What’s Wrong With Neoliberalism?

For many people in or around Britain the sight of the burning hulk of the Grenfell Tower block of flats in Kensington, London during the night of 14 June 2017 was the final horrific comment on the ideology that had guided so much public policy for the previous four decades. A small fire in one apartment spread rapidly throughout the block, probably killing around 100 people; the true figure will probably never be known. Whatever the role of the recently installed cladding on the block played in spreading the fire, and why a form of cladding had been used that is banned in Germany, the USA and some other countries, we have also yet to learn. But there was a strong suspicion that the decision to use it was motivated by public spending cost considerations. Residents in the block had indicated their concerns about the cladding 19 times to their local authority, the Royal Borough of Kensington and Chelsea, but had received no response. Like most local authorities in the United Kingdom, the borough had handed over management of its properties and many of its other services to private companies with a mandate to maximise their shareholders’ profits rather than provide services of a specific quality. In the hours and days after the fire, masses of volunteers came to the aid of the distraught and now homeless residents, as did the public fire, police and medical services. But there was virtually no sign of care workers from the local authority. By early August only ten families of the hundreds who had been living in the block had been rehoused. Kensington and Chelsea is the richest borough in London, and one of the richest residential areas in the world; large numbers of apartments and houses within it are left empty, owned by very wealthy people from around the world, who either use them very occasionally or keep them merely for their investment value.

Kensington and Chelsea council is dominated by the Conservative Party, the main political exponent of neoliberal ideas in the UK. Many of its wealthy residents draw their incomes from the financial sector that dominates the British economy and whose success is an example of neoliberalism at work. It is central to neoliberal ideas that public spending must be kept to a minimum, including spending on social care services; that health and safety regulation should be the butt of sceptical jokes; and that residual public services should be provided by profit-maximising firms, as these will be more efficient than a local authority’s own employees. The residents of Grenfell Tower were tenants of social housing. In an ideal neoliberal world there would be no social housing; people would live in whatever they could afford within the private market, irrespective of the quality. Under the influence of these ideas, successive UK governments and councils of all parties have gradually run down the stock of social housing. (In 1981 32% of English homes were in such accommodation and 11% in privately rented homes – the remainder were owner-occupied. By 2016 the social housing figure had dropped to 7%, private renting had risen to 31%.) Social housing tenants are the unwanted residue of a pre-neoliberal past.

Neoliberalism also celebrates inequality, which is interpreted as reflecting the appropriate rewards of market-related economic activity. If people consider themselves to be too poor, then they should see that as an incentive to work harder. One’s level of income and wealth is therefore an indicator of one’s social worth. A council like that of Kensington and Chelsea would not have a great deal of respect for residents of a place like Grenfell Tower.

These and many other instances of the negative consequences of a low tax, low regulation regime, with high inequality and lack of concern for collective needs have led many people to reject the whole neoliberal adventure; certainly to see the political and business leaders who have embraced it so whole-heartedly over the decades as incapable of saving it from its self-made disasters. For others, however, there is much that has been attractive about its vision of a world where people can keep almost everything that they earn without a proportion being taken in taxes; where one can therefore spend one’s money as one chooses, rather than have governments spend it on things in which one might have no interest; where official rules and regulations interfere with life as little as possible; where businesses are left free to plan how they can best make a profit, generating wealth that gradually spreads to everyone. At the heart of the vision is the pure market, a place where everyone expresses their preferences, those goods and services are produced for which there is popular demand, and no one dominates. The values of all the goods and services one might want to acquire can be compared through the market’s prices. Every individual, firm and national economy freely and amicably trades and competes with each other, all doing what they do best and benefiting from each other’s contributions.

Is it impossible to keep many of the advantages that a free market economy can deliver, while also maintaining a welfare state, redistributive taxation and a degree of regulation to rein in the excesses of a system aimed solely at the maximisation of profit and individual material gain, generating extreme inequalities on the way? In practice, the answer has to be ‘yes’, because in no advanced economy, even that of the US, where neoliberal ideas are especially dominant, has the neoliberal vision been realised in its entirety. Social spending, progressive taxation and regulation survive and keep returning after attempts to hack them back. In real politics rather than in the battle of ideas, the debate between neoliberals and their critics is a matter of degree: not whether to retain or destroy the rival institutions at stake, but what balance to achieve among them.

