Free Minds & Free Markets

The Neoliberal Revolution

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

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. 

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.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • 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!"

  • PS||

    "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.

  • Nic P.||

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

  • Jeremy H.||

  • Alan Vanneman||

    The better the article the fewer the comments? Maybe!

  • PM||

    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


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