The triumph of an idea: how neo-liberalism succeeded

The following is an excerpt from Chapter 3 of "Beyond Right and Left: New Politics and the Culture War" (Allen & Unwin, Sydney, 2005).

The power of ideas to shape societies is profound although we are largely unaware of their effect in our day to day lives. Underneath the common sense of an epoch and the slogans of its political parties are buried sets of philosophical ideas and values. These new ideas often begin as the property of a small group which then filter out into the surrounding society. If they find fertile ground they can spread and transform societies in a relatively rapid time. This has occurred with many new religious ideas, such as Christianity and it also occurred with the ideas of the socialists in the nineteenth century. The ideas of democracy, equality and reason fermented in French society before they burst out in 1789 in a revolution which not only transformed France but Europe and beyond.

A more modest revolution has occurred in the last 20 years. Like similar changes it was preceded by a ferment of ideas that were originally the property of a small group but then struck a chord and changed society.

Today our world is not just made by markets but by 'free markets' a phrase which operates as a code word for the triumph of a politico-philosophical trend known by various names but increasingly by the phrase neo-liberalism. In popular Australian parlance it's 'economic rationalism'. Other critics, like George Soros, prefer the term 'market fundamentalism'. I prefer the term neo-liberalism because it conveys the profoundly important philosophical ideas which underlie what are often seen as merely economic policies. Conversely, to oppose the logic of neo-liberalism requires a different set of philosophical ideas and values, not just different policies or a set of slogans.

Neo-liberalism stands for a range of ideas but the most popular expression of its best known stances are:

* individual choice expressed in markets is better in principle and gives better outcomes than any other;

* government regulation of private business should be abolished in favour of self-regulation and greater competition;

* the public sector should be commercialised and state owned enterprises sold to shareholders;

* tax should be as low as possible, with a user-pays principle for many government services;

* barriers to trade between nations should eliminated;

* the market principle should be applied far beyond the economy to all public goods - education, health, the environment etc.

There is more to this than meets the eye, including certain deeper assumptions about human nature. But 25 years ago the small group of economists and philosophers who held these views were regarded as rather eccentric even by the mainstream Right. They met in small discussion groups and debated each other in obscure magazines and economic journals. They dreamt of a world reshaped by these ideas. We now live in this world.

Looked at coolly, this transformation is an inspiring testament to the power of ideas to shape society. It can give us hope that other ideas might also reshape the world and fashion it to more human ends. But first, the ideas of neo-liberalism need to be understood. In fact the success of neo-liberalism contains many lessons for those who oppose its relentless commercial logic. The fact that its critics have understood neither its ideas (including their strengths) nor why they have taken root, means that the emergence of new political philosophies beyond Right and Left continue to be delayed.

Neo-liberal ideas trace their origins to the Scottish economist Adam Smith. Smith's weighty book The Wealth of Nations is still a reference point and in Britain his name is commemorated by the Adam Smith Institute, a think tank founded in 1977. The glory days of economic liberalism were mid-nineteenth century Britain, still an idealized reference point for modern neo-liberals. But perhaps the key date for us is 1947 when the Austrian economist Friedrich Hayek founded the Mont Pelerin Society. The Society was no secret cabal of conspirators, but a regular forum for discussion by the tiny minority of post-war economic liberals who swam against the tide of opinion which favoured the welfare state and government intervention.

But the tide changed, as it always does. By the late 1960s the ideas of Hayek, and of other economic liberals, such as the US economist, Milton Friedman, had won important ground among academic and professional economists in universities, government and corporations. Global institutions such as the IMF and World Bank had been increasingly staffed by people who described themselves as 'neo-classical economists'. The tide of opinion was slowly but inexorably turning among elite economists, but this was not enough. Their target, the welfare state and government regulation of the economy, was the product of both conservative and social-democratic governments. Both had been pragmatic in their economic theory, adjusting their policy sails to the winds of key constituencies such as farmers, manufacturers, trade unions and exporters. When it finally succeeded the neo-liberal revolution was as much a trampling of an older conservatism as it was the beliefs of socialism. (See Chapter 4).

Two processes opened the door to the storm that was to come in the 1980s and 90s. The first was a series of events in 1971-74 which crystallized problems in managed capitalism. In 1971 after a series of trade deficits attributable to the costly war in Vietnam, US President Nixon removed the US dollar from a system of fixed exchange rates - the dollar floated. In 1973, the largely Arab organization of oil exporters (OPEC) dramatically raised the price of oil to the industrialized countries. As well, for some time, the unusual combination of both inflation and lack of growth ('stagflation') had become apparent in industrialized economies. This meant that the Keynsian approaches to managing the economy, supported by both conservatives and non-conservatives, simply did not work. The Keynesian approach to inflation recommended higher interest rates and tightening government spending but these measures would further deepen stagnation and worsen unemployment.

The second process was a quite different phenomenon. It was not an economic crisis but a slow building, deeper social and cultural change. The long boom of the 1950s and 60s in advanced industrial countries had increased material wealth for nearly all their citizens. The expansion and cheapening of the number of consumer goods led to a growing expectation of greater individual choice in satisfying material wants and more importantly, elsewhere. For example, the motor car came within reach of far more people with the consequent decline of state-supported public transport. Personal choice for women was widened by the widespread availability of the contraceptive pill. All of this generated a climate in which individuals chafed at the restraints of a narrow minded moral uniformity favoured by church and state. The result was the cultural and political revolt of the 1960s which saw a blossoming of libertarianism.

