Neoliberalism: what is it? Or, what was it?

And is there really no alternative?

Left-wing authors often write that something is “neoliberal”, assuming that the reader knows what that is, and that, whatever it is, it must be bad. Those assumptions call for close examination.

Suppose someone says that governments of affluent economies can get addicted to spending – to keep their bureaucrats, teachers, soldiers and other dependents in the lifestyles to which they’ve become accustomed – and so they increase taxes on the people who are actually economically productive. As they start over-taxing, however, economic productivity declines and the government ends up with less revenue, not more. Such fiscal irresponsibility can ruin the state, especially when, in a competitive world, there are hordes of people ready to take advantage of any weakness.

A contemporary critic might call that “neoliberal thinking”. But I’ve just paraphrased the philosopher-jurist Ibn Khaldun. What could possibly be “neoliberal” about a Muslim from North Africa writing in the late fourteenth century?

Taxing and spending wisely in order to encourage – rather than discourage – enterprise and trade could just be long-understood common sense, rather than a dangerous or inhumane right-wing ideology of recent invention.

We need some historical context here, so let’s begin with the classical liberalism of the Industrial Revolution.

Liberalism is, as its name suggests, a philosophy of personal and economic liberties. It began from the premise of a naturally rational and free individual. One of its purposes was to free us from the constraints of landed privilege, feudalism and tyranny. Hence it favoured free trade, enterprise and competition, with as little interference from the state as possible. That meant allowing workers to move to wherever the jobs were – and rejecting slavery. It assumed that poverty-relief could only temporarily stave off the inevitable, however, and so there was no use in taxing the industrious people to support the indolent. But this was never a universally accepted ideology.

In the twentieth century, the seven decades or so from the end of World War I to the collapse of the Soviet Union saw a catastrophically violent contest between three rival models of political economy: liberal capitalism, fascist corporatism and communist command economy.

In Vienna in the 1920s a school of thought had emerged that noticed a downside to the break-up of the old Austro-Hungarian Empire: the erection of borders around the newly-formed nation-states and hence new trade barriers. These economists argued for free international trade, lower taxes and weaker trade unions. What really worried them, however, was the rise of criminally totalitarian governments in Italy, Germany and Russia. Before World War II began, these economists (some of whom had to flee from Nazism) were arguing for a new kind of liberalism – or neoliberalism.

Contrary to past thinkers such as John Locke, they argued that well-functioning competitive markets and monetary systems don’t arise spontaneously without government. Markets need good law – and effective enforcement – to ensure security of property, fair competition and respect for the sanctity of contracts. Neoliberals wanted a small state with low taxes, but a strong state that would enforce the rule of law and make the world safe for private enterprise to flourish.

Meanwhile, the fascist model was defeated in WWII, but communism persisted and indeed spread to China and elsewhere. The capitalist countries, led by the USA, brokered a deal in 1944 (named after Bretton Woods, New Hampshire) that stabilised their currencies and permitted a degree of economic protectionism. Emergency conditions had accustomed people to state intervention for the war effort, and then for reconstruction, and hence higher tax-rates, especially in the top income brackets. Above all, people wanted peace and (given their memories of the Great Depression) no more unemployment.

The neoliberals, however, weren’t satisfied. In the capitalist countries, post-War government spending rose year after year, and they feared a return of totalitarianism. What really worried them was the seizure of hard-earned wealth and property through nationalisation and redistribution.

The Bretton Woods arrangement fell apart anyway in the early 1970s and there was a global recession.

The neoliberals seized the day. To stop the state from getting ever-larger, they argued for law and policy that would self-limit what governments could do. They wanted an open and competitive global economy, including the removal of cross-border controls on capital and freer migration of labour. The threat of capital flight would force governments to be prudent; “the markets” would hold a permanent veto over the state. These economists found an audience with UK prime minister Margaret Thatcher and American president Ronald Reagan. It was Thatcher who insisted “there is no alternative”. And the notion of a “Washington consensus” about such policies emerged in 1989, the same year that NZ passed its trend-setting Reserve Bank Act.

