The Conceptual Confusion Caused by the Differences Between Historical Neoliberal Theories and the Modern Neoliberal Doctrine
An Article in the Compendium of Market-Based Social-Ecological Economics
Key issues in view of the neoliberal crisis:
How can we guarantee employment and fair income?
How can we protect the environment effectively?
How should we shape the economic globalization?
What should the economic sciences contribute?
What must be the vital tasks of economic policy?
How can we legitimize economic policy democratically?
Table of Contents
The comparison of historical neoliberal theories with the current »modern« neoliberal doctrine can help to eliminate conceptual confusion and sharpen our focus on the necessary economic choices we have to make in the face of the social and ecological crisis caused by the prevailing economic doctrine.
2. The Double Meaning of the Term
The use of the term »neoliberalism« causes confusion again and again. For one thing, the term has become established for the doctrinal principles of the economic globalization, that has been constantly advancing since the 1980s, but it also stands for an economic school of thought which has its origin in the 1930s of the last century and, moreover, has split into a German and an Austrian-Anglo-Saxon variant in the following decades. Since the historical German and the modern meaning of the term in particular hardly have anything in common and are even diametrically opposed in the essential question of the interaction between economic policy regulation and market mechanism, they should not be confused. As will be seen, the literal meaning of the term fits the current process of economic deregulation and »market liberalisation« going along with globalization even better than the former German school of thought. See also the article Economic Globalization.
3. The Former Economic School of Thought
As mentioned above, historical neoliberalism was developed in the thirties of the twentieth century, namely as a regulatory economic theory and doctrine – inspired by the bad experiences with laissez-faire-liberalism of the nineteenth century, but also as a response to the totalitarianism of that time. The central idea of the economists involved was to combine private-sector initiative with an institutional regulatory framework to protect free competition from both escalating market power and exaggerated state collection. The high productivity expected from this combination was primarily intended to serve the purpose of social balance.
However, this development has not led to a uniform neoliberal theory, but has produced different doctrines and different economic policies until the 1990s. The greatest influence on economic policy was initially exerted by the so-called Ordoliberalism of the Freiburg School, which formed the basis for the Social Market Economy of the young Federal Republic of Germany under the Economics Minister and later Chancellor Ludwig Erhard (see his photo on the left). The driving force behind the Freiburg School was the economist Walter Eucken, who advocated an active framework that would do equal justice to economic and social interests (by the way, Eucken rejected the term neoliberalism as inappropriate because of this objective). The core of the model developed by Eucken was a comprehensive order of competition (competition regime) of constituent and regulating principles based on the maxim of a »price system of complete competition«. Since Eucken at the same time demanded open markets, especially the abolition of customs duties and quantity restrictions, it remains unclear how he intended to maintain a strict domestic economic order and competition regime combined with duty-free import prices and arbitrary import quantities. Erhard’s policy, however, was spared this test because it was still committed to the firm rules of the post-war order established with the 1944 Bretton Woods Agreement, besides that, the opening of markets only began during the 1970s (as a supplement see the article Bretton Woods System (English)).
The Austrian-Anglo-Saxon variant of historical neoliberalism can be traced back to works by the Austrian economist Friedrich August von Hayek. Hayek was the successor of Eucken in Freiburg and, in contrast to Eucken, he focused on a spontaneous, naturally (evolutionarily) developing regulatory framework. In the seventies and eighties of the last century, the so-called Chicago-School under the US economist Milton Friedman was building on Hayek’s ideas and triggered a renaissance of the supply-oriented neoclassical theory with its so-called monetarism. Neoclassicism and monetarism are characterized by the assumption of ideal markets with perfect competition, complete information and complete foresight of all participants as well as flexible prices and wages and an automatically resulting economic equilibrium with full employment. These ideas found their way directly into the neoconservative policies of Margret Thatcher and Ronald Reagan and accelerated the process of »market liberalization« worldwide.
4. Modern Neoliberalism
In the mid-1990s, the unbridled process of »market liberalization« and globalization was for the first time described by critics as »neoliberal«, however, without historical reference. In retrospect, the economic state of the nineties can be seen as a fusion of Hayek’s Viennese School with Friedman’s Chicago School, driven by the »liberation« of the entrepreneurial quest for profit and expansion from national regulation, a process that began with the failure of the Bretton Woods Agreement in the early seventies. In contrast to the variants of the earlier neoliberal school of thought decribed above, the »modern neoliberal doctrine« has neither emerged from an economic theory nor can it refer to empirical experiences. It is supported solely by the selfish machinations of financial and industrial players and their economic and political advocates. Such a development is unprecedented in economic history.
