As a university lecturer, I often find that my students take today’s dominant economic ideology – namely, neoliberalism – for granted as natural and inevitable. This is not entirely surprising given that most of them were born in the early 1990s, for neoliberalism is all that they have known. In the 1980s, Margaret Thatcher had to people that there was “no alternative” to neoliberalism. Today, this assumption comes ready-made; it’s in the water, part of the common-sense furniture of everyday life, and generally accepted as given by the Right and Left alike. But it has not always been this way. Neoliberalism has a specific history, and knowing that history is an important antidote to its hegemony, for it shows that the present order is natural or inevitable, but rather that it is , that it came from somewhere, and that it was designed by particular people with particular interests.
If an economist living in the 1950s had seriously proposed any of the ideas and policies in today's standard neoliberal toolkit, they would have been laughed right off the stage. At that time pretty much everyone was a Keynesian, a social democrat, or some shade of Marxist. As , “The idea that the market should be allowed to make major social and political decisions; the idea that the State should voluntarily reduce its role in the economy, or that corporations should be given total freedom, that trade unions should be curbed and citizens given less rather than more social protection – such ideas were utterly foreign to the spirit of the time.”
So how did things change? Where did neoliberalism come from? In the following paragraphs I offer a simple sketch of the historical trajectory that got us to where we are today. I demonstrate that neoliberal policy is directly responsible for declining economic growth and rapidly increasing rates of social inequality – both in the West and internationally – and I make a few suggestions for how to tackle these problems.
The story begins with the Great Depression in the 1930s, which was a consequence of what economists call a “crisis of overproduction.” Capitalism had been expanding by increasing productivity and decreasing wages, but this generated deep inequalities, gradually eroded people’s ability to consume, and created a glut of goods that could not find a market. To solve this crisis and prevent it recurring in the future, economists of the time – led by John Maynard Keynes – suggested that the state should get involved in regulating capitalism. They argued that by lowering unemployment, raising wages, and increasing consumer demand for goods, the state could guarantee continued economic growth and social well-being – a sort of class compromise between capital and labor that would forestall further instability.
This economic model is known as “embedded liberalism” – it was a form of capitalism that was embedded in society, constrained by political concerns, and devoted to social welfare. It sought to exchange a decent family wage for a docile, productive, middle-class workforce that would have the means to consume a mass-produced set of basic commodities. These principles were widely applied after World War II in the United States and Europe. Policymakers believed that they could use Keynesian principles to ensure economic stability and social welfare around the world, and thus prevent another world war. They developed the Bretton Woods Institutions (which would later become the World Bank, the IMF, and the WTO) toward this end, in order to smooth out balance of payment problems and to foster reconstruction and development in war-torn Europe.
Embedded liberalism delivered high growth rates through the 1950s and 1960s – mostly in the industrialized West, but also in many postcolonial nations. By the early 1970s, however, embedded liberalism was beginning to face a crisis of “stagflation”, which means a combination of high inflation and economic stagnation. In the US and Europe, inflation rates soared from about 3% in 1965 to about 12% ten years later. Economists debate the reasons for stagflation during this period. Progressive scholars such as point to two factors. First, the high cost of the Vietnam War left the US with a balance-of-payments deficit – the first of the 20 century – to the point where worried international investors began to offload their dollars, which set inflation rates rising. Second, the oil crisis of 1973 drove prices up and caused production and economic growth to slow down, leading to stagnation. By contrast, conservative scholars hold that stagflation was a consequence of onerous taxes on the wealthy and too much economic regulation, claiming that it represented the inevitable endpoint of embedded liberalism and justified scrapping the whole system.
At the time, the latter argument held a great deal of appeal for the wealthy, who – according to David Harvey – were looking for a way to restore their class power in the wake of embedded liberalism. In the US, the share of national income that went to the top 1% of earners fell from 16% to 8% during the post-war decades. This didn’t hurt them a great deal so long as economic growth remained strong, since they were getting a still-large share of a fast-growing pie. But when growth stalled and inflation exploded in the 1970s, their wealth began to collapse in a much more serious way. In response, they sought not only to reverse the effects of stagflation on their income, but also to leverage the crisis as an excuse to dismantle embedded liberalism itself.
They got their solution in the form of the “Volcker Shock.” Paul Volcker became the chairman of the US Federal Reserve in 1979, appointed by President Carter. Following the recommendations of Chicago School economists like Milton Friedman, Volcker argued that the only way to halt the crisis was to quell inflation by raising interest rates. The idea was to clamp down on the supply of money, incentivize savings, and thus increase the value of currency. When Reagan took office in 1981, he reappointed Volcker to continue to jack interest rates up from the low single digits to as high as 20%. This caused a massive recession, led to unemployment rates of over 10%, and consequently decimated the power of organized labor, which – under embedded liberalism – had been the crucial counterbalance to the capitalist excess that had lead to the Great Depression. The Volcker Shock had devastating effects on the working class; but it cured inflation.
If tight monetarist policy (i.e., targeting low inflation) was the first component of neoliberalism to be put in place in the early 1980s, the second was supply-side economics. Reagan wanted to give more money to the already-rich as a way of stimulating economic growth, the assumption being that they would invest it in productive capacity and that the windfall would gradually “trickle down” to the rest of society (which didn’t work, as we will see). Toward this end, he cut the top marginal tax rate from 70% to 28%, and reduced the maximum capital gains tax to 20%, the lowest since the Great Depression. The lesser-known correlate of these cuts is that Reagan also payroll taxes on the working class, moving toward the Republican goal of an across-the-board “flat tax”. A third component of Reagan’s economic plan was to deregulate the financial sector. Because Volcker refused to support this policy, Reagan appointed Alan Greenspan to take his place in 1987. Greenspan – a monetarist who promoted tax cuts and the privatization of Social Security – was reappointed by a succession of both Republican Democratic presidents until 2006. The deregulations he p