Neoliberalism as a distinctive strand of liberal ideology first appeared in the 1940s, but its period of major influence is usually dated from the 1970s. Neoliberalism is not a uniform doctrine and has many internal tensions, not least between a laissez-faire strand which believes that the best policy is to allow markets to operate with as few impediments as possible, and a social market strand which believes that for the free market to reach its full potential the state has to be active in creating and sustaining the institutions which make that possible.
The first people to call themselves neoliberals were the German Ordo liberals such as Alexander Rustow. They became part of a wider movement of western liberals after 1945 seeking to reverse the long retreat of liberalism in the face of collectivist ideologies and reasserting what they saw as the basic principles of liberalism – the rule of law, the minimal state, individual liberty – against all forms of collectivism, including many versions of liberalism, such as New Liberalism and Keynesianism, which had sanctioned an expanding state to provide welfare programmes, full employment, and economic prosperity.
The classic statement of neoliberal principles was Hayek’s The Constitution of Liberty published in 1960. This set out the political institutions and rules necessary for a liberal order, drawing on the classical liberal tradition, in particular the critical rationalism of Adam Smith. Hayek was keen to distinguish true liberalism from false liberalism, and to recapture the term liberal from its contamination by collectivist ideas. Neoliberal ideas began to gain ground in the 1970s. The adoption of basic neoliberal precepts by international agencies such as the IMF for containing inflation was key. The crisis of the 1970s made a new set of guiding principles to manage the global economy necessary, and this was supplied by neoliberalism, initially in the ideas of monetarism put forward by economists such as Milton Friedman to tackle inflation, but soon widened into a more general neoliberal political economy for removing the perceived wider institutional causes of inflation, which included trade union power, welfare states, taxation, regulation, and barriers to competition.
As an economic doctrine the core of neoliberalism has been an attempt to revive the case for reducing the role of government in the management of the economy as much as possible, giving primacy to markets and the free play of competition. It is axiomatic in neoliberalism that government solutions are inferior to market solutions because they are less efficient in economic terms and they harm individual liberty. The solution to every public policy problem is to take responsibility away from government and allow markets to function freely. Typical neoliberal policy prescriptions are therefore for deregulation of economic activity, privatization of assets owned by the state, and reduction of welfare spending except for the provision of a safety net for the very poorest. This combined with a more general withdrawal of the state from involvement in many other areas of social and economic life gives scope for large cuts in taxation and the share of state spending in national income.
The role of the state in the neoliberal programme is not a passive one. It has to be both active and forceful. The free economy requires a strong state in order to function properly. The state should not intervene directly in the workings of the market; instead its task is to guarantee the basic institutional requirements of a liberal market order. These include the minimal state functions of external defence and internal order, the rule of law, sound money, and the enforcement of property rights. Without these requirements individuals do not have the confidence or the incentive to produce and exchange freely. The market order is a natural spontaneous growth, but it is also very fragile and easily damaged by state intervention and state control, or by private monopolies which prevent free exchange. The state has to reform its own practices so as to minimize their harmful effects on the economy; at the same time it needs to remove all other obstacles to the free working of the economy. These may include restrictive practices of all kinds, by companies, trade unions, professions, and public bodies. The role of the state is to be the champion and defender of the free market, by enabling the institutions it requires and empowering its agents.
From being a heresy neoliberalism became an orthodoxy in the 1980s and 1990s, and many of its favourite nostrums were crystallized in the set of assumptions and prescriptions about the world and how it should be governed which became known as the Washington consensus. Neoliberalism shaped the policy prescriptions of globalization, setting out the conditions which countries had to meet in order to integrate fully into the global economy and be in good standing with the financial markets. To its critics, neoliberalism had become a form of market fundamentalism, which advocated the breaking down of obstacles to the commodification of social life and the penetration of market forces into all areas of economy, society and politics.
With the collapse of the Soviet Union the neoliberal message that there was no alternative to markets and private property in coordinating modern complex large-scale economies appeared unchallenged. All governments were forced to become in some sense neoliberal, since they were obliged to operate within a set of structures in the global economy which reflected, however imperfectly, neoliberal principles of global order. The ascendancy of neoliberalism however suffered a major setback in the great financial crash of 2008. Its belief in the superiority of market over government solutions, and in the ability of markets to be self-regulating and to price all risks encouraged the dismantling of regulatory controls over the financial sector in the 1980s and 1990s, and a rapid expansion of new forms of credit and financial instruments. Speculative asset bubbles developed, particularly in housing, which when they finally burst required crisis measures by governments to bail out the banks and stop the collapse of the financial system. Critics of neoliberalism argued that the events of 2007-8 demonstrated the limits and potential risks of deregulated markets, and the need for governments to be more interventionist.
- Harvey, D. (2005) A Brief History of Neoliberalism. Oxford University Press, New York.
- Hayek, F. A. (1960) The Constitution of Liberty.Routledge, London.
- Skidelsky, R. (2009) Keynes: The Return of the Master. Allen Lane, London.
- Turner, R. (2008) Neo-Liberal Ideology: History, Concepts and Policies. Edinburgh University Press, Edinburgh.