In 1938, French philosopher Louis Rougier organised the Walter Lippmann Colloquium. This was a conference of intellectuals whose main objective was to come up with a new liberal philosophy in order to replace the failed laissez-faire liberalism and fight the rise of collectivism and socialism. It was at this summit that the term neoliberalism was coined. Among the delegates in attendance was Austrian economist and philosopher Friedrich Hayek.
Hayek, though already a distinguished faculty member of the London School of Economics, rose to prominence after the publication of his 1944 book The Road to Serfdom. This book summarised his conception of classical liberalism, and in it he argued that government control of economic decision-making inevitably leads to totalitarianism and the loss of individual freedoms. This rejection of government central-planning stood in stark contrast to the ideas of Keynesian economics, which had become the norm in Western countries in the aftermath of the Great Depression of the 1930s.
The Road to Serfdom achieved great popularity in the United States, particularly among economists at the University of Chicago, such as Milton Friedman. An abridged version published by Reader’s Digest in 1945 allowed Hayek’s views to spread beyond academia to the general public. Crucially, it also reached the hands of wealthy people –such as American businessman Harold Luhnow– who saw in Hayek’s condemnation of taxes and regulations a way of increasing their fortune. Backed by these millionaires and their foundations, Hayek founded the Mont Pelerin Society in 1947 as a way of spreading his neoliberal philosophy. His backers also funded the creation of several think-tanks, among them the Heritage Foundation, the Cato Institute and the Adam Smith Institute, and financed academic positions and departments, effectively creating a transatlantic network of academics, businessmen and journalists.
Despite this, neoliberalism would remain at the fringes of economic orthodoxy for another thirty years, during which Keynesian economics remained extremely influential. This period, known as the post-war consensus, saw governments developing strong welfare states financed by high taxes for the wealthy (the top marginal income tax rate in the U.S. stood at 90% in 1960). It was generally accepted that governments were needed to provide basic services, regulate markets and mitigate the vices of capitalism, such as recessions and inequality. However, the oil crises and stagflation of the 1970s exposed the flaws of Lord Keynes’ ideas and resulted in Western governments seeking an alternative. Thus, neoliberal ideas entered the mainstream. U.S. President Jimmy Carter and British Prime Minister James Callaghan’s left-leaning governments adopted monetarist policies advocated by Milton Friedman; and while they managed to tame inflation, the recession eventually deepened and this resulted in the Democrat and Labour parties losing the subsequent elections.
These events ushered the advent of neoliberalism as the main economic ideology in the West, with U.S. President Ronald Reagan and UK Prime Minister Margaret Thatcher as its most celebrated champions. They gave massive tax cuts to the rich, deregulated industries, privatised public services, decreased social spending and destroyed trade unions. The idea was that these policies would boost investment and competition, thus spurring growth. The profits would eventually “trickle down” from the top and benefit everyone (everyone lucky enough to get a decent job, that is). Gradually, neoliberal policies were imposed on the rest of the world through the International Monetary Fund, the World Bank, the World Trade Organisation and the Maastricht Treaty.
So what were the consequences of this shift towards a neoliberal model?
Neoliberal policies are at the heart of several of the most pressing issues of our time. Chief among them is growing levels of inequality. In his 2013 book Capital in the Twenty-First Century, French economist Thomas Piketty paints a harrowing picture. Since 1980, inequality in developed countries has exploded and reached levels unseen since before the Great Depression, especially in Anglo-Saxon countries. In the United States, the top 10% have seen their share of national income increase from 35% to 50% in the last four decades (with 18% going to the top percentile). Wealth inequality also stands at absurd levels, as the top percentile owns 70% of total wealth in the US.
These figures are not surprising given the diminished power of trade unions and the deregulation of labour markets, which have a direct consequence on wage growth as workers’ bargaining power is eroded. Again in the United States, the bottom 20% of earners have seen their after-tax income increase by 46.1% since 1979. During that same period, the after-tax income of the top 1% increased by a whopping 192.2%. Further, CEO-to-worker pay ratios have increased dramatically. Today, the average CEO of a S&P 500 company earns around 361 times the wage of a median worker. In 1980, the ratio was 42:1.
