The Neoliberal Revolution

A new book gives Hayek, Friedman, and others too much credit—and too little.

(Page 2 of 2)

Milton Friedman proposed a “negative income tax” that would have replaced many welfare programs with direct cash payments. He also advocated vouchers for education and health care, plus a progressive consumption tax. Jones suggests that Friedman was opposed to both the welfare state and progressive taxes, but that’s a bit misleading. What Friedman opposed was paternalism and inefficiency. At times Friedman indicated that his ideal society was a minimal state, but his policy recommendations would have given the government a substantial role in addressing issues such as health care, education, and income inequality. Hayek too supported a basic safety net.

A study by the libertarian political scientist Charles Murray in the mid-1980s did point to the pernicious effect of welfare on incentives, but the issue was not significantly addressed until the mid-1990s, when the welfare system was modified—under a Democratic president—to provide smaller benefits to the nonworking poor and more subsidies to the working poor. This wasn’t a conservative plot to cut spending. It was an example of modern liberalism being transformed by academic research.

All the other major neoliberal initiatives in America were essentially bipartisan, including free trade agreements, cuts in capital gains taxes, the reduction of the top income tax rate, and the deregulation of transportation, utilities, and banking. Because big social programs such as Medicare and Social Security in America and the National Health Service in the U.K. are highly popular, criticism of the welfare state is often directed at relatively modest efforts aimed at groups not likely to vote for the more conservative party. Even as Mitt Romney complained about people “who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them,” he campaigned vigorously against President Barack Obama’s Medicare cuts.

Jones’ focus on America and Britain leads him to exaggerate the affinity between neoliberalism and the right, since both countries elected relatively conservative administrations just as neoliberal ideas were gaining influence. If the study had focused on Australia and New Zealand, Jones would have described how a pair of labor parties radically transformed economies that had been hamstrung by regulation and barriers to trade.

In many respects the New Zealand Labour Party pushed its market reforms much farther than Thatcher did, and it did so without abandoning its left-wing commitments in civil rights and foreign policy. Indeed, by the 1980s and ’90s virtually all countries were moving toward more market-oriented economic models, including those ruled by socialist and even communist parties. Because both Reagan and Thatcher are larger-than-life figures, people tend to overlook the quiet neoliberal revolution that was occurring simultaneously in many other corners of political life.

Jones does note that the Thatcher and Reagan administrations were products of their times. He acknowledges, for instance, that the backlash against Keynesianism in Britain actually began under James Callaghan’s Labour government in the late 1970s. And in the early ’80s the Thatcher government was initially reluctant to push neoliberalism too far. 

The Tories’ first efforts were focused on reducing inflation, not radical moves toward a more unrestrained market economy. The 1979 Conservative Party manifesto did not even mention privatization. As the 1980s progressed, however, the Tories were emboldened by neoliberal initiatives in other English-speaking countries, especially the U.S., and adopted a more extensive agenda of privatizing government enterprises and weakening labor unions. Jones points out that many Thatcher reforms were maintained after she left office and that the Labour Party “continued and deepened” them after 1997.

Jones often tries to distinguish a more pragmatic form of neoliberalism, whose policy reforms he sometimes supports, from a more far-reaching laissez-faire agenda, which he blames for major policy failures, including the financial crisis of 2007 to 2010. There is no question that free market ideology was ascendant in the latter part of the 20th century. But Jones presents no compelling argument connecting the crisis with “deregulation,” other than vague references to the Glass-Steagall Act, derivatives, and other factors that are tangential to the subject. Progressives have an unfortunate tendency to call for more government intervention whenever they perceive a market failure, and they assume almost all failures are market failures, even those that stem from previous government interventions.

Specifically, government insurance creates moral hazard and encourages excessive risk taking. Neoliberal economists, aware of this problem, have proposed many regulatory reforms, such as breaking up the government-sponsored mortgage lenders Fannie Mae and Freddie Mac, reforming deposit insurance, and ending the “too big to fail” policy that encourages bailouts of financial institutions. Another neoliberal reform would require income verification and a minimum 20 percent down payment for all mortgage loans made with federally insured funds. 

But the political establishment listens much more closely to the banking and real estate industries. Hence the authors of the 2,000-page Dodd-Frank bill neglected to ban subprime mortgages or rein in Fannie Mae and Freddie Mac, despite the fact that subprime loans were allegedly at the heart of the crisis. It’s a perfect illustration of the “regulatory capture” argument developed by George Stigler at the University of Chicago and discussed by Jones.

All that said, Jones is right to suggest that a more dogmatic form of free market economics has been ascendant among conservatives in this century. For instance, Milton Friedman blamed tight money for the near-zero interest rates and depressed economy in the U.S. during the 1930s and Japan during the late 1990s. There is every reason to assume that if Friedman were still alive he’d again favor monetary stimulus over fiscal stimulus. Yet today most American and northern European conservatives have walked away from Friedman’s argument that monetary policy is frequently too contractionary, moving toward a hard-money Austrian approach instead.

