Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics, by Daniel Stedman Jones, Princeton University Press, 424 pages, $35
The 20th century saw two great economic revolutions: socialism and neoliberalism.
Socialist ideas were already floating around the democratic West in the early 1900s, but they gained much greater popularity after the Great Depression, which was widely seen as a failure of capitalism. One part of this shift entailed a greater role for the government in regulating or owning business enterprises. The second part involved a major expansion of social insurance programs.
Beginning in the late 1970s, there was a backlash against excessive government intervention in the economy. This neoliberal revolution involved privatization, deregulation, and cuts in marginal tax rates, but it left most social insurance programs in place.
Daniel Stedman Jones, an independent historian (and barrister) in London, has written a balanced and informative study of neoliberal thinkers such as F.A. Hayek and Milton Friedman, exploring their impact on policy making, particularly during Margaret Thatcher’s administration in the United Kingdom and Ronald Reagan’s in the United States. Jones suggests a policy revolution that began in the 1970s drew on 30 years of neoliberal research and advocacy, partly financed by businessmen hostile to Franklin Roosevelt’s New Deal policies. Although Jones is skeptical of the more radical elements of neoliberalism, he is mostly respectful of the major neoliberal figures, despite the fact that his own politics are clearly left of center.
Jones traces the origins of neoliberalism to the mid-1940s, specifically to the nearly simultaneous publication of Hayek’s The Road to Serfdom (1944), Ludwig von Mises’ Bureaucracy (1944), and Karl Popper’s The Open Society and Its Enemies (1945). The appearance of these highly influential books was followed by the formation of the Mont Pelerin Society, a group of American and European neoliberals who met annually starting in 1947. Even within this group there were important ideological differences, with Popper being much more sympathetic to the democratic left than Mises. Early neoliberals rejected complete laissez faire, which was widely seen as discredited by the depression; they supported economic interventions such as antitrust laws, the regulation of natural monopolies, health and safety regulation, and government provision of education and other social services.
Over time the center of the neoliberal movement shifted from Europe to America, especially the economics departments at the University of Chicago, where Milton Friedman taught, and the University of Virginia, where James Buchanan and Gordon Tullock developed “public choice” theory, which aims to explain why government policies often end up serving special interest groups. At the same time, the ideology drew closer to laissez faire. Neoliberal economists were less likely to endorse interventions such as antitrust and more likely to support a radical program of deregulation.
Beginning in the late 1970s, neoliberal ideas began to have a significant impact on policy in the U.S. and Britain. Under President Jimmy Carter there was significant deregulation of transportation, utilities, and banking, and capital gains taxes were reduced. Deregulation continued in the 1980s under President Reagan, who also slashed the top income tax rate from 70 percent to 28 percent. In Britain the Labour Party began to move away from traditional Keynesian stimulus programs, as these policies were widely blamed for the high rates of inflation during the 1970s. Thatcher sped up that trend after taking office in 1979. Her Tory government privatized state-owned firms and public housing, deregulated the financial industry, weakened labor unions, and sharply reduced the top income tax rate.
My reservations about Jones’ study start with the term neoliberal, which is often intended as an insult when used by people on the left. Jones places neoliberalism within the framework of modern conservatism. I see neoliberalism as exactly what the name suggests, a new form of liberalism. It might be viewed as classical liberalism with a welfare state added on, or mid-20th-century liberalism without government ownership of industry and without regulation of prices and market access.
Jones is aware that the neoliberal revolution was often a bipartisan affair. “Too often,” he writes, “the adoption of certain key [neoliberal] policies by Labour or Democratic administrations during the 1960s and 1970s is assumed by conservative commenters to have been a sham, or by left or liberal commenters to be a source of shame. These views miss important elements in the successes and failures of the neoliberal political project.”
But in the end Jones accepts the standard left-wing complaint that neoliberalism eventually turned into what the Nobel laureate economist Joseph Stiglitz has called “market fundamentalism.” In Jones’ words, neoliberalism became the “elevation of the market to an almost theological status.”
There is a grain of truth in this charge, but Jones misses the bigger picture for three reasons: He underestimates the extent to which neoliberalism was built on impressive economic research, he overstates the extent to which neoliberalism became associated with modern conservatism, and he overstates the neoliberals’ opposition to government. Most of the neoliberal critique was aimed at specific statist policies, such as nationalization and regulation, not at “big government” per se.
Consider Jones’ description of neoliberalism’s evolution from the late 1940s to the ’70s: “The early neoliberals were marked by their desire to move beyond both laissez-faire economics and the New Deal. Later neoliberals, defined by the Chicago emphasis on unregulated markets, were less ambiguous in their opposition to the welfare state and to the need for government intervention in the economy.”
In political practice, neoliberalism was not about abandoning the welfare state. It was about deregulation, privatization, freer trade, lower marginal tax rates, and keeping inflation under control. Thatcher’s policies were viewed as a big neoliberal success, despite the fact that government spending remained close to 40 percent of GDP. There is far less regulation of investment, trade, market access, and prices in developed countries today than in the 1970s. Many state-owned enterprises have been sold to the private sector, and inflation has been brought down to relatively low levels. Virtually every developed country has sharply cut its top income tax rate from the levels of the 1970s. Yet the welfare state in those countries is roughly as large as it was four decades ago.
Nor was opposition to the welfare state ever a big part of the academic side of neoliberalism. I studied economics at the University of Chicago between 1977 and 1980, when the Chicago school had reached its peak of influence. There was a heavy focus on the failures of Keynesian demand-side macroeconomics as well as the often counterproductive effects of regulation. But if the welfare state ever came up, it was generally brushed aside with the comment that the optimal policy would probably be to just give money to the poor.
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