This revolt has been largely claimed by the Left but its effects were far deeper and complex. While the conservative moral order enforced by government and churches was flouted it was only a matter of time before all sorts of other regulatory, restrictive policies, including those on businesses small and large, came under fire. When the 20 year olds who asked 'why should a government censor films' turned 30, they were open to neo-liberalism's questions: 'Why should a government run a national bank, an airline or a phone company?' As one commentator on Thatcherism notes, on moral issues the British New Right worked against the grain of the 1960s but they worked with the grain on economy-state issues. 'Many of the Thatcherites viewed their politics as a crusade against the pettiness, restrictiveness, traditionalism and inertia that characterised the post-war settlement', argues Richard Cockett. Such were also the terms of Left libertarianism of the 1960s.

Hayek: Prophet of the free market

Any understanding of neo-liberalism must grapple with the complex ideas of the Friedrich Hayek, because they are foundational to the revival of neo-liberal ideas which have swept the world. It is Hayek's vast intellectual output and theoretical system which gave the revival its resilience and depth. His vision and ideas helped give the sustaining confidence needed by the small radical liberal movement in its years before triumph. What follows in this chapter is a description and discussion of Hayek's key ideas.

Hayek was born in Vienna in 1899 and took degrees in law and politics. But economic theory dominated his early work and in the 1930s, while he taught at the London School of Economics, he clashed with John Maynard Keynes, at that stage making little impact. The disagreement was over the correct analysis of the Great Depression and prescriptions for avoiding such calamities in future. In 1950 he moved to the University of Chicago, the intellectual centre for the development of neo-liberal economic and social theories and where a colleague was Milton Friedman.

Hayek was not just an economist but an evangelist who was prepared to swim against the tide. To most people World War Two had demonstrated the enormous advantages of the state in co-ordinating workers and industrialists in a single victorious focus. By 1944 planning for post-war reconstruction assumed large state sponsored projects of education, health, national development. At precisely this most unlikely of times Hayek wrote his best known polemic in favour of liberty and against the state and all its works. The Road to Serfdom compared state socialism, economic planning, Nazism, communism, social liberalism and concluded that they were all very similar under the skin because they shared an opposition to the free market order. It was dedicated 'To the socialists of all parties'.

A remarkable quality of The Road to Serfdom is its absolutism. Not only is central control and planning an absolute evil but there is a rapid and slippery slope between government planning of any form and total central control. He was also blithely unaware of (or dismissive of) the realities faced by many ordinary people.

In a competitive society it is no slight to a person, no offence to his dignity, to be told by any particular firm that it has no need for his services, or that it cannot offer him a better job. It is true that in a period of prolonged mass unemployment the effect on many may be similar. But there are other and better methods to prevent that scourge than central direction.

At first glance Hayek's book was a polemic against socialism and fitted the rapidly growing anti-communism that dominated the Cold War. But as his dedication made clear, Hayek was highly critical of anti-Communists who believed in a strong state. He was far from an ivory-tower dwelling academic. As an intellectual engaged in combat, he not only helped found the Mont Pelerin Society in 1947, but also the Institute for Economic Affairs in Britain in 1957 which helped fashion what the world came to know as Thatcherism.

As the years went by it became clearer that he represented a strand within the Right which was quite different from simple anti-communism and mainstream conservatism (which had merged with social liberalism). His aim was to revive a minority strand within liberalism which he believed had been largely taken over by a rationalistic, Continental liberalism which aimed to guarantee a liberal society more through governments than markets. Hayek's liberalism, which drew on Adam Smith and philosopher David Hume, was grounded in a view which argued that liberal institutions (such as the market) evolved slowly and spontaneously and were justified by their success, not by government. In Hayek's version of liberalism there was little room for government modification of market forces in the name of social cohesion. In his speech accepting the Nobel prize for economics in 1974, Hayek congratulated the selection committee for their willingness to award the prize to someone 'whose views are as unfashionable as mine are'.

Hayek believed fashions changed through the central role of ideas and intellectuals and this had long been part of his crusade. In 1960, which many thought was the high noon of triumphant and prosperous capitalism, Hayek worried that 'the propertied class, now almost exclusively a business group, lacks intellectual leadership and even a coherent and defensible philosophy of life'.

Hayek's self-appointed task was to provide this intellectual leadership and a coherent and defensible philosophy of life. He did this by conceiving an intellectual system covering economics, law, politics, social evolution and morality. This system was developed from first principles, in this case Hayek's particular concept of liberty. This gives his ideas the attractive element of coherence but like so many ideological thinkers, including many Marxists, a foundation of simple first principles also opened the way to fundamentalism. Hayek, however, had a number of genuine insights which it would be unwise to ignore. In any case, those repelled by the market fundamentalism of his followers need to understand the intellectual challenge he threw down to his fellow liberals, to conservatives and to socialists.