HOW DID IT HAPPEN? In the early 1970s, Western governments, academia, and the media understood the relationship between the state and the market according to the same liberal consensus that had been in place since the end of World War II. During what is commonly called the “golden age of capitalism,” government, capital, and labor had reached the uneasy agreement that markets produced social ruin when left to their own devices. The state was needed to mitigate inequality, to provide basic services, and — through a combination of monetary and fiscal means — to even out capitalism’s boom-bust cycle. By the early 1980s, all that had changed: the British and American governments, joined by large segments of the media and intelligentsia, declared that the state was the root of social evil, that free markets could do nearly everything better than government, and that the economic crises of the past were the result of state meddling.
This view is often called “neoliberalism,” a term first used by interwar continental and British economists and philosophers to describe an economic doctrine that favors privatization, deregulation, and unfettered free markets over public institutions and government. These philosophers saw themselves as championing the values of classical liberalism in a mid-20th century world threatened by unchecked state power — a threat vividly embodied in the totalitarian societies of Nazi Germany and Stalinist Russia. Writers like Ludwig von Mises and Karl Popper saw hope in the liberalism of J.S. Mill and Adam Smith. They shared the earlier philosophers’ skepticism about the capacity of human reason to design functional and ethical social orders, and were committed to processes of “liberated” or open exchange to create knowledge and distribute wealth.
The meaning of the prefix has aroused a great deal of debate. For thinkers on the left, “neo” signals a liberalism shorn of many of the features that made classical liberalism plausible and effective. Recent scholarship on Adam Smith, for example, has emphasized the extent to which neoliberal thinkers such as F. A. Hayek focus on Smith’s celebration of self-organizing markets in The Wealth of Nations while neglecting Smith’s argument, in the Theory of Moral Sentiments, for the importance of non-market values in sustaining social orders. Indeed, the neoliberal embrace of the prospect of a social world almost wholly organized by market relations strongly distinguishes this thought from the classical liberal tradition, which fostered a capitalism embedded in the institutions of civil society, the norms of civilized communication, and state regulation of the economy.
There are two popular accounts of how this philosophy of free markets and minimal government came to determine the economic policies of the US and UK. For the right, including the heirs and acolytes of Milton Friedman, the failures of both state socialism and the Keynesian welfare state made the political triumph of neoliberal ideas inevitable. For the left, including figures like the Marxist geographer David Harvey and the activist-journalist Naomi Klein, neoliberal policies were the expression of the interests of capital, which systematically infiltrated government in order to reverse postwar regulations.
In Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics, the economic historian Daniel Stedman Jones persuasively argues that both these popular accounts are wrong. That neoliberalism won out was due neither to the failures of the welfare state nor to a “master plan” pushed by the agents of capital. The story Stedman Jones tells is considerably more nuanced. He shows neoliberalism’s ascendance to be the result of a series of more or less ad hoc moves on the part of politicians, activists, media figures, and economists in response to a series of political and economic shocks that began in the 1970s. The image of a dramatic face-off between neoliberals and proponents of the postwar center-left consensus is largely an artifact of retrospective right-wing propaganda, which the left seems to have accepted in its essential features.
The main lines of Stedman Jones’s narrative are as follows: The appearance of stagflation in the 1970s, and the perceived inability of conventional economic wisdom to account for or mitigate it, made left governments in the US and UK receptive to certain technical policy adjustments, collectively known as “monetarism,” to combat inflation. Monetarists believe that control over the money supply should be the chief means that governments use to moderate the fluctuations of a national economy, as opposed to the view (derived from John Maynard Keynes) that both monetary and fiscal intervention could (and should) be used to tame the business cycle. The intellectual sponsors of these monetarist policies, Milton Friedman and his acolytes at the Heritage Foundation, the American Enterprise Institute, and the University of Chicago economics department, also tended to believe in the power of free markets to organize society more efficiently than the state. But if both Jimmy Carter’s Democratic and James Callaghan’s Labor administrations accepted the monetarist policies, and began to implement them, they rejected the free market philosophy.
