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"Neoliberalism" is fast becoming the ideology that dares not speak its name.
Thirty years ago, members of the global elite sang lustily from the same neoliberal hymn book: prefer the market to the state, embrace free movement of capital and goods, let business be business. Today, even the International Monetary Fund, the Vatican of the creed, pronounces it passe. On April 27, U.S. National Security Advisor Jake Sullivan delivered a speech that might well have been titled "the era of neoliberalism is over - and good riddance."
But is it really good riddance? Would the world have been a better place if the neoliberals had remained in their think tanks rather than entering the halls of power? And will the world be a better place if neoliberalism is killed off? The answer to both questions is an emphatic "no."
Neoliberalism started to exercise influence amid the stagflation and disorder of the 1970s. (Thinkers such as Friedrich Hayek and Milton Friedman had been preparing the formula in their laboratories for decades.) Britain proved a test case. Strikes had become a way of life. Trade unions brought down Edward Heath's government in 1974. Inflation reached 25%. Marginal tax rates of up to 98% destroyed incentives. Joel Barnett, the chief secretary to the Treasury, joked that the Keynesian social contract rested on give and take between the government and the unions - the government gave, and the unions took.
Prime Minister Margaret Thatcher was determined to restore the ability of the government to govern and businesspeople to manage by applying neoliberal orthodoxy (Thatcher reportedly carried a copy of Hayek's Constitution of Liberty in her handbag): control the money supply, confront the unions and remove capital controls. Ronald Reagan applied a similar formula in the United States, and eventually European governments followed behind. The neoliberal revolution certainly involved pain for some workers (notably the British miners) and some economic sectors (notably industry). But the new heights to which both Tony Blair and Bill Clinton took it demonstrate that there was no appetite for a return to the civil war of the 1970s.
These domestic revolutions coincided with two momentous international developments: the "death of distance," brought about by the telecommunications-and-internet revolution, and the implosion of the Soviet Union. The neoliberals seized on these opportunities to advance the idea of "globalization": an idea that combined zeal for lowering barriers with a belief in a rules-based global order policed by international organizations. They prodded countries around the world, rich and poor, to lower their trade barriers and created global treaties and organizations, notably the World Trade Organization, to make sure that everybody played by the same rules.
Liberalization sped up global growth, particularly in the emerging world. Several recent studies demonstrate that economic growth is roughly 1.0-1.5 percentage points higher after trade reform, adding up to a 10% to 20% boost in income after a decade. Liberalization set off the "third wave" of democratization, with democracies more likely to undertake trade reform and trade reformers more likely to embrace democracy. It reduced global poverty, with the proportion of the world's population living in extreme poverty falling from 42% in 1981 to 10% in 2015, according to the World Bank, and created a new middle class in the emerging world. And it kept rich-world inflation under control while showering rich-world consumers with cheap stuff. Hardly the stuff of heartless disaster-mongers bent on grinding the faces of the poor!
Sir Keith Joseph, Thatcher's ideological soulmate in the reforming 1980s, put his finger on one of the causes of the malaise of the 1970s: "by taxation, by inflation, by the remorseless flood of regulations and legislation, by controls and by the constant and arbitrary intervention of authority, successive governments since the war have cumulatively taken away both the pleasure and the rewards that once made risk-taking worthwhile." The neoliberals restored both the rewards and, importantly, the pleasure of risk-taking.
The neoliberal era ushered in the greatest period of creation of mega-businesses since the second half of the 19th century. It is no accident that the greatest center of business creation in this era was the country that drove the neoliberal revolution the hardest. The United States produced a succession of companies that redefined their industries - Microsoft and Apple in computing, Amazon in retail, BlackRock in investing, Google in information and Facebook in social communication. This business vitality helped to keep the American economy humming away even as other advanced economies struggled: the U.S. currently accounts for 57% of the Group of Seven's GDP compared with 40% in 1990.
To be sure, neoliberals committed serious errors and suffered from terrible blind spots: fresh thinking congealed into an orthodoxy and erstwhile critics of rent-seeking sometimes became rent-seekers in their own right. Neoliberals proved to be remarkably naïve about the realities of power in post-Soviet Russia when they privatized everything they touched. (It turns out that taking a few classes at Harvard's Kennedy School and watching "Doctor Zhivago" is an insufficient preparation for outwitting the Russian mafia.) Likewise, they deluded themselves about the inevitability of democracy taking root in China in the wake of economic reforms. And at home, they proved to be equally naïve in dealing with bankers who piled debt upon debt and risk upon risk.
