Neoliberalism: An Explainer
Is it an economic framework? Is it an insult? What is it?
The term “neoliberal” is ubiquitous in current political discourse. It is hard to find a discussion about politics in which the specter of neoliberalism is not invoked to describe some position or some figure. This is especially true of discussions related to economics or finance.
Yet this term is among the most misused and misunderstood.
This is because, in its current usage, it is as frequently employed as a pejorative against political opponents as it is a descriptor of an economic ideology or set of policies. What makes this unfortunate is that neoliberalism is an influential political framework that demands we take it seriously.
To do so, let’s explore some of the history behind the term, as well as its contemporary connotations. Part of this will involve tracing its evolution throughout the 20th century, which will in turn help us understand our political moment today.
What is neoliberalism, then?
Neoliberalism is a political and economic framework that has gone through several forms. The first time the term “neoliberal” was used was in the 1930s. The first proponent of this idea was the legendary American journalist Walter Lippmann, in his 1937 book An Inquiry into the Principles of the Good Society.
Though Lippmann did not use the term in his book — that term would be coined by Alexander Rustow the following year at an event called “The Walter Lippmann Colloquium” — he nevertheless laid out the intellectual underpinnings of neoliberalism in those pages. Unsurprisingly, Lippmann’s vision of liberalism rejected centrally-planned, socialist economics. It also rejected just as vigorously laissez-faire capitalism, believing the state could play a positive role when it came to managing certain aspects of the economy.
In his book, The Good Society, Lippmann rejects what he calls the “nightwatchman” state, in which there is minimal government intervention. From Lippmann’s perspective, the state could play a role in the provision of services including education, healthcare, environmental protection, financial regulation, and more. In a section entitled “The Fallacy of Laissez-Faire,” Lippmann takes aim at what he sees as the errors of 19th-century liberal economics. According to Lippmann,
The whole effort to treat laissez-faire as a principle of public policy, and then to determine what should be governed by law and what should not be, was based on so obvious an error that it seems grotesque. The error was in thinking that any aspect of work or of property is ever unregulated by law.
Lippmann offers a clear and forceful repudiation of the proto-libertarian economics which would go on to be promoted by Ludwig von Mises, Friedrich Hayek, and Milton Friedman. In many ways, Lippmann’s liberalism prefigured the so-called “third way” politics of Tony Blair, Bill Clinton, Barack Obama, and, to use a more contemporary example, French President Emmanuel Macron.
Although the globalized economy of the late 20th and early 21st century has required that these politicians embrace a more market-oriented version of the framework than Lippmann ever saw need for, a thread runs through both that places great trust in the power of lightly- to moderately-regulated markets, and sees the state as a vehicle for offering meaningful provisions and targeted interventions.
Though at one point being associated with the classical liberalisms of the aforementioned von Mises, Hayek, and Friedman, “neoliberalism” increasingly became attached to a vision of liberalism that walks hand in hand with a more involved state than libertarianism felt comfortable with. Those three strongly rejected Lippmann’s economic vision, which outlined too great a role for the state.
In Human Capital, von Mises made his case against Lippmann’s version of neoliberalism, directly critiquing, in Part Six, the idea of a “third system” of economics espoused by Lippmann and his contemporaries. From von Mises’ perspective, any and all government intervention necessarily results in the reduction of freedom. Though he makes a distinction between a regulated market, a la Lippmann, and outright socialism, von Mises sees their motivating impulse as one and the same:
It is important to remember that government interference always means either violent action or the threat of such action. Government is in the last resort the employment of armed men, of policemen, gendarmes, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom.
If the essence of neoliberalism is a faith in the power of markets, one can see why von Mises’ characterization of the liberal welfare state as inimical to liberty would have the power to redirect neoliberalism away from thinkers like Lippmann and toward those who would emerge to place their trust in market forces. Pro-market politicians like Margaret Thatcher and Ronald Reagan began to fit this bill. At this time, neoliberalism also became more closely associated with a specific set of economic policies, such as removing trade tariffs, deregulation, and privatizing industry.
Today, this conception still exists, though the pendulum has swung somewhat back toward an embrace of state intervention. The ever-increasing globalization of the economy, and the ensuing levels of global competition in the marketplace that flow from it, have become closely associated with this understanding of neoliberalism. The term has certainly exited its libertarian period, but it has not shed its trust in market forces.
By understanding the history of the term, a more nuanced conception of neoliberalism is possible. The current caricature of neoliberalism by its opponents as a form of free-market absolutism is in stark contrast to what neoliberalism, particularly its earlier form, has been understood to involve. The likes of Lippmann and Rustow, far from having a laissez-faire approach to economic matters, took a complex view of the role of government as an actor in the economy.
Many decades ago, Alexander Rustow ignited important debates about the role of government in the economy, debates that have strong parallels with ones we’re having today. Rustow was vigorously opposed to corporatism; he argued in Between Capitalism and Communism that large corporations exerted undue power over markets, distorting them and not allowing smaller businesses and individuals to compete. He was an advocate for policies which would be deemed populist by today’s standards, such as heavily taxing the largest corporations, as well as raising the possibility of breaking up the largest ones. Rustow called himself a “neoliberal,” yet some of these positions are indistinguishable from those maintained by Bernie Sanders.
Rustow also disliked the tendency of laissez-faire economics to reduce everything to an economic question; he believed that social questions were also important to consider. In a paper entitled “The Failure of Economic Liberalism,” he writes that “the economy must be in a serving position,” with the economy being for the benefit of the people, not the other way around.
Again, one can see the similarities between Rustow’s brand of neoliberalism and the economic and political platforms which many populists — including populists on the left — are presently running on.
Though Rustow and Lippmann are of course from a very different age, their economic theories are worth re-examining today. While socialist, centrally-planned economies have proven unsuccessful wherever they have been tried, the excesses of current neoliberal economics are also not without their drawbacks.
The current surge of populist politicians is a testament to the fact that globalization and free-market economies, while having garnered substantial benefits to the world, also generate discernible drawbacks which must be addressed.
Global trade, while having many winners, also has losers — and our political contests, as well as the grassroots movements which are energizing them, are proving that the losers of globalization’s trampling march can no longer be ignored. Global economic inequality is now at its highest point in the past half century.
A modified version of Lippmann’s and Rustow’s third-way neoliberal economics, which tempers the market economy with the kind of regulation that is socially enhancing, may be just what we need.
