Liberalism’s Fateful Mistake

Liberalism’s Fateful Mistake

In my last post, I attempted to analyse the reasons why so many people worldwide are finding the appeal of political populism so attractive. This concentrated on the right-wing populism which has proved so successful in countries like Poland, Hungary, the United Kingdom, and, most recently, the USA. 2017 will see further tests in the Netherlands, France, and Germany. After the unexpected successes of Brexit and Donald Trump last year, most pundits have become extremely wary of giving predictions. What seems likely is that, while Geert Wilders and Marine le Pen will increase their support substantially, it won’t be enough to get them power. Wilder’s PVV will possibly get around 20% of the Dutch vote, but none of the other parties will go into government with him; in the end, he’ll have augmented his position in parliament (and in the media), but he’ll be in opposition. Le Pen may possibly win the first round of the French presidential election, but I just can’t see her getting the necessary absolute majority in the subsequent run-off poll. And the Alternative für Deutschland may poll around 15% in the German general election, but, as in the Netherlands, none of the other parties will have anything to do with them after the election.

But left-wing populists have also been gaining support in Europe, particularly in those countries most seriously hit by the 2008 financial crisis. In Greece, Syriza has been in government for the past two years. In Spain, Podemos won 21% of the vote in the last general election. And in Ireland, Sinn Fein and the Anti-Austerity Alliance, both campaigning on a left-wing populist platform, together achieved 17.7% of the vote in last year’s election. All three countries had been forced by the IMF and the European Central Bank to implement swingeing fiscal rectitude as a condition for further loans and loan guarantees.

One thing all populist movements seem to have in common, generally speaking, is the basic composition of their electorate. Whether in rural, small-town, or city constituencies, these voters are more likely to be older, male, of native (as opposed to immigrant) background, and less-well educated. In other words, they are disproportionally working-class, or “blue collar”[1]. And the interesting thing here is that this is a clientele which, up to around fifteen years ago, was the bedrock of classical centre-left, social democratic parties. In the USA, where left/right definitions and alignments are differently understood, the best equivalent is probably the Great Society programmes initiated by the Lyndon B. Johnson Democratic administration in the sixties.

All this leads to a central question; why have large sections of the traditional working class turned away from “liberal” social democrat parties? To find an answer, we have to look at global economic history since the Second World War.

The basic economic architecture of the post-war reconstruction (in the west; the structures in areas of Soviet hegemony were, of course, quite different) was designed by the great economist, John Maynard Keynes. Keynesianism[2], among other things, prescribed a strong role for governments and states in general economic affairs. Free markets alone would not be able to cope with the growth-depression cycles which had characterised capitalism in the modern era and led to the terrible instability which was partly responsible for great social upheavals and, ultimately, disastrous war. Only robust state intervention could ensure stable growth and increasing prosperity for all.

For over twenty years, Keynesianism seemed to work very well. Indeed, many of the nostalgic utopian visions propagated by populists seem based on rose-coloured memories of halcyon years of the 50s and 60s, years of increasing prosperity, progress, and full employment. These were the years when ideas of social democracy and the welfare state flourished and “the little guy”, voting Labour in Britain, Democrat in the USA, or SPD in Germany, could feel that these parties were really representing his interests and working to make life better for him and his family.

By the beginning of the 1970s, however, Keynesianism was in trouble. Throughout the developed world, growth was declining and inflation rising; this so-called stagflation was difficult to explain in classical Keynesian terms[3]. But as the crisis deepened, help was at hand. For throughout the whole period of Keynesian domination an alternative recipe for dealing with macroeconomics had already been developed and its prophets were more than ready to implement it.

The story of the rise of neoliberalism is a fascinating one. From the founding of the Mont Pelerin Society by Friedrich Hayek in 1947 to the beginning of the implementation of its basic policies in the 80s under Ronald Reagan and Margaret Thatcher, it is nothing less than an account of how an open, and openly declared, conspiracy succeeded in conquering the world[4]. But a more detailed telling of that story must wait for another time; here it is more important to briefly define what exactly is meant by the term.