But, in banking at least, the neoliberals proved that they had one more trick up their sleeve: ruthless pragmatism. Tim Geithner likened his experience as president of the Federal Reserve bank of New York during the 2007-08 global financial crisis to that of the bomb disposal expert in Kathryn Bigelow's The Hurt Locker, who disposed of bombs wearing a body-covering suit. To dispose of the GFC bomb, neoliberal policy makers quickly abandoned their ideologies, donned the body-covering suit of pragmatism and did whatever it took to save the system - pouring state money into banks, nationalizing industrial companies and imposing greater restrictions on financial markets.
The neoliberal regime survived the GFC more or less intact only to succumb to a succession of subsequent shocks: Donald Trump's election, the Covid pandemic, Putin's invasion of Ukraine and, behind it all, China's growing self-assertion. Joseph Biden is spending $2 trillion reshaping the economy for a post-neoliberal world - protecting selected industries from competition, imposing restrictions on trade with China and speeding the "green transition." In a speech at the Peterson Institute for International Economics in Washington, Rachel Reeves, the likely chancellor of the exchequer in a future Labour government, aligned herself with Biden's policies ("securonomics," she called it, in a phrase that's destined to die an early death), promising to use a mixture of government investment and government guidance to rebuild Britain's industrial infrastructure. "I have seen two big ideologies fall apart in my lifetime," Branko Milanovic, a prominent economist who was born behind the Iron Curtain, recently tweeted, "communism and neoliberalism."
Which brings us to our second question: Will the death of neo-liberalism usher in a better world? It is quite easy to imagine the opposite happening. We are witnessing the return of many of the problems that plagued the 1970s - inflation is stubbornly high, productivity is stagnant and strikes are rampant, with Britain once again suffering from a particularly acute incidence of a common malady. There is a risk that the current fashion for industrial policy and feel-good management mantras will only make matters worse. The state is currently doing a dismal job of performing its core functions such as policing the streets, making the trains run on time or, in the United States, passing a budget. Why should we think that it will do a better job of selecting high-growth companies or birthing revolutionary technologies?
For all its faults, neoliberalism at least provided a source of discipline on the fantasies of activist governments and their cheerleaders: It reminded us that governments will sprawl if they are not squeezed, that interest groups will capture well-intentioned policies, that businesses contribute to the common good by sticking to their knitting rather than warbling about "corporate purpose," and that central banks work best when they are fighting inflation rather than pursuing a laundry list of good purposes. The danger is that, with the waning of neoliberalism, everybody with a pet cause will find a friendly ear in the world's capitals, exacerbating the current crisis of governability tenfold.
The need for neoliberalism's strict hand is equally pressing on the international level. There is a broad consensus that trade policy needs to be rethought in the light of Russia's invasion of Ukraine and China's growing might. Russia's invasion exposed the foolishness of the West's reliance on a hostile power for vital energy supplies and China's saber-rattling over Taiwan demonstrates the same about semiconductors.
These twin threats justify policies that neoliberals have traditionally anathematized, such as shortening some supply chains (particularly by "friend-shoring") and fostering the domestic production of vital inputs such as semiconductors. The notion of a "strategic industry" has rightly broadened. But we need to be careful not to allow prudence to morph into protectionism, and military preparedness to justify junking international rules. America has already been insensitive to Europe's concerns in its enthusiasm for subsidizing domestic electric vehicle producers.
It is also in danger of surrendering to domestic producers who would like to classify socks and T-shirts as "strategic assets." Biden has plenty of lobbyists whispering into his ear about the case for bringing jobs home. He also needs neoliberals whispering into his other ear about the way that trade restrictions reduce living standards, slow down innovation and inflame international tensions.
Neoliberalism needs to be reconceived in the light of what we have learned about the fragility of finance and the ambitions of Xi Jinping. It needs to be enriched by being brought back into contact with rival liberal traditions that emphasize other liberal virtues beyond consumer satisfaction.
But the current out-of-control demonization of neoliberalism runs the risk of turning a positive adjustment to the excesses of recent years into an excuse for returning to the disastrous policies of the 1970s.
Previously:
• 05/02/23: Disruption will always be capitalism's secret sauce
• 05/02/23: What science says about the coronation of Charles III
• 01/04/23: Who are the nepo babies among us?
• 07/13/22: Boris Johnson's fall is populism's latest act of self-destruction
• 06/21/22: The West is facing a followership crisis
• 05/25/22: The 1970s had a big bright side, too
• 05/10/22: Young Americans aren't as woke as you think
• 05/04/22: The furor facing Disney in Florida is a warning that capitalism won't regain its legitimacy by alienating
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Adrian Wooldridge is the global business columnist for Bloomberg Opinion. He was previously a writer at the Economist. His latest book is "The Aristocracy of Talent: How Meritocracy Made the Modern World."