Deregulation of the banking sector has also played a role in increasing inequality. According to David A. Moss, an economic and policy historian at the Harvard Business School, bank failures and financial crises were common until 1933, when regulations were put in place as a result of the Great Depression. After that, bank failures and financial crises virtually disappeared, but resumed after the financial liberalisation process that began in the 1980s. Deregulation allowed financial institutions to invest in more speculative activities and form giant conglomerates that would eventually become “too big to fail”. This process culminated in the Great Recession, the worst financial crisis the world has seen since 1929.
Further, there seems to be a correlation between financial crises and growing inequality. Financial crises disproportionately affect the working and middle classes, as job losses are concentrated in so-called “middle-skill” jobs. This effect is exacerbated by the austerity measures that are put in place as a result of the crises and the government bailouts that usually follow. Pension cuts and decreases in welfare, public health and education spending are the norm. Ironically, the cost of these bailouts is borne entirely by the common taxpayer, while banking executives emerge largely unscathed.
The global neoliberal apparatus is also partly responsible for the worsening of environmental conditions. While man-made environmental degradation precedes neoliberalism, the adoption of market-and-export-oriented policies by much of the world since the 1980s has certainly exacerbated it. Global greenhouse-gas emissions have increased dramatically, especially in developing countries. Further, as the number and size of multinational companies has grown, so has their influence on global public environmental policy. The International Centre for Investment Dispute Settlement at the World Bank allows foreign private investors to sue sovereign governments whenever they feel laws and regulations –including environmental protections– hurt their profits.
For example, in 2009, a Canadian mining firm called Pacific Rim sued the government of El Salvador for 284 million dollars because they would not allow them to open a gold and silver mine, as they lacked proper environmental permits and land ownership rights. Similarly, Houston-based Occidental Petroleum sued the government of Ecuador in 2012 after it cancelled an oil-exploration contract. Ecuador was ordered to pay a record 1.8 billion dollars, an amount roughly equal to the country’s health budget for a year. Most international trade and investment treaties contain a mechanism called “investor-state dispute settlement” that allows investors to challenge governments in a similar manner.
The extreme form of competition and individualism behind neoliberal thinking also affects us in more subtle, personal ways. The all-knowing, all-powerful market is a sorting system that determines who has merit and who doesn’t. Thus, if you are poor or unemployed, you are meant to feel unworthy and incompetent. This, along with the lingering effects of the Great Recession and growing inequality, have arguably contributed to the rise of right-wing populism in Western societies, as the many that have been left behind grew tired of the status quo.
U.S. President Donald Trump exploited the anger of manufacturing workers, miners and farmers in order to win the 2016 election. Presenting himself as an outsider, he promised to “drain the swamp” and fix the corrupt Washington establishment. Instead, he appointed an investment banker, an Exxon executive and a fossil fuel industry shill to his cabinet. He gave massive tax cuts to the rich and rescinded several regulations regarding the environment, labour, finance, housing, education, health, telecommunications and agriculture.
It was also this wave of discontent that got Marine LePen, a far-right candidate, to the second round of the French presidential elections last year. However, “centrist” Emmanuel Macron ended up winning the elections, under the guise of being an anti-establishment outsider. Ironically, since his term started, he too has given tax cuts to corporations, cut public spending on healthcare and housing, and done away with workers’ protections.
Voter disaffection also played a role in the Brexit referendum and the election victories of several far-right parties all over Europe, such as the AfD in Germany, the Law and Justice Party in Poland, the Austrian Freedom Party and the Five Star Movement in Italy. At the same time, mainstream left-wing parties such as the Socialist Party in France and the Labour Party in the Netherlands have seen substantial drops in support.
Clearly, the left has failed to inspire voters disillusioned by the neoliberal policies of the past four decades; and now the working and middle classes are unwittingly voting against their own interests.
If we are ever to live in a world that works for everyone, it needs to come up with a viable alternative that is economically and environmentally sustainable.