The problem is that the complex of concepts normally described as “neoliberalism” itself developed over time, with the influence of some strands (Ordoliberalism, for example) decreasing, whereas ideas from other sources, like Ayn Rand’s Objectivism (largely mediated through Rand’s disciple, Alan Greenspan), were incorporated. In addition, even within the area of academic neoliberal economics, there were different tendencies, not always in agreement, the best known perhaps being the Chicago School (Milton Friedman, Gary Becker and George Stigler), as well as the whole area of Public Choice Theory, pioneered by James M. Buchanan[5].

Daniel Stedman Jones defines neoliberalism as “the free market ideology based on individual liberty and limited government that connected human freedom to the actions of the rational, self-interested actor in the competitive marketplace.”[6] It even goes beyond the area of economics proper and can be “broadly defined as the extension of competitive markets into all areas of life, including the economy, politics and society.”[7]

The neoliberals who came together in the Mont Pelerin Society, under the informal leadership of Hayek and, increasingly, Milton Friedman, had a long-term strategy. This involved working to steadily increase the popularity of their ideas among the various elites who exercised serious influence on society[8]. And so, over a long period of time, they succeeded in establishing precedence for their ideas in the economics departments of more and more universities, winning over managers and owners of more and more concerns (not such a difficult task, given the kind of ideas they were promoting), who then willingly provided funding for further multipliers of neoliberal impulses such as think tanks. The influence of organisations like the Cato Institute and the Heritage Foundation (USA) or the Institute of Economic Affairs (UK) was, over the years, enormous.

In the 60s and 70s, political developments in Indonesia and, especially, Chile[9] allowed early experiments in the application of neoliberal policies to national economies. But it was the elections of Margaret Thatcher as Prime Minister in Britain in 1979 and Ronald Reagan as US president a year and a half later which put neoliberal ideas at the centre of a fundamental remodelling of political, economic and social policy, a remodelling which by the end of the 20th Century would be implemented worldwide.

Keynesianism was out. Free markets, smaller government, deregulation were the new buzz-words. The collapse of Soviet hegemony in Eastern Europe (1989) and, ultimately, the Soviet Union itself in 1991 seemed to provide complete proof of the rightness of the new political/economic concepts. To the accompaniment of The Scorpions singing Wind of Change, Francis Fukuyama’s The End of History and the Last Man, published in 1992, proclaimed free market liberal democracy as the endpoint of humanity’s sociocultural evolution.

This is the background to the period in power of (most loosely described) left-of-centre administrations in the USA and the UK in the 90s. The inevitable pendulum-swing had taken place and the conservatives, who had initially pushed the implementation of neoliberal policies, were replaced by Bill Clinton and Tony Blair. The central point here is that these left-leaning liberals did not reverse the fundamental neoliberal alignments initiated by their conservative predecessors; on the contrary, they continued and deepened them. Though the formative negotiations leading up to it had, in fact, been the work of the previous administration, NAFTA came into force during Clinton’s first term. The World Trade Organisation (WTO) came into existence a year later, in January 1995. The Maastricht Treaty, which is the bedrock of the European Union and the euro, and was signed in 1992, is deeply influenced by neoliberal ideas.

In summary, if it was the conservatives who were responsible for the abandonment of Keynesianism paradigms of state economic management and the pioneering of neoliberal policies in the 80s, it was the liberals who solidified and deepened their role as economic policy fundamentals in the 90s.

The Third Way, they liked to call it, something between post-1989 discredited Marxian socialism and radical laissez-faire capitalism. The term itself isn’t very precise and was used in different ways by different people. However, in practice, most Third Way politicians accepted the basic premise of neoliberalism; that markets were most efficient, and provided most prosperity for all, when they were as lightly regulated as possible. It seemed to be proven by history; the stagflation of the 70s in the West had been overcome, above all, by freeing the markets and diminishing state intervention in economies, and the collapse of the Soviet system had shown that state-controlled planned economies just didn’t work. Deregulation was leading to growth everywhere, the rising tide lifting all boats. In an action which would have fateful consequences, in 1999 Congress removed the sixty-six year old separation between investment and commercial banking. It seemed that the Golden Age of prosperity had arrived. Even the collapse of the dot com bubble and 9/11 had only short term effects.

And then came 2008. Lehman Brothers. The sub-prime mortgage collapse. The financial crisis. The Great Recession.

