On the Success of Neoliberalism
Freer markets turned out to be the solution to economic stagnation
I have a new article up on Human Progress about why neoliberalism worked.
Despite the polarization of our times, there is widespread agreement regarding the economic approach pursued by global elites between, roughly speaking, 1980 and 2008. If the term “neoliberalism” is used today, it is usually as an epithet for that era. Progressive critics including Joseph Stiglitz frame neoliberalism as a destructive ideology that widened inequality, weakened democracy, and commodified social life. To populist and national conservatives, neoliberal globalization hollowed out national industries, undermined communities, and empowered elites at the expense of ordinary citizens.
These critics are wrong. Neoliberalism emerged to deal with real problems, had strong intellectual foundations, and largely accomplished its goals. The anger at neoliberalism does not reflect its failures but instead represents scapegoating for complaints that are largely unrelated to economic issues. Critics of neoliberalism are wrong on economics, and there is little reason to believe that most of their preferred policies provide a better alternative.
Neoliberalism was a response to stagnation and malaise around the globe. Outside the Communist Bloc, the mid-20th century was dominated by Keynesianism in the West and state-led development in the Global South. Governments regulated industries, controlled capital flows, and expanded welfare states. By the 1970s, cracks appeared in this system: stagflation (low growth and high unemployment) in the United States and Europe and recurring fiscal crises discredited state-centered models. In the developing world, mounting debt and balance-of-payments problems forced governments to seek assistance from international institutions, setting the stage for policy change.
This atmosphere of crisis created an opening for market-oriented thinkers who had been marginalized in earlier decades, perhaps most notably the Chicago University economist Milton Friedman, who would win the Nobel Prize for economics in 1976 and become highly influential as a public figure advocating for deregulation. The law and economics movement, centered on figures including Ronald Coase, Richard Posner, and Gary Becker, also emerged at the University of Chicago, and they began to apply cost-benefit analysis to government regulations that had previously gone unquestioned. They called for taking efficiency concerns into consideration when interpreting legal doctrine.
Read the entire thing here.
When Western countries moved towards neoliberalism, recessions became less frequent and severe. Developing nations, primarily China and India, brought hundreds of millions out of poverty by accepting the kinds of reforms recommended by Western elites. The US ended up more neoliberal than the UK, which was more neoliberal than Europe, and over the last few decades, the order of economic growth has been US-UK-other major European economies. Oh, and the members of the former communist bloc that adopted the Washington Consensus have taken off. I also address the cases of Russia and China, and explain why they are not the strikes against neoliberalism many people think they are. Moreover, the biggest economic problem in many developed countries is the cost of housing, and here there is a virtual consensus among all knowledgeable observers that we haven’t had enough capitalism in this area.
Why do people speak so harshly about neoliberalism then? In part because our political and intellectual culture has gotten a lot dumber and more pessimistic. People dislike markets, so blame them for everything bad that has gone wrong in the world. Neoliberalism was an economic theory that produced economic results. Capitalism is always having to prove itself over again. Major nations of Eastern Europe started seeing fast, multi-decade growth via pro-market reforms, making up massive ground toward catching up to the West after centuries of relative stagnation, yet we soon forget this ever happened and instead focus endlessly on some factory job in Ohio that was lost, even as Americans continue to grow wealthier. Overwhelming evidence emerges that land use regulations have driven the cost of housing up, and people begin to after a very long time see that as an issue, without making the larger connection to other policy areas and drawing more generalizable lessons. You can be an abundance bro and still have a friendly attitude towards labor unions, because most will only adopt a pro-market position when they are absolutely forced into it by overwhelming evidence rather than updating their broader model of the world.
It’s like a guy bought a book on how to get rich, he actually succeeds in that goal, and then blames the book when his wife doesn’t love him anymore. Perhaps neoliberalism is responsible for some of our problems in the sense that American capitalism created the iPhone, and if labor unions were still strong and taxes were higher we would’ve been too poor for big tech to succeed like it has. But becoming poorer so new problems don’t arise isn’t a good solution to anything. It’s better to try to become wealthy and then figure out the issues that emerge as a result, since life will never be perfect.
While I disagree with probably most of what this piece argues (less on the specific facts then on the generalizable conclusions that can be drawn from them), this is a pretty decent take on neoliberalism and its history.
There are a few weak areas. One of the biggest is China. You are undoubtedly right about the immense progress China has made since Deng's reforms, but your comparison of China to its smaller East Asian neighbors is rather faulty. Singapore, Hong Kong, and Macau are essentially city-states, with different political/economic constraints than large continental empires (like mainland China). My personal opinion is that communism was the only political movement at the time that could have united the mainland after the disastrous warlord years and consolidated a central state that could eventually liberalize economically. Neoliberal policies were simply off the table in 1949. In any case, neoliberalism doesn't really provide answers to thorny questions like land reform in a semi-feudal country (since the most efficient policy is usually to divide up the unproductive estates among the peasants, a rather anti-market approach), especially given how land reform helped spark the growth of East Asian countries (as well as their integration into the world market).
Your qualifications about Eastern Europe are also somewhat lacking. It's worth pointing out that in most Eastern Bloc nations, there was some level of continuity in government during the transition from communism to capitalism. This continuity in government, as well as popular support for decommunization and the subsequent integration of Eastern Europe into the world market, partly explains why neoliberal policies worked so well there. Yugoslavia collapsed, but it's at the very least unclear whether neoliberal economic policies had any impact: neoliberalism would have probably worked had the government stayed intact, but neoliberal reforms have a destabilizing element that can quickly get out of hand in left unchecked. The collapse of the USSR was largely the product of failed policymaking: Gorbachev put political reforms before economic reforms (when he should have pulled a Deng and done the reverse), and the economic reforms under Yeltsin were downright backward: privatization has its uses, but privatizing profit-making enterprises starved the government of revenue (contributing to hyperinflation) and fuelled corruption. You sorta elide the point by talking about how Russia should have used spending cuts rather than printing money, without accounting for the chaotic nature of state collapse and how those spending cuts were supposed to pan out (remember that several million Russians died during the crash of the 1990s). Neoliberalism (to the extent that it worked) worked when coupled with a strong and authoritative state (think Thatcher's Britain or Singapore); neoliberal reforms with a weak state just don't pan out because investor confidence remains too low to stimulate investment.
I have other critiques, but instead of airing out dirty laundry, I want to commend you for taking a historical approach to neoliberalism and recognizing how it emerged from the policy failures of the 1970s, something that many critics of neoliberalism tend to downplay. Whether or not neoliberalism was the only solution to that is debatable, but at least you took the effort to address the issue in its historical context.
I think the stagflation point is weak, given the exogenous shock of OPEC and exploding gasoline prices. But the larger point still stands.
As a liberal who believes in strong markets + strong safety net, it’s frustrating that progressives have successfully turned “neoliberal” into a slur. Any idea that isn’t “kill the billionaires” is called “warmed over neoliberalism” and that’s the end of the argument.