Since the turn of the millennium, attempts have been made repeatedly to dress up the »modern neoliberal doctrine« scientifically, mainly enforced by the conspicuous social and ecological devastations caused, but also to secure the supremacy of financial and industrial interests. The advocates of the doctrine preferably express their views on the matter in the form of individual set pieces, knowing that the inner contradictions of the doctrine do not allow for a conclusive construct of ideas. Likewise, they avoid attaching the course they support to a term. With this tactic they aim to preserve the protective shield behind which they can argue very flexibly in the face of the imponderable consequences of the development, and it also allows them to present the criticism that befalls them under the adjective »neoliberal« as misguided in terms of terminology and content. The power of the factual social and ecological devastations, however, ensures that the terms »neoliberal globalization« and »neoliberalism« prevail inexorably for lack of other terms. Even in the economic editorial department of the Süddeutsche Zeitung – a newspaper from which fundamental criticism of the system is not to be expected – the terms are now used by some editors in their modern meaning and without quotation marks. After all, a development whose contextual interrelations are incomprehensible to many people cannot also remain terminologically incomprehensible.
Because criticism of the pretended scientific basis of the »modern neoliberal doctrine« would be ridiculous, serious critics deal exclusively with the unmistakable global economic facts and their implications. Criticism is therefore mainly directed against the unmissable asymmetries in the distribution of economic power, productive capital, property, wealth and earned income, as well as against the illusion of absolute rationality, self-regulation and welfare orientation of the special modern-neoliberal market and price mechanism, especially on a global scale. More popular, understandably, is the direct criticism of the obvious social grievances, but also of the ecological devastations, that manifest themselves in increasing mass unemployment, mass poverty and irreversible environmental destruction. The decline of Greece is proof enough of this (see cartoon above).
As indicated above, modern neoliberalism is not free of historical references, regardless of its historic development driven by economic interests: It contains elements of classical economics, which originated in the eighteenth century and focuses on the self-interest of economic players and the restraint of the state, and it conforms at the same time to the illusion of self-stabilization of the private economic sector, which is the focus of neoclassical economics and monetarism. It particularly resembles these two schools of thought in that its advocates tend to trivialize or negate the negative external effects in society and the environment caused by themselves.
5. The Absurd Economic Dispute
The dispute between neoclassical and Keynesian economists about the sovereignty of interpretation of the causes of mass unemployment that is going on behind the scenes of the current development seems downright grotesque. The dispute goes on, although neither the supply-oriented economics that have passed into history as Thatcherism and Reaganomics nor the anti-cyclical method of the English economist Maynard Keynes is suitable to put the neoliberal competition on open global markets for the most effective social and eco-dumping within humane bounds:
The supply-oriented economics focuses on unleashing market forces by reducing corporate taxes and conditions with the intention of generating employment and prosperity. Instead, however, it fuels competition on open global markets and, as a result, accelerates the concentration process of economic power and capital, thus creating new unemployment and unequal distribution.
Keynesian economics is based on increasing debt-financed public investment during a recession in order to boost aggregate demand and thus indirectly labour demand. Under the rising neoliberal cost pressure, this only triggers a flash in the pan, if at all. Moreover, this method, which has become known as »deficit spending«, presupposes balanced public budgets, including the realistic prospect of repaying public debt during the subsequent upswing.
Crucial for understanding the ineffectiveness of both methods is the fact that both have been developed at a time when autonomous national regulation of domestic and foreign trade was still a matter of course. That both methods must inevitably fail in case of deliberately declining regulation, i.e. deregulation and consequently open global markets, should therefore come as no surprise to anyone. Nor can the economic dispute with its recourse to the theses taken out of context contribute to liberating modern neoliberalism from its inner contradictions.
6. Teaching of Economics Under Neoliberal Conditions
Since the 1990s, economics has become regrettably dependent on current neoliberal developments and has largely lost its scientific neutrality. The schizophrenic aspect is that an estimated 95 percent of teachers at economics and business administration faculties represent the mainstream of the neoliberal course and are uncritical towards the negative effects of the neoliberal globalization. Nonetheless, they are outraged when the label »neoliberal« is attached to them because, as indicated above, they too do not want to link the development to a single term and do not want to commit themselves. In addition, it has become common at universities to disapprove of criticism of the ruling economic system, especially when it is voiced by students. This exposes economists students to enormous pressure to adapt, exacerbated by their constantly worsening prospects of secure employment. In this environment neither the development of a post-neoliberal economic theory nor the urgently needed paradigm shift in economic policy have a chance. The existential question of how domestic and foreign trade can be made sustainable in a world growing together must meanwhile be answered without academic contribution.
One of the few economists who dare to call a spade a spade is Edward Fullbrook, Visiting Research Fellow at the School of Economics of the University of the West of England, UK. As editor of the book »A Guide to what’s wrong with Economics« he explicitly addresses today’s students of economics and writes in his introduction among others things (Fullbrook 2004, p.1):
»First, this book offers you some protection against the indoctrination process to which you are likely to be subjected as an economics student. There are many things that your teachers should tell you about the brand of economics they are teaching you, but, in most cases, will not. This book will make you aware of some of the many worldly and logical gaps in neoclassical economics, and also its hidden ideological agendas, its disregard for the environment and inability to consider economic issues in an ecological context, its habitual misuse of mathematics and statistics, its inability to address the major issues of economic globalization, its ethical cynicism concerning poverty, racism and sexism, and its misrepresentation of economic history.«
Click here for the German-language version: Neoliberalismus – alt und neu.
Sources and Literature
Fullbrook, Edward (Editor): A Guide to What’s Wrong with Economics. Anthem Press, 2004