The application of these monetarist policies tamed inflation, but not before deepening the recession and contributing to the ouster of the Democrats and Labour. The conservative governments of Margaret Thatcher and Ronald Reagan that succeeded them claimed that neoliberal free market thinking had rescued America and Britain, and that these ideas should be systematically implemented to solve a range of economic and social questions going forward. This narrative, that neoliberalism emerged victorious from Keynesianism’s inability to deal with stagflation, won widespread acceptance.
Pushing against this dominant account, Stedman Jones disassembles the monolithic neoliberalism of left and right myth into several conceptually and historically separate elements, which he shows came together in a “lucky” way at a particular moment in history. These elements are:
A) A network of intellectuals joined by belief in the power of free markets, initially centered on F. A. Hayek’s Mont Pelerin Society, later exerted force through conservative and libertarian think tanks and economics departments in Chicago and Virginia.
B) Milton Friedman’s development of monetarism into a viable economic policy rival to the reigning Keynesian approach.
C) The economic crises of the 1970s, ranging from the collapse of the Bretton Woods agreement, to the OPEC oil shocks, culminating in runaway inflation and high unemployment.
Stedman Jones quotes Friedman’s statement that “the role of thinkers […] is primarily to keep options open, to have available alternatives, so when the brute force of events make a change inevitable, there is an alternative available.” When the worst postwar economic crisis discredited Keynesian orthodoxy, Friedman was ready with an attractive technical solution. In turn, a transatlantic network of intellectuals and journalists — figures like Ed Fuelner of the Heritage Foundation, Samuel Brittan of the Financial Times, and Peter Jay of the BBC — was ready to cast the distinction between these policies, not only in technical terms, but also as an epochal choice between the welfare state and the free market.
Rather than emerging from any sort of “master plan,” it was, in fact, a series of local choices — in the face of unyielding inflation, the Carter administration’s appointment of Paul Volcker as Chairman of the Federal Reserve Board in 1979, or the reluctant decision of Hayekian free marketeers to make uneasy peace with social conservatives — that led to the neoliberal breakthrough.
Stedman Jones traces the rise of neoliberalism to the decision of left-leaning governments to adopt monetarist policies. His description of this decision is perhaps the most distinctive aspect of his account. To understand how his argument challenges what we think we know of neoliberalism, we need to take a step back, and take a closer look.
Discussions of neoliberalism, on both the left and the right, suffer from what Paul Krugman and others have called “zombie” ideas. These are economic concepts that have been long discredited, but continue to shamble on. On the right, a central zombie idea is that reduced state regulation of markets leads to sustainable economic growth. If you believe this, then the rise of neoliberalism is a no-brainer. Neoliberalism is simply the economic philosophy that works. But why should anyone believe this? The idea that unleashing free markets then leads to good economic times should never have survived the Great Depression, and should surely be killed for good by the Great Recession and its aftermath.
Meanwhile, a new generation of leftist economists has discovered that their progressive brethren suffer from a zombie idea of their own. Mike Beggs, for example, has recently argued that the Marxist economics many on the left continue to find attractive has a fatal flaw. Marx believed in the labor theory of value, the idea that a commodity’s value is equal to the labor that goes into it. Generations of Marxist thinkers have built on this foundation to form a picture of the way the world’s economy works. Thinkers like David Harvey have used this theory to create a sophisticated explanation of neoliberalism as the natural response of capital to changing conditions. If you subscribe to Harvey’s Marxist theory, then the rise of neoliberalism is, again, a no-brainer. But as Beggs points out, the concept underlying theories like Harvey’s was decisively disproved over a century ago, and no one has ever come up with a persuasive defense.
Once we see that the no-brainer explanations of neoliberalism are in fact zombies, then the question becomes truly interesting. How did the governments of the Western world come to embrace this radical free market philosophy? Stedman Jones answer is: they didn’t. What they did accept was monetarism. Monetarism — the idea that one can smooth out economic cycles by controlling the money supply — was invented by Milton Friedman, a neoliberal. And virtually everyone on both the left and the right associates monetarism with the neoliberal commitment to free markets. But, as Stedman Jones argues, these are two very different things, and history turns on this difference.
