By Alessio Bertolini (Staff Writer)
All the World has become neo-liberal. This is no news. But how did it happen? How come that an ideology which, up until 50 years ago, was only known by a bunch of isolated thinkers in sparse universities of Anglo-Saxon countries, became the dominant economic ideology[1] in the whole World? We have been told that this ideology (which was advertised simply as a theory, in order to highlight its scientific premises) is the right one and all other theories simply got it wrong. We have been inclined to think that, a bit in the same way as Copernican heliocentric theory, after some struggle, replaced Ptolemaic geocentric theory, neoliberal theory substituted older economic theories, from Marxism to Keynesianism. It replaced other theories because it is the true one and, as Hollywood movies have taught us, the Truth and the Good go together…oh, and they win! As you cannot tell the Sun to rotate around the Earth, because this is not how it works, so the neoliberal recipe has been seen as the only way to make the economy work. In this article, I will briefly outline how neoliberalism became the dominant global economic ideology and how historical contingencies and competition between ideas and power struggles have all contributed in giving neoliberalism its ideological supremacy.
First of all, neoliberalism, as its name suggests, has its roots in very old economic ideas, which go back to Adam Smith and to the birth of the Industrial Revolution. Liberalism dominated economic thinking up until World War II. In the aftermath of the War, after a long period of stagnation following the 1929 Crisis, the tragedy of the World conflict and the Communist Threat on the other side of the Iron Curtain, prompted Western governments to introduce a completely new economic paradigm, based on government spending, control of unemployment and other Keynesian ideas. Across the political spectrum, all parties became conscious of the need to temper the excesses of Capitalism which, left to its own devices, failed to provide the wealth and prosperity its advocates had been preaching and whose failures contributed in bringing to power fascist regimes across the World. But, whilst Western countries unanimously adopted Keynesianism[2] for the following 30 years as their core economic tenet, an out-of-the-box Austrian economic thinker, Friedrich Hayek, continued to advocate the virtues of Liberalism, and the risks and dangers of Post-War Keynesian policies. It took him more than 30 years to have his ideas heard by someone powerful, whilst other economists joined him in further elaborating his theories and disseminating them in multiple venues.
So, what was different at the end of the 1970s that made his ideas interesting which was not there at the end of the 1940s? The main argument is that the Oil Crises in those years, technological changes and the first signs of globalisation provoked structural transformations in Western economies which could not be solved with the usual Keynesian toolkit. As the economy changes, so must economic policies. But, taking a closer look, other things changed as well. Soviet Russia was not to be considered a major threat anymore as it struggled to catch up both economically and technologically with the Western World, the phantoms of the War were long forgotten and the standards of living of both middle and working classes had grown as never before. It is hard to discard these changes as minor compared to the purely ‘technical’ ones. When societies do not face any major external threat and when they become more prosperous, it’s easier for its citizens to become more selfish and to care more about their private interests than the collective ones. As the end of 1970s showed the limitations of Keynesian economic ideas, they were also years in which societies were mature for a social change.
However, up until the 1980s, these neo-liberal ideas were only taken up by like-minded governments in Britain and the US, and by the US-dominated International Monetary Fund, which followed US diktats in lending money to developing countries under financial strains. By the end of the 1980s, two of the most important economic institutions in the World, the US Government and the IMF, both based in Washington, DC, had fully embraced neoliberalism and they were eager to spread its principles throughout the World. The Washington Consensus was born.
And then what happened? The end of the 1980s saw the collapse of Communist Regimes throughout Eastern Europe. With the fall of the Berlin Wall, not only did a bunch of new countries become the new fertile land where the US and IMF could sow the seeds of neoliberalism by facilitating the economic re-structuring of their former communist economies, but something even more important and long-lasting happened. The great enemy of Capitalism, Socialism, was dead, and with it the main alternative way to organise the economy and society virtually disappeared. And Capitalism, in its late ‘80s fashion, came in its brand-new version: neoliberalism. With the fall of Socialism, Communist parties throughout Europe became orphaned by their ideology whilst social-democratic parties had to look to the Right to find solutions which were appealing to their electorate. Neoliberalism won not because it was the best solution, but because it was the only one left. The end of the 20th century saw the World dominated by a pensée unique (single thought) in economic thinking.
By the 2000s, notwithstanding the economic failures of some neoliberal poster children, such as Russia and Argentina, no other economic ideology had the necessary political support to oppose neoliberalism. However, governments in Continental Europe applied neoliberal principles with a pinch of salt, mostly avoiding the radical reforms which were carried out in countries like the UK or the US, as its citizens were still unwilling to give up completely the welfare and social conquests which had been achieved in the previous decades. But then the Great Recession came, an economic slump whose roots go back to the financial deregulation of the 1980s and 1990s, a deregulation which is of the key ingredients of the neoliberal recipe with the scientific certainty that markets will regulate themselves. We all know how it went…
… At this point, one might think, it was a good time for a change, right? I won’t go into much discussion about the reasons why there was not a real change of economic paradigm in countries such as the UK or the US, the two best students in the school of neoliberalism, for which I suggest the reader looking at some interesting thoughts written, for instance, by Krugman[3] or Blyth[4]. What I will discuss instead, is how Continental Europe, once sceptical of the virtues of neoliberalism, fully embraced it to treat the malaise of the Crisis. Why, in a moment in which many of the problems engendered by neoliberal policies had finally surfaced, an entire Continent, country by country, decided to follow that route? Well, the reasons are very complex, but one of the factors is certainly that the neoliberal recipe was instrumental to different a goal, which had nothing to do with the best way of making economies work. The creation of the European monetary union in 1999 tied together the destinies of European economies, without providing the necessary fiscal integration for an effective supranational management of macroeconomic policies. So, during the Great Recession, the virtuous countries of Central and Northern Europe found themselves obliged to lend money to almost bankrupt countries mostly in Southern Europe to avoid the collapse of the Euro and with it, probably the entire Continental economy. The lack of trust in the ability of those countries to repay their debts made lending countries condition those loans upon mandatory neoliberal reforms across Europe. Wait a minute, why is that? Because the best way to make governments save money and repay debts (and not having to ask for loans in the future!) was to reduce their size and let the markets take over, which is exactly what neoliberal thinkers have always been advocating. This helps explaining why, after a few years of disastrous application of austerity policies across Europe, even when the IMF supported, if not a change of agenda, at least a milder and slower implementation of those policies, Europe continued in the same direction. Thus, neoliberalism in Continental Europe was not applied because it was the right way to make those economies work, but because it was considered the best available way for lending countries to get their money back!
So this is how the World became neoliberal. And the World is now neoliberal not because we live in the best of possible worlds nor, to echo a Thatcherite expression, because ‘there is no alternative’. We live in a neoliberal world because political pressures, historical contingencies, powerful interests and poverty of ideas have made the World as it is. But our World, unlike the Earth, can decide to rotate in a different direction, to follow different rules and to accelerate or decelerate its pace. The World is neoliberal but it doesn’t have to be…
[1] http://www.britannica.com/topic/neoliberalism
[2] http://www.britannica.com/topic/Keynesian-economics
[3] Krugman, P. 2015. The case for cuts was a lie. Why does Britain still believe it? The austerity delusion. The long Read. The Guardian (29 April 2015).
Available at http://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion
[4] Blyth, M. 2013. Austerity. The History of a Dangerous Idea. New York: Oxford University Press.