This is not the place to go into the various whys and wherefores of the 2008 crisis. The important point is that the financial crisis proved that the fundamental assumptions at the basis of neoliberal economic theory were just as questionable as those of Keynesianism. Free, deregulated markets are not automatically self-regulating. Privatisation in place of public enterprise is not always more efficient – at least when it applies to questions of the common good. Ironically, the measures which most states resorted to, at least in the short term, in order to deal with the acute effects of the crisis were classical Keynesian ones.

But short-term, Keynesian, deficit-funded, stimulus measures did not mean a fundamental rethinking of the neoliberal model for economic and social policy. Even today, nine years later, centre-left, liberal political leaders and parties still adhere to the basic picture of the way the world works as described by neoliberalism, even if they seem uneasy about it at times. There are two reasons for this.

Firstly, unlike the situation at the end of the seventies, this time there was no obvious alternative to the neoliberal narrative which had been shaping the world for a quarter of a century. When the post-war Keynesian consensus broke down, the neoliberals already had an alternative model ready to be implemented, and they had achieved a position in the decisive areas of policy formation where they could ensure that they would be heard. In the aftermath of 2008, there were no corresponding new concepts available to rebuild the global economy on a new foundation, or those few who were developing such concepts were on the ignored fringes rather than at the influential centre of civil culture.

Secondly, the fundamentals of neoliberal thinking have permeated human and societal thinking at all sorts of levels beyond simple economic ones. Once more, I refer to Steadman Jones’ basic definition quoted above; “the free market ideology based on individual liberty and limited government that connected human freedom to the actions of the rational, self-interested actor in the competitive marketplace.” The marketplace has become the location, the model which we have increasingly become used to for describing all sorts of categories we apply to define and understand ourselves and our relationship with others. Everything is a transaction. What’s in it for me? Do I have to put more in than I get out? Is this a win-win situation? Winning or losing, profit or loss? The ever more sophisticated economic markets, which have quantified and financialized more and more areas of life, and packaged different kinds of risks and options into complex “financial products” (some of which nobody seems to fully understand any more), have seeped into and coloured the ways in which we relate to each other and perceive our very selves.

In a prescient series of lectures given in 1978-79[10], the French philosopher, Michel Foucault, described this development; the tendency to see the market as the fundamental category for understanding the idea of civil society. “Man” in this context becomes homo economicus, a being whose very existence is defined by market-bounded trading.[11]

“We are all Keynesians now,” Richard Nixon is said to have reluctantly admitted in 1971, ironically shortly before Keynesianism went out of fashion[12]. In much the same way, we can also say, “we are all neoliberals now.” Surrounded by markets, determined by markets, our mentalities formed by market thinking, our lives unfold according to market principles, each of us living according to his/her own personal version of The Art Of The Deal.

The greatest illusion which the proponents of neoliberal theory presented and sold to the world – as has become abundantly clear since 2008 – is that everyone would profit from it. But the spread of neoliberal ideas, particularly combined with other tendencies whose unfolding it facilitated and which are all inextricably entwined with each other (globalisation, the burgeoning industrialisation of the developing world, urbanisation, mechanisation and industrialisation of agriculture, the continuing automation of industrial processes, digitalisation and worldwide networking, the end of communism) has produced millions of losers, as well as winners. Indeed, there has been a widespread public perception in the wake of the 2008 crisis that there have been far more losers than winners. The “elites” have set up and gamed the system to pocket obscene amounts of profits for themselves, at everyone else’s cost. Seen from this perspective, the Tea Party and Occupy movements have, despite their differences, a lot in common.

The losers of the neoliberal world order are predominantly rural and small-town communities, as well as the traditional, blue-collar working class. The way they see it, their (modest) prosperity, their security, their very existence as individuals and communities are under acute and increasing threat. And they are not wrong. It is, then, no wonder that populists, who offer simple analyses, and simple solutions (generally involving clearly identifiable culprits – immigrants, Muslims, those who are obviously “other”) for their problems, find a receptive public among these groups.