I am writing for those who feel that, even if there is some element of compromise in place, neoliberalism has gone too far in making society unequal and in allowing those values that can be pursued through the market to dominate over others. How might the balance be redressed? That it could be redressed is clear: there is no shortage of ideas, practical policies and national examples for more equitable ways of having a competitive market economy that also achieves a high level of social justice. The problem is one of power and will. The world’s great corporations and super-rich individuals have major leverage over governments of all kinds, and they have a strong interest in low taxes (at least on the wealthy), poor public services (because they never use them) and low regulation of business activities. We need the jobs that the corporations create and the goods and services they produce. But the more wealth that they and rich individuals accumulate, the more resources they can deploy to influence governments; the more that they can influence governments, the more they can secure policies that suit their interests; the more they do that, the more wealth they accumulate; and thus the self-reinforcing spiral moves on. It seems that one can expect only an intensification of neoliberalism rather than its moderation. It is a bitter irony that this political process that entrenches neoliberalism is itself completely contrary to neoliberalism’s own principles, according to which there should be no political lobbying for economic ends.

But cracks have been appearing in neoliberalism’s glossy surface. The financial crash of 2007-8 was its very own crisis, and in recent years there have been growing signs of popular anger at neoliberalism’s consequences in many countries. As Wolfgang Streeck has shown in Buying Time, the global economic system is becoming increasingly dependent on debt, public and private, which is reaching limits of sustainability. Some observers see here an imminent collapse of the entire neoliberal capitalist edifice. Some dream that this as an opportunity to create socialism, however that is defined in this post-Soviet age; others, including Streeck, warn that economic collapse could well lead to a far worse world than we experience now. It is therefore urgent to explore neoliberalism’s capacity to accept reform. Are there points at which global corporations, the super-rich and governments under their influence would be likely to accept that they must change direction, or face recurrent crisis?

Various political forces have had to acknowledge this in the past. After the Second World War, European conservatives had to learn that their willingness to make alliances with Nazism and fascism in order to ward off mass democracy had been disastrous. They then became highly adept practitioners of the compromise strategy of conservative or Christian democracy. At various points starting in the 1950s the social democratic movements of Europe contemplated the ugly edifice that was being constructed in the name of socialist planning in the Soviet bloc. At different speeds and with different degrees of enthusiasm they came to realise that the market economy should be accepted, not just as a temporary compromise with political realities, but because, when combined with social democrats’ own policies of strong social policy and government economic management, it produced a better world than state socialism was achieving in the east. A similar conversion is now required of neoliberals. If their ideology is to depart from the destructive path on which it is currently set, they must appreciate that such things as progressive taxes, a strong welfare state aimed at enhancing economic capacity, and business regulation that enables us to pursue goals other than narrow profit maximisation are positive in themselves and not just occasional temporary political necessities. There would still be many opportunities for conflict between neoliberals and their various (social democratic, green, social liberal and conservative) opponents. Agreement that, say, income inequalities need to be reduced still leaves considerable room for debate over how much, through what means and with what urgency.

For the past quarter century to call for the ‘reform’ of some institution or other has meant to make it more subject to the discipline of the market, to remove regulation, cut taxes and reduce the role of government in general. ‘Reform’ has come to be a euphemism for neoliberalism. Can the boot now be put on to the other foot, with neoliberal edifices being themselves subject to a tough reform process? To be able to contemplate these possibilities, neoliberalism’s critics need to stop seeing it as an undivided, rock-like and evil edifice. There are major divisions among neoliberals, most importantly a rarely noticed one between advocates of the pure market and those who incongruously equate the market with dominant corporations. There are also vulnerabilities, in particular those that stem from neoliberalism’s role in the 2007-8 financial crisis, and those concerned with its relationship to the nationalistic and xenophobic forces that have today become important across much of the world. On the other hand, some of neoliberalism’s achievements have been useful and should be retained. These are the issues that I shall address in this book. It is not a contribution to the demonology of neoliberalism, but an attempt at a nuanced account. Only in that way can we assess its capacity for reform. We must first clarify the main characteristics of neoliberalism, and what is wrong with it; then consider why it should not be viewed solely negatively; and finally assess the capacity of its protagonists to rescue it from what are emerging as its self-destructive tendencies.

