Vaishak Kumar, University of Pennsylvania
A political ideology is a set of ideas that offers a representation of how the world works, the goals that a society ought to aspire to in that world and the methods to achieve those goals. Though latent at times, ideologies are highly influential in determining the direction of a society. From a political philosophy perspective, it is imperative that we make the assumptions and core principles of ideologies explicit and critique them so as to move towards better guiding ideologies. The ideology of neoliberalism has implicitly come to dominate the Anglo-American political economy from the 1980s onwards. This series of articles will trace the history of the ideology itself, the ways in which it has manifested itself in public policy, and then critically examine its core tenets to identify its shortcomings.
The term neoliberalism first appeared in the scholarly writings of a small circle of economists associated with the German Freiburg School in the interwar years. The German neoliberals accepted the classical liberal notion that competition among free individuals drives economic prosperity, but they also believed that private interests need to be kept in check through the creation of a well-developed legal system and capable regulatory apparatus that went well beyond the minimalist state promoted by followers of John Stuart Mill and Adam Smith. After a decline in usage, the term neoliberalism made a comeback but with a meaning that had shifted dramatically from its Freiburg origins. In the 1950s the Chicago boys, a group of Chilean economics graduate students were trained at the University of Chicago under Milton Friedman, and influenced by Friedrich Hayek.
In the 1970s, the Chicago boys became the architects of far-reaching economic reforms which would be passed under the rule of Chilean dictator Augusto Pinochet. The reforms which called for extensive privatization and deregulation were labeled neoliberal by its critics. By the 1980s, neoliberalism in Latin America had taken on a negative connotation and shifted in meaning from a moderate to a fundamentalist form of liberalism (Boas and Gans-Morse). In this paper, we will use this definition of neoliberalism as a type of market fundamentalism promulgated by Friedrich Hayek and Milton Friedman.
- The History
The economic climate in the Western world in the postwar period was dominated by statist ideas such as keynesian economics, the welfare state, nationalized industry, and state regulation of the economy. In the 1960s, Milton Friedman was one of the few American economists who identified with the liberal ideas of the nineteenth century. Inspired by the writings of Friedrich Hayek, Friedman believed that individual liberty was the most important value in a society, and that a free market with the least government intervention would result in the optimal allocation of resources in an economy. His militant views even called for floating exchange rates, legalization of marijuana and negative income tax. While his views were well outside of the mainstream to begin with, over the course of a decade the public and academia warmed up to them. By the 1970s, the Vietnam war and a decade of stagflation had turned Americans away from the state. In 1976, Britain was forced to ask the International Monetary Fund (IMF) for a bailout because of its over-expenditure. The timing was perfect for the propagation of Friedman’s ideas. Friedman, who had earned professional reputation (evidenced by his Nobel Prize), won popular attention through lectures, debates, newspaper articles, and even a ten-part television show in 1980.
It was Margaret Thatcher and Ronald Reagan who would put Hayek’s and Friedman’s ideas into practice in Britain and the U.S. respectively. A member of the Conservative Party, Thatcher was elected as Prime Minister in 1979. She brought monetarism, which emphasized low inflation, to the fore in British economic policy. From 22% in May 1980, the government brought inflation down to a 15-year low of 4.9% by June 1983 (“The Thatcher Years in Statistics”). Unemployment being of secondary consideration, Thatcher sold off social housing projects and cut industrial subsidies which painfully affected labor-heavy sectors such as coal, steel and shipbuilding. She also shifted the balance of power from workers to employers by enacting laws that choked union activities like picketing and the closed shop system.
Though Thatcher’s reputation had hit a low by 1981 when unemployment hit three million, the 1982 war against Argentina in the Falkland Islands brought her ratings up and helped her get reelected in 1983 (Jenkins). In her second term, Thatcher privatized almost three-fourths of state corporations and industries including British Gas, British Airways and British Telecom. She followed her privatization spree with drastic cuts on income tax rates for the rich. She had a showdown with the National Union of Mineworkers which went on strike in 1984-85 over Thatcher’s decision to close many pits and privatize the rest. In a major blow to the union movement, Thatcher did not relent. By her third term, the fruits of the reforms had become
clearly visible. By the end of 1989, unemployment was below 1.6 million due to booms in the financial and retail sectors. The average home price doubled between 1986 and 1989. The macroeconomic success of her policies vindicated her although a lot of damage was dealt to British society. Under Thatcher, inequality drastically increased (the GINI index increased from 0.25 in 1979 to 0.34 in 1990) and the people living under the poverty line increased from 13% to 43% (Dean). Thatcher’s idealism drove her to prune the state and keep it efficient but it also made her blind to social concerns.
On the other side of the Atlantic, Ronald Reagan began his presidency in 1981 with a similar promise of deregulating the economy and curbing inflation. In his inaugural address, he said “In this present crisis, government is not the solution to our problems; government is the problem.” In 1981, PATCO – the union that represented air controllers – went on strike for better pay and working conditions. Reagan, on whose Economic Policy Advisory Board Milton Friedman served, declared the strike illegal and demanded that the workers return to work within 48 hours. Only 1,300 of the nearly 13,000 returned to work. Reagan promptly fired the rest and put them on a government employment blacklist. This significantly decreased the strength of unions everywhere in the country (McCartin).
The recession of the early 1980’s ended and nominal GDP grew continuously during Reagan’s eight years in office to a high of 12.2% in 1981 and an average annual rate of 7.9%.With the creation of over sixteen million new jobs, unemployment decreased from 7.5% to 5.4%. His monetarist regime helped reduce inflation from 12.5% to 4.4% over his two terms. However,
these achievements came at a cost. The gap between the rich and the poor increased dramatically. In the period 1981-89, the top percentile increased their share of wealth (excluding capital gains) from 8.03% to 12.61% while the share of the top decile increased from 32.72% to 38.47% (Piketty and Saez). Reagan’s administration remains the only one to not have raised the minimum wage. In the name of reduced governmental interference, he cut federal assistance to local governments by 60% and also the budget for public housing and rent assistance for the poor in half. Many non-military programs including Medicaid, food stamps, federal education programs and the Environmental Protection Agency also had their budgets slashed. However, these cuts were not sufficient to cover the deficit forcing the United States to borrow heavily both domestically and abroad. The Reagan years saw the rocketing of national debt from $997 billion to $2.85 trillion. The administration used the neoliberal doctrine to justify slashing funds for social programs and reducing taxes for the rich. The result of this was effectively a transfer of wealth from the poor to the rich.
After the Falklands war, it would be the turn of another geopolitical event to help the cause of neoliberalism. In November 1989, the Berlin wall was torn down by people on both sides, and in 1991 the Soviet Union itself collapsed. The fall of the Soviet Union was seen as a result of a competition between two ideologies. Political scientist and Reagan doctrine contributor Francis Fukuyama would write in his 1989 essay The End of History and the Last Man:
What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of post-war history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government. (Fukuyama 4)
Even while the results of the Thatcherism and Reaganomics were being debated, public opinion sharply shifted towards economic liberalization in the wake of the collapse of Soviet Communism. Neoliberalism had arrived and was here to stay.