Moreover, particularly among the working class, many feel that they have been abandoned by those who have traditionally represented their interests; the centre-left liberal parties. Whether it was Tony Blair’s New Labour, or the Democrats under Bill Clinton, it was the centre-left liberal parties which enthusiastically pushed the neoliberal vision of the world – and persuaded their followers that it was good for them. The same applies to many social democratic parties in Europe[13]. When the end of the good times came in 2008 and millions of working-class voters lost their jobs, saw their pension plans wiped out and even, particularly in the US, lost their homes, it is understandable that these voters, and the communities in which they lived, saw “their” political representatives as the ones who had betrayed them. Particularly as those leaders seemed to feel completely comfortable with the status quo, indeed, able to profit personally from the very conditions which had let so many down so badly.

Centre-left liberalism (and particularly its political leaders) had, in the eyes of many, become identified with all the nasty extremes and injustices which unbridled neoliberalism had given rise to. The liberals had “bought” neoliberal ideology, now they “owned” the consequences. Their readiness to adopt, continue, and deepen the originally “conservative” programmes, initiated by Reagan and Thatcher in the 1980s had come back to haunt them.

Of no one is this picture so true as Hillary Clinton, the very epitome of the professional liberal politician, the wife of the liberal president who had so enthusiastically embraced neoliberal ideas. The light of hindsight is singularly unforgiving. Bill Clinton’s motivations for embracing neoliberal unfettered market ideology were, in all likelihood, the very best. And, in the short term – indeed for many years – the results seemed to prove him right. But it was Hillary who paid the price for that ideology’s ultimate failure. An interesting analysis of the election results shows that if just 77,744 people in Michigan, Wisconsin and Pennsylvania had voted the other way, she would today be the 45th President of the USA. How many of those swing voters (all three states had been won by Obama in 2012) were working class?[14]

The espousal of neoliberal economic policies by centre-left liberal parties has cost them large sections of their traditional voters. For this reason, there’s the unusual phenomenon of voters switching from moderate left-wing parties to populist right-wing ones. In the regional election in Berlin in September 2016, the right-wing populist Alternative für Deutschland (which was contesting an election for the first time in the city) won 14.2% of the vote. 10% (24.000 voters) came directly from the centre-left SPD. (30% of the AfD vote came from people who had not voted in the previous election – their ability to mobilise people who are disillusioned with the whole system is another characteristic of right-wing populist parties.)

Liberal parties have paid in support for their espousal of neoliberal policies. But the damage goes deeper. The fact that they are losing supporters to right-wing populists means that their adoption of these policies has also meant that other liberal values have suffered by association, values like tolerance, and respect for human rights. The tragedy is that the populists are able to harvest former supporters of liberal parties not because they have convinced them of their positions, but because their approach is attractive to those who are disillusioned, disappointed, and looking for a way to register a protest. They peddle negative messages, tuned to harvest negative emotions. Often, the populists have no problem with many neoliberal policies; one example is Trump’s recent moves to have the Dodd-Frank Act, which increased regulation in the banking and financial sector after 2008, repealed.

Liberalism has been damaged by its association with discredited neoliberal policies. If it is to remain faithful to its fundamental values of freedom, equality, human rights, and social justice, and continue to be a strong, progressive force for the future, it must discover new economic ideas, better suited to the complex, globalised, post-industrial, networked world in which we now live. In my next post I will examine what these ideas might look like.


[A note on links and footnotes: The links in the text serve two purposes; to demonstrate basic fact checking, where I feel that what I write requires corroboration, and to give further background on people and terms which may not be familiar to the normal reader. The footnotes serve two further purposes; to give me the opportunity to make additional comments or explanations which (in my judgement) would disturb the flow of the main text, had I included them there, and to reference written sources (though in this case I have eschewed the strict academic form for such sources – publication location, year, etc. – and instead given a link to the title on Amazon.]

[1] The left-wing populists are not as strongly male and older; but the “working-class” proportion of their supporters is even higher than those on the right-wing.

[2] There is no area of economics which is not hotly debated (one might even say ideology-driven), and this includes basic definitions and history. Definitions of Keynesianism differ, depending on what particular economic school those doing the defining come from. The Wikipedia entry here (and, indeed, for most basic terms and definitions in economics) is more neutral than most of the others I have looked at on the web.