What is neoliberalism?

Neoliberalism is a political strategy that seeks to make as much of our lives as possible conform to the economist’s ideal of a free market. That simple idea is all one really needs to understand what it is about, and it has been the ruling idea of most governments in the western world and beyond for almost 40 years. There are several good books for readers wanting a richer understanding. David Harvey’s A Brief History of Neoliberalism offers a highly critical perspective. More balanced is Neoliberalism by Damien Cahill and Martijn Konings. Philip Mirowski goes deeper into the highly organised way in which leading neoliberal thinkers set about influencing government policy across the world in Never Let a Serious Crisis Go to Waste. Werner Bonefeld provides a similar analysis of the specifically German form of neoliberalism known as Ordoliberalismus in The Strong State and the Free Economy. In The Limits of Neoliberalism William Davies demonstrates how deeply neoliberal ideas have penetrated into the obsession with calculation and measurement in contemporary government.

Neoliberals believe strongly in a capitalist economy, one in which most wealth is in private hands and where market transactions dominate. But neoliberalism is not coterminous with capitalism; not all forms of the latter feature the total faith in markets and rejection of an economic role for government that we find in neoliberalism. We might define neoliberals as capitalist extremists. While it is common in contemporary political thought, especially in the US, to see capitalism and democracy as inseparably linked, many neoliberal and ordoliberal thinkers have in fact been highly suspicious of democracy, and have wanted to ensure that its ability to interfere with markets is highly restricted. This is well discussed by Bonefeld, Mirowski, and by Streeck in Buying Time.

The term was first coined by a group of mainly German and American economists and philosophers who wanted to avert what they thought would be the disasters of a socialist planned economy, or indeed of any role for government in the economy other than that of protecting capitalist competition itself. Based initially on an organisation called the Mont Pèlerin Society (named after a mountain in Switzerland), they grew in numbers and political importance and began to operate through a wide range of think tanks, such as, among many others (in the USA) the American Enterprise Institute, the Heritage Foundation and the Cato Institute; in the UK the Adam Smith Institute and the Institute for Economic Affairs. The World Economic Forum that meets every year at Davos in Switzerland was established to promulgate neoliberal ideas at a global level, though it allows expression of a wider range of views at its meetings than do most other neoliberal institutes. Neoliberals’ opposition to government restraint on capitalist activity has attracted the heavy financial support of many wealthy interests opposed to government regulation of their activities. This is especially the case with the US oil industry, billionaires like the Koch brothers being active in funding neoliberal organisations and various neoliberal lobbying activities, including those related to climate change denial.

As their influence has come to dominate the world, and as their policies have attracted criticism, neoliberals have become coy about using the word. The key neoliberal texts appeared before the 1980s, the decade when, starting with Ronald Reagan in the USA and Margaret Thatcher in the UK, the ideology began to gain the active support of powerful political leaders. Friedrich von Hayek’s The Road to Serfdom dates back to 1944, though Hayek himself lived on to become a close associate of Thatcher. Ayn Rand’s The Virtue of Selfishness first appeared in 1964, though the Ayn Rand Institute formed in her memory remains active. Milton Friedman’s two key ideological (as opposed to technical economic) works were published in 1962 (Capitalism and Freedom) and 1980 (with Rose Friedman, Free to Choose). Today neoliberalism is more likely to be named by its critics than by its apostles.

