In 1947, the Austrian philosopher Frederick von Hayek organized a gathering of economists, historians and philosophers at a Swiss spa at the base of Mount Pelerin, to discuss the state of the world following World War 2. The group called themselves the Mont Pelerin Society (MPS), and their main concern was the growth of government power. If governments became too strong, they believed, the freedom of the individual would be at risk. The solution was a return to classical forms of economics, and a reinforcement of the free market in all aspects of life.
This became known as the philosophy of Neoliberalism.
During their first meeting, the Mont Pelerin Society consisted of numerous famous figures, including Hayek, the famous economist Milton Friedman and for a time, the philosopher Karl Popper. The Mont Pelerin Society’s first meeting opened with the following ominous description of the dangers facing civilization since World War 2:
Over large stretches of the Earth’s surface the essential conditions of human dignity and freedom have already disappeared. In others they are under constant menace from the development of current tendencies of policy.
The position of the individual and the voluntary group are progressively undermined by extensions of arbitrary power. Even that most precious possession of Western Man, freedom of thought and expression, is threatened by the spread of creeds which, claiming the privilege of tolerance when in the position of a minority, seek only to establish a position of power in which they can suppress and obliterate all views but their own.
In the East, communism and socialism were rising threats, which risked obliterating the ideals of the free market and private property. Without these two bedrock institutions, they believed, it was difficult to “imagine a society in which freedom may be effectively preserved.”
The solution to this threat was a renewed commitment to the free market under capitalism. Only the free market could prevent state monopolies and the tyrannical threat of authoritarian rule. Milton Friedman wrote that: “Many people want the government to protect the consumer. A much more urgent problem is to protect the consumer from the government.” State power could only be checked by the increased power of private companies, competing for the attention of free consumers in a free market.
Friedrich von Hayek explained it in greater detail, as follows:
Our freedom of choice in a competitive society rests on the fact that, if one person refuses to satisfy our wishes, we can turn to another. But if we face a monopolist, we are at his absolute mercy. And an authority directing the whole economic system would be the most powerful monopoly conceivable… it would have complete power to decide what we are to be given and on what terms.
It would not only decide what commodities and services were to be available and in what quantities; it would be able to direct their distributions between persons to any degree it liked.
The simple theory had a complex name: neoliberalism. To understand it, it helps to break up the word into its components, “Neo” and “Liberal”.
- The “neo” comes from a commitment to “those free market principles of neo-classical economics”.
- The “liberal” comes from a “commitment to ideals of personal freedom.”
Together, they refer to a philosophy of free individuals, making choices in a free market, to buy and do as they wish, without the interference of the government. Instead of telling people what to do, ordering them around, or controlling them with laws, the free market would allow them to make their own decisions – but in a manner that encouraged efficiency. The market would provide enough variation to satisfy any individual’s needs or wants through competition.
Neoliberal thinkers pushed the idea further, however. They believed that the free market should be introduced to all aspects of our lives, even in areas that were historically provided by the state. Instead of the government running healthcare or education for instance, private companies were to take control of these functions, to allow people to have more individual choice and freedom. The introduction of the market would also drive innovation, because competitors would have to differentiate themselves.
The state’s role, instead of providing public services, was to merely protect private interests and private property. The protection of intellectual property and copyright, specifically, would ensure that “technological changes” could proliferate throughout society, leading to innovation. Innovation would increase productivity, and this would develop higher standards of living and higher wages. This became known as trickle-down economics, and is usually referred to by the phrase, “A rising tide lifts all boats”.
Through deregulation, tax cuts and laissez-faire economics, companies would compete and make huge profits, which would “trickle down” from the winners of the market to their employees. In practice, this did not always come to pass. Aside from a few notable exceptions (in South-East Asia and France, for example), neoliberalism has typically led to increased income inequality, stagnant wages and a growing gap between the rich and the poor.
In the 1970s and 1980s, neoliberalism went from a fringe academic idea, talked about at a Swiss spa, to a mainstream political movement aiming to reshape Western society. The Mont Pelerin Society (MPS) started to lobby for political power. They garnered “financial and political support” in the US from “a powerful group of wealthy individuals and corporate leaders” who had a vested interest in the success of their philosophy, from tax cuts to deregulation.
Success came on multiple fronts. First, Frederick Hayek and Milton Friedman, core members of the group, won respective Nobel Prizes in economics in 1974 and 1975, boosting the reputation of neoliberal theory significantly. Second, the theory entered the hallways of political power after two consequential elections.
In 1979, Margaret Thatcher was elected Prime Minister of England and in 1980 Ronald Reagan was elected President of the United States. Both ushered in an era of neoliberal politics. Thatcher came to power with a “strong mandate to reform the economy”. Under the influence of Keith Joseph, a political advisor from the neoliberal thinktank the Institute of Economic Affairs, Thatcher attacked trade unions and social solidarity and privatized public assets, such as public housing. Her “Right to Buy” policy allowed people living in public housing to buy the house they lived in, transitioning it from public to private ownership. Several decades later, Britain still has a shortage of public housing stock and a huge homelessness crisis, in part caused by this policy.
Privatizing the national rail service followed, under both Thatcher and her successor John Major, causing similar problems. Railway lines and competition are incompatible ideas; only one train can arrive on one track at any one time. For multiple trains to arrive at once, in direct competition, the trains would have to have less carriages – negating the entire point of trains, being a mass form of transit. The benefit of privatization is meant to be increased competition, but on a railway line, no competition can occur. Instead of lowering prices, privatizing the rail service made the UK’s trains some of the most expensive in Europe, to this day.
In the US, Ronald Reagan’s government adopted other neoliberal policies, including deregulation, tax cuts, budget cuts and attacks on trade unions and professional associations. Deregulation of the banks and financial services laid the groundwork for later financial crises, while tax cuts came alongside decreased spending on public services.
On both sides of the Atlantic, “Raegonomics” and “Thatcherism” pushed for the withdrawal of the state from public service delivery. Instead of seeing society as a collective community with collective rights, society was seen as individualistic, with individual rights. Margaret Thatcher put it even more bluntly: “There is no such thing as society,” she said. There are only individuals.
There are many flaws to neoliberalism as a political theory, including the risk of monopolies, market failures and economic inequality. Most crucially, neoliberal philosophy can lead to the concentration of power and wealth in the hands of an elite (the “winners” of the market competition), who can entrench their power with a monopoly and can thereafter widen the gap between the rich and the poor. When the state stops offering state services, it is the poor who suffer the most – the people who most rely on these services for the basic provisions of food and shelter. Private charities, generally speaking, do not have the same resources as a government, to deal with these shortfalls.
Apologists of neoliberalism say that it creates wealth. By some estimates, under neoliberal regimes, extreme poverty across the globe has fallen from 44% to 9.6%, from the 1980s to now. China is often pointed to as the classic example, which has shifted from a traditional communist system to a market-based economy (albeit with various controls on certain industries). Although neoliberalism is now a dominant force in modern political life however, significant questions remain as to its efficacy and effect on society. While it may decrease extreme forms of poverty, it also stops the forms of social services that lift people from poverty into the middle class.
This is an altered public version of text from my PhD. For more on neoliberalism (and references for quotes used), see my full PhD text here.
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