regulating many areas but especially and crucially financial services. And we all know where that led.

So where is ‘neoliberalism’ in all this? The answer is whilst it exists in ‘talk’ it is rarely translated into decisions and actions that would come even remotely close to vision of a neoliberal state that its critics claim is being created. We are no nearer the ‘neoliberal state’ now than we were in 1980. Nor have most political parties – especially social democratic ones – been taken over ‘neoliberalism’.

(See Nils Brunsson discussion of the frequent lack of congruity between talk, decisions and actions within organisations – although it also applies very well to politics and policies).

Neoliberalism exists but mainly as a bogeyman created on the left to oppose various conservative attempts to ‘rebalance’ government-market relations. These attempts on the right were far less dramatic than both their proponents and opponents suggested (but it often suited both sides to exaggerate).

There have been changes to be sure – both at country-level and in specific policy areas. A couple of countries did significantly reduce the size of public spending – both New Zealand and Ireland (for different reasons) went from over half of GDP to around a third over two decades. But other, larger, countries like Germany, France, the UK and USA remained more or less stable or grew slightly. Spending on some types of social programs reduced (especially housing) but in others (health, education) it often grew.

‘Neoliberalism’ has become a term of abuse and an obstacle to serious thinking about what is, and is not, happening in politics and public policy.

Perhaps this is best illustrated by some counter-examples using the idea of ‘socialism’? Does any reform that replaces ‘free market’ solutions amount to ‘socialism’? Of course not.

When the UKs telephone system was nationalized by the Asquith Liberal Government in 1912 was this ‘socialism’? When the Macmillan Conservative government of the 1950s committed to and achieved building 300,000 council houses was this ‘socialism’? Most reasonable observers would say ‘no, of course it isn’t socialism’. But when equivalent reforms in the opposite direction occur, they are immediately branded as ‘neoliberalism’.

Neoliberalism is a convenient myth invented by opponents of any type of pro-market reform or political position that recognizes markets may – in the right circumstances – be a good thing. Everyone from moderate social democrats to the most lurid free-marketeers gets lumped together under a convenient ‘neoliberal’ label. I suppose it saves the bother of actually thinking, but otherwise it is not helpful.

 

Sources

 

Taylor Boas and Jordan Gans-Morse (2009) Neoliberalism: From New Liberal Philosophy to Anti-Liberal Slogan, Studies in Comparative International Development, 44(2).

Nils Brunsson (1991) The Organization of Hypocrisy: Talk, Decisions and Actions in Organizations, Wiley.

David Harvey (2007) A Brief History of Neoliberalism, Oxford.

Peter Lindert (2004) Growing Public – Social Spending and Economic Growth Since the Eighteenth Century, Cambridge.

Vito Tanzi and Ludger Schuknecht (2000) Public Spending in the 20^th Century, Cambridge

OECD (2005) Modernising Government: The Way Forward, OECD, Paris