At the core of neoliberalism is a vision of the market as a mechanism that enables large numbers of individuals to express their free preferences. It gives incentives to producers of goods and services to meet those preferences, without the need for state regulation or commands; individuals need little from a wider society beyond a guaranteed capacity to express their wants through market choices. Neoliberals regard government as a particularly incompetent institution, the less of which we have, the better. The market is seen as self-correcting in a way that is more flexible and responsive than anything that can be achieved by government regulation. If consumers’ tastes change, producers quickly notice this, stop producing goods and services that have become unpopular, and start producing what customers want. For example, if private home owners place a priority on fire protection and use their resources to acquire expensive cladding, then well and good; if they prefer to take the risk that a fire will occur and prefer to spend their money on other things, then that is their free choice too. No public issue arises; in the view of the most extreme neoliberals, there are no public issues. Similarly, if a firm starts to make defective or dangerous products, customers will notice this, and the firm will lose trade to honest practitioners. This can happen rapidly and without the need for elaborate rules and inspection services that a system of public regulation requires. All that is necessary is that the firm’s sole role is made to be the realisation of maximum profit for its shareholders. Since, in a pure market, profits can be maximised only by satisfying customers, there is no need for customers’ interests to be considered as any different from those of shareholders; there is therefore no need for consumer protection legislation. A major success of neoliberal reforms has been to have the maximisation of shareholder value made the sole legal object for firms in most advanced economies.

The weaknesses of the neoliberal approach can be analysed under five broad headings, at least four of which are fully recognised in the neoclassical economic theory on which neoliberalism draws. Economists, but not ideological neoliberals, are usually prepared to accept various forms of government intervention to remedy these market failures. The four are: the presence of negative externalities; the existence of public goods; the absence of means to counter systematic inadequacies in the information available to market participants; and difficulties in achieving adequate competition in many sectors. Finally, where there is possibly less agreement with standard economics comes the fifth: inequalities in the ability of different people to participate fully in the market.

Negative externalities are harmful by-products of market activity, which do not form part of the costs of that activity. The most obvious examples concern pollution. In a free market, a firm suffers no financial cost if chemicals released from its factory chimneys damage the health of large numbers of persons in the vicinity. Their health is outside the market exchanges in which the firm is engaged. This is a problem for neoliberals, who recognise only those interests that are within the market, arguing that considerations outside it cannot be calculated and therefore cannot be compared with those within the market. They point out that even a polluting economic activity adds to economic value, and that simply suppressing the firm’s activities or imposing taxation or expensive regulations on it might do more overall harm than damaging the health of a few people. How can we tell, if the latter is not part of the market? The only solution they can see is for that health to be made marketable, i.e. are the sick people willing to compensate the firm’s costs in abating the pollution? If not, then they are deemed not to place a market value on their own health adequate to pay for the constraints that protecting it imposes on economic activity. Even if one accepts that logic, it cannot cope with externalities where the source cannot be linked to an identifiable group of sufferers from it. This applies particularly strongly to the main environmental challenges resulting from economic activity facing us today, which affect billions of people and where there are no means for relating individual sources of pollution to individual damage. Such phenomena cannot be brought within the market. It is not surprising that many neoliberal think tanks are heavily engaged in climate change denial with devastatingly successful consequences for US rejection of international agreements on the issue.

Public goods are defined by economists to refer to goods (in the widest definition of that term as things that are desired) that are ‘non-rival and non-excludable’. The first term means that the consumption by one person of a good does not prevent another person consuming it too; the second means that it is not possible to prevent people from having access to it. Non-rival goods lack a quality necessary if price to be set for them: scarcity, while if it is impossible to exclude people from the enjoyment of a good, it cannot be provided in the market. Therefore, in a pure market economy, public goods will not exist. If they are there already, as for example natural beauty spots, they are likely to be damaged or neglected, as no one has a market incentive to care for them. The only neoliberal solution is to impose an artificial scarcity and excludability by enforcing private ownership and enabling private owners to charge for access. This is often not practical (for example, fresh air or the ocean bed). Where it is possible, neoliberalism becomes a restrictive and controlling force rather than the liberating one that it is presented as being.

Problems of information: Economic theory assumes that market participants have perfect information – or at least as much information as they need – in order to make optimal decisions about the price, quality and other attributes of goods and services that they are buying and selling. It further assumes that rational actors will ensure that they have this, and therefore that, if we seem sometimes not to take much care in acquiring information before making a choice, then we can be assumed to have rationally concluded that we did not need to do so. But we often have very little chance of acquiring the knowledge we would need to make complex decisions. For example, can children or their parents be expected to know the value of education to them in twenty or thirty years’ time? Similar arguments apply to decisions whether we ought to insure ourselves against illness, disability, unemployment, prolonged old age and other risks that might prevent us from earning a living. There are also many products that we buy in everyday markets, particularly technically complex ones, where it is extremely difficult for ordinary consumers to access adequate information to judge quality. Publicly funded provision of education and health care, and consumer protection legislation, are ways that we have found of tackling these problems. But public spending, public provision and regulation are anathema to neoliberals.