Monetarism is a government policy for manipulating the economy. The free market is the vision of an economy liberated from government control. Understanding how a rather technical policy approach came to be identified with the love of free markets opens an entirely new approach to the fundamental economic and political transformation of our time. And understanding how this identification came to be resisted allows us to understand the longevity of the biggest zombie of all: the tendency to blame government for everything that’s wrong with the economy.
The story of monetarism begins with the way in which Keynesian orthodoxy came to dominate economic policy in the English-speaking democracies. The basic logic of this orthodoxy is familiar. The Great Depression spectacularly illuminated capitalism’s tendency to periodically implode, but the problem was not just that the cyclical busts seemed to be getting worse and that the resulting unemployment threatened social stability. Keynes argued that even the eventual recoveries could not be relied on to productively employ the population. He saw a basic gap between social goals and the outcomes produced by markets. Government, however, could overcome this gap. Through loose monetary policy and spending by the state, we could counter the cyclical waning of demand, restoring full employment. Then, when the economy threatened to overheat, we could raise taxes and tighten the money supply to control inflation.
Vast wartime spending reversed America’s unemployment problem and fueled the prestige of the Keynesian approach. A Keynesian “technocratic elite” rose to control the levers of fiscal and monetary policy, hoping to ensure the country would never again suffer a devastating depression. This Keynesian faith in the power of government to solve social problems meshed with broader liberal goals — to invest in the nation’s infrastructure, to create a health care safety net, to defeat poverty — that were pursued by successive Democratic and Republican administrations. And while virulent racists and anticommunists increasingly protested these social programs, when it came to economic policy, as Nixon famously said, everyone was a Keynesian.
But the economic technocrats had an Achilles’ heel. Stedman Jones points out that although Keynes doubted that managing supply and demand could ever become an exact science, his heirs came to believe that advances in statistics gave them access to fine-grained, timely economic data, which they could use to strike the sweet spot of low unemployment and low inflation. However, events were soon to prove their confidence hubristic.
Milton Friedman, meanwhile, had been developing an alternative mode of government control over markets, one with “much more modest goals,” and animated by skepticism about the ability of any centralized administration to gather accurate and up-to-date information about a complex modern economy. He dismissed the Keynesian technocrats’ idea that one could achieve low inflation and full employment, arguing that the application of inevitably crude fiscal tools to lift employment would always tend to increase inflation. It was far better, he thought, to restrict central economic policy to what it could do well: control inflation by controlling the supply of money.
The coming of stagflation, and the seeming incapacity of economic orthodoxy to deal with it, discredited the Keynesians and lifted the monetarists. Economic policy didn’t seem to be working, and as the 1970s progressed, the pressure to make a change became irresistible. Monetarists ascended to key policy positions, but this ascent did not mark the capitulation of center-left governing practices to the neoliberal faith in free markets, as right-wingers like to claim. The idea that accepting monetarism meant accepting free markets is the result of a retrospective “conflation of monetarism with a theoretically separate set of arguments about the supposed superiority of markets over government intervention in the economy.”
At first glance, this seems a strange claim, given both Friedman’s status as a prime exponent of free-market thinking, and the fact that — compared with Keynesianism — monetarism represents a relatively restricted mode of government economic intervention. Isn’t opting for monetarism simply a form of opting for greater freedom for markets?
But in fact, as Stedman Jones argues, monetarism is not the same as the neoliberal faith in markets. Monetarism is not — nor did it appear to policy makers in the 1970s to be — a laissez-faire program. Rather, it is a program for government control of economic volatility. Given stagflation, the choice between monetarism and Keynesianism looked less like an ideological choice and more like a choice between two techniques of state intervention.