[3] The reasons for the crisis of the 70s are manifold; the usual explanation (both at the time, and since), blaming it all on the 1973 Oil Crisis, is far too simple. Other factors include the increasing breakdown of the Bretton Woods system (especially Nixon’s abandonment of the Gold Standard in 1971), the cost of the Vietnam War and the Space Race to the US economy, loss of complete control of primary commodity prices and supplies as a result of decolonialisation and increasing Soviet influence in many former colonies, social instability, serious short-term policy mistakes (particularly in Britain), extreme worker militancy, rising debt, etc.

[4] There are a number of books on the subject. By far the best is the scholarly and well-balanced Masters of the Universe by Daniel Stedman Jones. For two more left-wing views see A Brief History of Neoliberalism by David Harvey and the thought-provoking The Shock Doctrine by Naomi Klein.

[5] These four economists were all at one time presidents of the Mont Pelerin Society. They were also all recipients of the Nobel Prize in Economics. The Nobel Memorial Prize in Economic Sciences, as it is officially known, does not belong to the original prizes established by Alfred Nobel. It was established in 1968 and – interestingly – a number of members of the Mont Pelerin Society were instrumental in its creation.

[6] Stedman Jones, op. cit., p. 2.

[7] Springer, Simon; Birch, Kean; MacLeavy, Julie, eds, The Handbook of Neoliberalism, p. 2

[8] Hayek outlines the strategy in his seminal paper The Intellectuals and Socialism (1949). In it he describes how, in his view, socialist ideas had spread so widely among “intellectuals” in the previous hundred years and pleads for the adoption of similar methods for “liberal” ideas. Especially interesting here is his perspicacious wide definition of intellectuals to include “the secondhand dealers in ideas … [which] … does not consist of only journalists, teachers, ministers, lecturers, publicists, radio commentators, writers of fiction, cartoonists, and artists all of whom may be masters of the technique of conveying ideas but are usually amateurs so far as the substance of what they convey is concerned … [but] …  also includes many professional men and technicians, such as scientists and doctors, who through their habitual intercourse with the printed word become carriers of new ideas outside their own fields and who, because of their expert knowledge of their own subjects, are listened with respect on most others.”

[9] For an account of the influence of American-trained neoliberal economists in Indonesia and South America (particularly that of the “Chicago Boys“ in Pinochet’s Chile) see Klein, op. cit. chs, 2-5.

[10] Michel Foucault, The Birth of Biopolitics

[11] In this context, the beginnings of homo economicus can be seen as synchronous with the beginning of Modernity in the 18th Century. According to the great sociologist, Max Weber, Modernity posits a fundamental state of “disenchantment” [Entzauberung] in which the premodern mentality, which saw human existence as defined within a sacral sense of belonging, to the tribe, to one’s state in life, to the God-given order of society, is superseded by the concept of the free, rational individual, making his/her own choices and, ultimately, taking responsibility for them. By the 19th Century, Karl Marx was already defining economics as the central, most important science of all.

[12] To increase the irony, the phrase was actually originally stated by Milton Friedman in 1966.

[13] Germany is a particularly good example. It was Gerhard Schröder’s Social Democrat/Green coalition which from 2003 onwards implemented a major reform in the social welfare and labour relations systems. The Agenda 2010, a market and business friendly programme, reduced medical, pension and unemployment benefits, in the name of promoting employment and growth. Most commentators agree that negative reaction to the reforms led to Schröder’s loss of power in 2005.

[14] The very same argument applies to the millions of Labour voters in the UK who voted for Brexit, although the official position of the party was to remain in the EU.

Written By: Francis Hunt

I was born in Ireland in 1960 and got my B.A. (Hons) in History and Philosophy from University College Dublin in 1982. I was a member of the Dominican Order of the Catholic Church for nine years, during which time I studied theology in Dublin and Rome. I left the order in 1986 and moved to Germany, where I have lived ever since. I trained as a nurse and spent many years working in care management but am much happier today doing honest nursing work once more with children in need of long-term intensive care. For the past two years I've been enrolled in a Masters programme at the Fernuniversität Hagen studying the "europäische Moderne". In January 2017 I joined the German Green Party. I have two daughters and one grandson.

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