Inadequate competition: For markets to work the way that neoliberals need, there must be many producers and many consumers; no one producer or consumer should be in a position to influence the market price by its actions alone, and they must not conspire together to do so; it must also be easy for producers and consumers both to leave and enter the market. Absent these conditions, markets do not do their work of bringing producers and consumers together in ways that enable both to exercise choice while achieving overall efficiency. Real markets frequently lack one or more of these conditions. It might be practically impossible to have more than a small number of producers serving particular consumers, as with many public utilities. It might be difficult for new firms to enter, because of high start-up costs, or to leave (banks were defined in 2008 as being ‘too big to fail’, i.e. to leave the market). Some firms may be sufficiently large within a market to be able to manipulate prices. Further, if the condition of near-perfect competition is not fulfilled, then the neoliberal equivalence between shareholders’ and customers’ interests falls, as it becomes possible for firms to exploit market dominance. The shareholder maximisation model is then thrown into doubt.

Neoliberals here face a fundamental dilemma. Should they prioritise the maintenance of competition, and accept state intervention through competition law to ensure it, or prioritise keeping government out and therefore accepting restricted competition? As I have discussed in The Strange Non-Death of Neoliberalism, they divide over this in a highly important way. Advocates of the latter position claim that a competitive economy is one in which competition has taken place, producing winners, rather than one in which it is a continuing condition. This approach has gained dominance as neoliberals have come to depend on wealthy, often monopolistic corporations to fund their think tanks and lobbies. In the US in particular (less so in European Union (EU) competition law) neoliberal judges have watered down the previous emphasis of anti-trust law on maintaining competition. This change has required a redefinition of customers’ interests from freedom to choose to the maximisation of their ‘welfare’. This is in turn defined as indistinguishable from the overall wealth of a society, which is identified with the maximisation of profits. The theoretical equivalence between shareholders’ and customers’ interests has been restored in the absence of full competition, but by the sleight of hand of redefinition.

There is a further problem. Economic theory shows us that where competition is intense, profit rates are low. Firms must therefore be expected constantly to escape its constraints, boosting profits by exploiting monopoly positions – what economists call extracting ‘rents’. This can be benign and describes how the market favours innovation: by doing something different from its rivals, a firm can escape their competition. After a while they imitate its success, the first mover’s advantage is eroded, competition is restored, and firms in the sector look around for something new to try. But firms will be seeking means to make first-mover advantages more permanent. Generous patent and intellectual copyright laws can help them do this, and so corporations frequently lobby governments to intensify the protection afforded by these laws. They can also benefit from what are known as ‘network externalities’. If a first mover can develop a large network of contacts around its products, competitor firms will have great difficulty rivalling it, even if their products are superior. This is a long-term problem, with important examples of large manufacturing companies that set up their own retail distribution networks, making it difficult for rivals with better products but unable to set up chains of shops. But the Internet, which is after all an epitome of networks, is creating many more instances. Once a firm has reached a certain size, it will always appear as the ‘go to’ site on the web. Serious monopolies are being created in this way, and some individuals are being made extremely rich. Amazon, Google and Facebook are the most prominent names among them, but there are many others. The European Court of Justice, which has a strong neoliberal mandate in this field, works at trying to find solutions to the problem, but that takes time and is far from easy to achieve. Some very important sectors of the modern economy fall far short of the pure competition model required by pure neoliberalism.