The fact that people, at the time, could clearly perceive a distinction between monetarist policy and neoliberal philosophy is illustrated in Hayek’s extreme reaction to Friedman’s plan. Hayek advocated the abolition of legal tender, and the spontaneous, market-driven creation of private currencies. From the other direction, Democratic and Labour governments with little interest in freeing markets from government could adopt monetarist policy solutions without believing they were admitting the bankruptcy of the welfare state. The latter interpretation was strictly rear-view, Stedman Jones claims. And had events like the Iran hostage crisis not intervened, he argues, the story of liberal capitulation and failure might never have served to justify the implementation of genuinely neoliberal policies in the 1980s and 1990s.
Stedman Jones’s careful history offers us a genuinely new account of the rise of neoliberalism by demonstrating that the link between monetarism and free markets was not obvious — it was forged in the fires of conservative ideology. But a flaw in his historical analysis prevents him from drawing the full implications of this fact. This flaw becomes visible in his conclusion, when he dismisses the desire for the free market as a delusion and calls for a return to “sanity” in economic policy. His plea finds many echoes in today’s center-left observers of our political scene. But while Stedman Jones judges the enthusiasm for free markets as essentially inexplicable, a boundless faith in free market logic keeps welling up in the story he tells, thus undercutting his effort to present the rise of neoliberalism as the result of rational decisions.
One can, of course, easily sympathize with his assessment of the desire for a free market. This enthusiasm doesn’t seem to have an obvious source. Every historical event — from the advent of the Great Depression under laissez-faire policies, to the advent of the Golden Age of Capitalism under Keynesian statism, to the financial panic of 2008 under deregulation — seems to undercut it. Still, he acknowledges that the conservative success in framing the economic story of the late 1970s and early 1980s as the triumph of markets over states, for example, drew upon a broad and deep existing enthusiasm for free markets in the population. Stedman Jones never accounts for why.
Even more troubling, the love of free markets won’t stay in the right political box. In his chapter on neoliberal housing policy, for example, he initially contrasts the conservative, proto-neoliberal emphasis on single-family suburban home ownership with the leftist urban vision of Jane Jacobs. But he soon suggests that the idea of curing urban ills with free market “enterprise zones” was inspired by the pro-commerce, anti-planning vision of… Jane Jacobs. One comes away from Masters of the Universe with the unsettling impression that many of the players in his story — on both sides of the political spectrum — are somehow predisposed to enthusiasm about the prospect of free markets. This doesn’t exactly undercut his narrative of neoliberalism’s political triumph, but it does alter our sense of the social and cultural context of this triumph in ways the book only fleetingly acknowledges.
Stedman Jones shows us the gap between the monetarist manipulation of the economy and the commitment to free markets. One might argue that this gap is more widely intuited today than Stedman Jones recognizes. Moreover, skepticism about the proposition that monetarism is a “free market” solution to economic crisis applies to other neoliberal policies that are said to promote free exchange. Many on the left, and the right, saw that what was being marketed as free market policy by Reagan and Thatcher was, in fact, an insidious form of government manipulation. Much of the political resistance of the past three decades has focused on distance between a social world, organized by genuinely free exchange, and the forms of government control identified with free markets by successive neoliberal administrations. The sense of this distance enables people on both the far right and the far left to claim, with justice, that the Reagan and Thatcher revolutions were founded on lies, that neoliberalism’s ascent witnessed not the retreat of government, but its insidious extension. Michael Hardt and Antonio Negri’s attempt to claim the slogan “down with big government” for the left, and the “end the fed” signs that appeared at both Occupy and Tea Party rallies, are symptoms of a pervasive belief that free exchange has yet to triumph over the state.
Clearly, a work of political history like Stedman Jones’s does not — nor should it — pretend to delineate the shape of popular free market utopias, to analyze why the idea of free markets is so widely appealing, or to trace the routes of its cultural dissemination. Yet he leaves us with too many unanswered questions to justify his concluding dismissal of it as insanity.
We may very well conclude not that free market ideology has coopted the left, but that resistance to actually existing capitalism now takes a form inassimilable to the political positions of the early postwar period. Perhaps Jane Jacobs is different from Milton Friedman after all. Perhaps there are two visions of the free market, left and right, and we will one day look back on the postwar period as the emergence of a new form of ideological struggle. For now, the scale of the problem is visible only in the distortions it causes in so sober a history as this one.