Commercial monopolies were busted up, state-owned assets sold off to private enterprise, trade protections eliminated, and tax-rates flattened out and reduced. Providers of public services were detached from the funders and made to compete for their money. Any public-sector organisations still in existence had to adopt management and accounting practices akin to private enterprise. The neoliberals argued that pretty much all of life (ranging from marriage to crime to voter behaviour) was best understood through economic concepts such as scarcity, incentives and contracts. We’re all economic actors, or rational utility-maximisers. People enjoy personal freedom and diverse choices in markets, whereas governments coerce us into uniform institutions.

Public-sector bureaucrats always have an incentive to maximise their budgets at the expense of efficiency and effectiveness, it was argued, and so they should be made to follow policy directives through performance-related rewards. In general, though, the less government the better – provided there’s a strong rule of law. There’d be no stinting on prisons, but those too could be built and operated under contract by private enterprise.

An enduring achievement of the neoliberal era was the reform of monetary policy, placing the primary focus on price-control, with institutional independence of central banks. Currencies fluctuate freely in markets now while the financial system guards against inflation. If governments spend and borrow too much, the consequent rise in interest rates will soon make them unpopular.

New Zealand was once world-famous for rapidly and rigorously implementing neoliberal policies in the period 1984–96. If the real world hadn’t evolved to fit the economic theory, then reality could be re-engineered by law, and the NZ parliament obliged.

These changes stimulated a negative public mood that led to the switch to MMP in a referendum in 1993. They also contributed to the formation of the NZ First and Act parties – the former resisting and the latter endorsing neoliberal policy.

Since the 2000s, New Zealand has resiled from many (but by no means all) of its neoliberal reforms. Think, for instance, of the renationalisations of workers’ compensation (ACC) and of the railways. Public healthcare is being re-centralised, and not even the Act Party tries to stop that now. Even by the late 1990s, the government was dialing down the individualism of the Treasury-driven model and pushing conservative concepts like social capital and family responsibility.

The neoliberal reform template has been gathering dust in a cupboard somewhere in the Treasury building for the last quarter century.

Nowadays neoliberalism is honoured more in the breach than the observance. Both Biden and Trump, for example, are pushing protectionist trade policies, especially around semiconductors. Immigration is perhaps the most sensitive political issue almost everywhere, most noticeably right now in the US, UK, France and Italy. Borders are hardening up again. And there was nothing in the neoliberal hymn-book about dealing with a pandemic.

There were always alternatives, moreover. Since the Limits to Growth report of 1972, green political theory, for instance, has a powerful critique of neoliberalism (or of industrialism in general, capitalist or socialist), on the grounds that perpetual economic growth is unsustainable, given the limits of the planet’s natural resources and its finite capacity to absorb pollutants. Global inequality has reached morally repugnant levels, exacerbated by neoliberal policies.

Whenever a politician proposes policies in favour of economic growth and fiscal prudence, there’ll be voices on the left complaining about “neoliberalism”. But they haven’t read Ibn Khaldun. Balancing the budget and improving trade weren’t new ideas even in his day. (People in medieval and ancient times weren’t ignorant!) To understand the rise and decline of neoliberalism, we have to look at its twentieth-century historical context and ask what motivated the people who promoted it.

If you ask about alternatives to neoliberalism, I’d say you’re living in one, but the experts haven’t given it a name yet, let alone a cogent theory. This emerging alternative is conditioned by international conflict, migration, climate change, AI and infectious diseases, but it may not be any more to your liking than neoliberalism was. No one seems able at present to implement a coherent and constructive alternative model of political economy with any level of international consensus – although many people are trying their best. The world is bumbling through without effective leadership and without an agreed model of political economy that would help save the planet and improve the wellbeing of the worst-off populations.

The recent Trump–Biden redux debate gave us no hope. And a rerun of the Luxon–Hipkins debate, though of much less consequence, is also uninspiring.

The world needs, I believe, something akin to the Bretton Woods agreement, this time with ecology at its heart. But it took a world war to get the big capitalist powers to cut a deal at Bretton Woods!

What, then, would it take to save planet Earth? An asteroid heading our way?

The Special Relationship.

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Readers vote to replace Chris Hipkins with Kieran McAnulty

In the straw poll last time, 53 percent of readers voted for Kieran McAnulty as the best person to lead the Labour Party, well ahead of current leader Chris Hipkins on 20 percent. No one else came close. A couple of people commented “none of the above”.

Of course, it wasn’t a scientific poll, and I have yet to see Kieran have any impact in published “preferred prime minister” opinion polls. What could it all mean?