Nor is this shift confined to monetary policy. In just a few years conservative American think tanks have moved from embracing a health insurance mandate in Massachusetts (signed by Mitt Romney) to opposing a similar mandate proposed by Barack Obama. Among conservatives there is now much more suspicion of the welfare state and little support for a negative income tax. Conservative support for carbon taxes has declined. The euro crisis is seen by some on the right as an opportunity to dismantle many government programs in the Mediterranean countries, whereas Friedman would have blamed the crisis on the euro and called for the economies facing deflation to exit the euro and devalue their currencies.

Not all the changes to conservatism have moved the right in a more libertarian direction. Conservatives also have become increasingly hostile to immigration, which the early neoliberals saw as integral to an open society.

Jones should be applauded for trying to produce a balanced account of the neoliberal revolution. The book is not a conspiratorial view of the sort produced by the leftist writer Naomi Klein in The Shock Doctrine. But it hews too closely to the conventional wisdom that the neoliberals had some good ideas that transformed conservatism but that they went too far. It would be more accurate to say neoliberals transformed liberalism, and that there is much more work to be done on that project. It would be interesting to see Jones write a history of neoliberalism in Sweden and Denmark, where policies such as privatization, free trade, deregulated labor markets (in Denmark), and universal school vouchers (in Sweden) are still seen as highly successful.

In the end, Jones gives the neoliberals both too much credit and too little. Mainstream liberal economists probably would have eventually figured out how to stop inflation with something like the New Keynesian approach, even without monetarism. And it seems clear that the worldwide move toward privatization, deregulation, and lower marginal tax rates was driven mostly by pragmatic rather than ideological considerations, particularly in areas, such as Scandinavia, where laissez faire has little appeal. As is frequently the case, the neoliberals probably changed history less than either their opponents or supporters imagine.

At the same time, Jones underestimates the neoliberals’ intellectual contributions. They were not merely advocates of monetarism and deregulation. They produced a mountain of very persuasive evidence that Keynesian and statist policies often did more harm than good. Given that between 1945 and 1970 they were often viewed as crackpots, their story is rather heroic. Just keep in mind that heroes are rarely as influential as they seem.  

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  • Fist of Etiquette||

    In Jones’ words, neoliberalism became the “elevation of the market to an almost theological status.”

    The state is a jealous god?

  • ||

    well it sure ain't Aphrodite the goddess of love

  • Whiterun Guard||

    You mean the same Aphrodite that tried to set up Psyche with Warty because she was...jealous?

  • Ted S.||

    That's the impression I get. I listen to a lot of European broadcasters, and the word "neoliberal" gets used as a sneer word in much the same way "fascist" is used to shut down debate. Basically, it seems to mean, "I don't like this economic policy!"

  • ||

    "I love Reason magazine, but macroeconomics is not their strong suit."

    I want to thank Reason and Mr Sumner for allowing him to enlighten us on macro.

  • ||

    what is Reason's strong suit?

  • Clano'6||

    Why, the witty banter of its readers, of course.

  • SaltySeaCaptain(LAOL)||

    The commentariat.

  • waaminn||

    Sometimes man, you jsut gotta roll with those punches!

  • Nic P.||

    Where do I get one of those t-shirts?!

  • Jeremy H.||

  • Alan Vanneman||

    The better the article the fewer the comments? Maybe!

  • ||

    Throwaway policy elements of neoliberalism were popular in a handful of economies for about 15 minutes in the early 80's before burning out. The entire premise of the book and article is absurd. There was no "neoliberal revolution", unless you consider tiny lapses into pre-intervention market behavior, swiftly followed by a return to centralization and interventionism revolutionary.

  • Coriolanus||

    Absolutely this, although the author's idea that 'The Shock Doctrine' should even be mentioned as a serious work is laughable. The fact of the matter is that economic policies that don't directly relate to the 'gimme more free stuff' crowd will never appeal to Europeans, and haven't appealed to Americans since the New Deal, despite the minor returns from the most ludicrous of interventionists policies.

  • Lord Peter Wimsey||

    I'll take the author's word that this book is much better than Klein's ridiculous rant, but it's hard for me to imagine a study that gets so much wrong, historically and factually, is worth my time. Add to that the fact that the author of this "more balanced" history of neo-liberalism uses the cheapest of fact-free lefty insults ("your position is theological, not factual") and I think I'll just skip this one.

  • theshakeydog||

    "the University of Virginia, where James Buchanan and Gordon Tullock developed “public choice” theory"

    *VIRGINIA TECH* not University of Virginia.

    Go Hokies

  • sohbet||

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  • haydenbridal||

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