Similar problems have been created by a further ironical twist. A major success of neoliberal reforms has been the privatisation of many previously public services (such as railways, postal services, gas, electricity and water distribution) and the sub-contracting to private firms of others that continue to be publicly financed (such as health, education and elderly care). In most cases these services remain monopolies or with extremely restricted competition, and/or of deep public interest. Government therefore remains closely interested in them. The net result is nothing like a system of perfect markets; rather, a small circle of politically privileged ‘crony’ firms grows up, which specialise in getting government contracts and developing close political links. In the UK a small group of firms has become so central to public service delivery that, even though several of them have been fined for various offences against the terms of the contracts, they keep on winning new ones, because parts of the country’s public services would collapse if they were no longer there. Like the banks during the financial crisis, they have become ‘too big to fail’ – a concept that is itself alien to the idea of a free market economy.

For these reasons I insist it is necessary to distinguish between ‘market’ and ‘corporate’ neoliberals. The former insist on trying to achieve perfect markets; the latter defend the role of oligopolistic corporations and therefore dilute the importance of the market. This makes them rather more realistic than market neoliberals, and pleases neoliberals’ wealthy backers, but it fatally undermines the pure market condition and the entire rhetoric about customers’ freedom to choose that remains a fundamental part of the case for neoliberalism and the sole justification for its central claim that maximising shareholders’ profits also serves customers’ interests better than any alternative.

Inequality: Neoclassical economics is ambiguous on the issue of inequality. It sees the pursuit of wealth as a fundamental motivation for economic behaviour, and therefore has to favour the inequalities of income and wealth that result from it. On the other hand, in a state of perfect competition, growing inequalities of income signal inadequate supply of the factor of production being rewarded. This should lead to an increase in supply of that factor until the inequality is reduced. For example, growing incomes among investment bankers should lead to more people becoming investment bankers, which should then reduce their incomes. A perfect market economy is therefore one in which inequalities keep rising and falling. Further, if inequalities are to act as incentives to effort, there should not be inheritance of wealth, as the second generation has not had to expend effort to secure its reward. We should expect a difference in approach to inequality among the different types of neoliberal. Market neoliberals should be dissatisfied with the incessantly growing inequalities that characterise the present period; corporate neoliberals, who have relinquished insistence on constant competition, will be very relaxed about it. The fact that neoliberals very rarely express concern at rising inequality suggests that the corporate form of the ideology has become dominant.

Inequality is highly relevant to the role of markets, as ability to use them depends on wealth. One can only accept that individuals’ access to goods, services, information, and protection from limited externalities should be entirely constrained by their income and wealth if one is content that existing inequalities in their distribution can be justified. The more arbitrary that distribution, the less acceptable becomes reliance on the market. Further, although neoliberals will insist that the market is not concerned with moral worth, only efficiency, in reality high income is often taken as a sign of social and even moral superiority. The rich receive deference and respect in daily life in a manner never accorded to people on modest incomes. In a society where neoliberal values dominate, a hedge fund director will always receive far more real respect in everyday life than a hospital nurse, whatever ritual gestures are made to the latter.

Conclusion: What’s wrong with neoliberalism

Neoliberalism is unable to cope with the externalities that, especially in the form of climate change, have become one of the gravest dangers confronting human life. It produces a society impoverished of public goods. It fails to equip citizens with the information they need to participate in the markets that it insists are the only fully acceptable form of allocation and decision-making. It has itself been corrupted by the rise of giant corporations, whose cause many neoliberals support even though this undermines the efficiency of the market itself. Finally, it offers no remedies for the inequalities produced by this distortion of its own pure form. It is not surprising that neoliberalism has many critics; and that, despite its dominance, almost nowhere has it been totally triumphant.

This is the pass to which the neoliberal revolution has brought us. Deregulation has enabled intensive industrial activity to damage the planet, perhaps to a point of no return. The growth of inequality has made many medium- and lower-income citizens dependent on high levels of debt if they are to maintain the level of consumption needed to keep the capitalist economy going. A vicious spiral is in progress: increased inequality increases the power of capitalist interests to affect public policy; these public policy changes in turn further increase inequality; and so on. The political power of neoliberalism is advanced by this spiral, though at the same time the integrity of neoliberalism itself is damaged: the use of political power for economic ends is anathema to market neoliberalism, though very welcome to its corporate counterpart. Meanwhile, a damaged planet and static incomes threaten the viability of the capitalist system itself.