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New Left Project | Articles | We Have Never Been Neoliberal

We Have Never Been Neoliberal

This has been written as a response to Jason Hickel's recent article for NLP on neoliberalism. While I have sympathy with
Hickels arguments (and have actually made similar ones in the past myself), I want to take issue with a specific part of these
arguments, namely how he has characterized monetarism. I do this in order to point out that it is too simplistic to classify the
transformation of Anglo-Saxon political economies over the last few decades as the exemplar of neoliberalism. In fact, we
could even argue that they are not neoliberal after all.
Hickel starts by arguing that:
'Neoliberalism has a specific history, and knowing that history is an important antidote to its hegemony, for it
shows that the present order is not natural or inevitable, but rather that it is new, that it came from somewhere,
and that it was designed by particular people with particular interests.'
This is a laudable aim for any take on our current political-economic system, and not one that I want to dispute here. Rather,
I'd like to outline how Hickel's presentation of core elements of neoliberal thinking and policy prescriptions is flawed when it
comes to monetarism and monetary policy. Aside from historical accuracy, this is important because understanding these
things in more detail actually problematizes the notion that we have ever been, or are now, neoliberal.
A concern with monetary policy or the control of the money supply and inflation is the foundation on which much of
later, supposedly neoliberal thinking and policies have rested. Many things that are now identified as neoliberal including
privatization of national industries and public utilities, liberalization of trade and capital movement, and deregulation have
one thing in common: they are premised on a particular understanding of the economy in which the stability of money and the
dangers of inflation are key concerns. Hence, understanding monetarism and monetary policy is central to understanding
wider neoliberal processes and policies if we accept that those things are neoliberal in themselves, which is a topic for
another day.
My argument necessitates two things: first, the ability to put aside political preferences for a minute or two in order to learn to
think like a neoliberal (difficult I know, but important nevertheless); and, second, learning a bit of monetary theory. The
latter may actually be trickier than the former.
First
Neoliberals and I apologize for using scare quotes here but I think it is important to do so like Friedrich von Hayek and
Milton Friedman were concerned with money and monetary issues because they had a particular (and peculiar we might add)
take on capitalism; they see the capitalist market as something that is natural and necessary for ensuring freedom see
Friedmans book Capitalism and Freedom for a prime example of this way of thinking. This means that anything that disturbs
the (assumed) natural functioning of the market mechanism which is dependent on private property and individual
transacting not only counts as unnatural, liable to fail and therefore incredibly costly, but also represents an assault on
human freedom. Hence why neoliberals are so vociferously against government intervention it not only disturbs the market
mechanism, but it ultimately leads down the road to serfdom as Hayek so stridently put it. Why is this important? Well, when
it comes to money and monetary policy, thinkers like Friedman and Hayek plus adherents to the Chicago, Austrian and
other neoliberal schools place a particular emphasis on taking politics and politicians out of the picture when it comes to the
money supply. According to Friedman, this lifeblood of capitalism needs to be 'free from irresponsible governmental
tinkering' in order to 'prevent monetary policy from being subject to the day-to-day whim of political authorities' (p.51,
Capitalism and Freedom).
This helps to explain what it is about Keynesianism that got the goat of monetarists like Friedman. The key to understanding
their overall concerns, and hence the neoliberal perspective, is their fear that the Keynesian policy of full-employment
would entrench an inflationary cycle in which inflation was used to control real wages in response to pressures from trade
unions, because wage restraint or moderation could not be used without the threat of industrial conflict. In the Keynesian
model, then, inflation helped to meet the growing demands of an increasingly powerful labour movement, but was always
dependent upon the maintenance of rising industrial productivity and ultimately demand. A good discussion of these fears
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can be found in Richard Cocketts book Thinking the Unthinkable. To neoliberals, this meant that inflation was inevitable and
that the inflationary pressures produced by the concentrated power of labour would mount over time as wages ratcheted up,
leading to the erosion of the natural and proper functioning of the market, as well as political freedom. In these
circumstances, neoliberals argue that governments would have no choice but to intervene, regulate and interfere more in the
market as there would be no other mechanism to curb inflation, and this would gradual erode economic freedom and hence
political freedom. The shared concern with this prospect is what helped to bring together a wide array of often different
thinkers including the Austrian School, Freiburg School, first and second Chicago Schools, British intellectuals from
Manchester and the LSE, business foundations, and so on in a neoliberal mlange.
This is the reason why monetary concerns are presented as central to neoliberal thought. They became key elements of
neoliberal policy-making as the 1970s progressed, since the ideas of people like Friedman seemed to become increasingly
self-evident as inflation accompanied growing stagnation (i.e. stagflation). It was hard to explain rising unemployment
alongside rising inflation using Keynesian ideas. However, rather than the orthodox view presented by Hickel that US
government spending on the Vietnam War and then the 1973 oil crisis caused these inflationary pressures, I have made the
argument elsewhere that an important and overlooked reason for rising inflation was the emergence of the state-less
Eurodollar market which enabled financial institutions to increasingly raise and lend money outside of national regulatory
control, leaving governments with no instrument to restrain the creation of money. The recent book by Nicholas Shaxson,
Treasure Islands, provides an illuminating insight into this international financial market and the problems it has caused
elsewhere. This, though, is a yet another topic for yet another day.
Second
It is important to remember that neoliberals, to continue using that fuzzy term, have a point or at least a point of view. It is
somewhat hard to appreciate this, however, without some grounding in the basics of monetary policy. This is where I feel the
need to correct Hickels argument. My main concern is with his characterization of the Volcker Shock named after Federal
Reserve Chairman Paul Volcker and monetary policy. I would suggest reading Geoff Manns article here for an accessible
and detailed explanation of monetary policy and its evolution.
Hickel follows David Harveys arguments in A Brief History of Neoliberalism, especially in relation to Harveys claims that
neoliberalism is really about the restoration of class power as the top 1% reassert themselves politically and ideologically.
Obviously, this restoration is not the same around the world and in fact there are major differences between countries, as this
blog by Timothy Taylor illustrates. So, it is important to note that Harvey focuses on the USA, making his claims very
specific a great website called The World Top Incomes enables you to look at these differences between countries. That
issue aside, the discussion of the Volcker Shock by Hickel misses some crucial points and misunderstands some monetarist
arguments when it comes to monetary policy back in the 1970s.
The key to remember is that monetary policy concerns the money supply; literally this means the amount of money in an
economy for a more detailed discussion see the website New Economic Perspectives and especially their primer on
modern monetary theory, or the New Economics Foundation booklet Where does money come from?. There are different
ways to measure the money supply and these are called monetary aggregates. They can be crudely split between M1, M2 and
M3. Each refers to a different form of money: M1 represents actual cash (i.e. coins and notes) as well as deposits in current
accounts which can be accessed immediately; M2 represents M1 plus money in savings accounts and mutual funds that take
longer to access; and M3 represents M1, M2 and even larger and longer-term deposits (e.g. certificates of deposit). It is
important to note that monetarists expected M1 to circulate about six times in any year; this is called the velocity of money
and can be worked out by dividing GDP by M1. Monetarists also assumed in contrast to Keynesians that any increase in
the money supply would lead to a subsequent increase in incomes as more money circulates thereby driving up inflation; see
Michael Barratt Brown on this.
Unlike what Hickel argues in his article, monetarists do not want governments to use interest rates to cut inflation that is
not the point monetarists are trying to make. Instead they want governments to stop using interest rates as a way to influence
inflation (or unemployment) and instead to focus on controlling the money supply by literally stabilizing the amount of
money in an economy. Governments can do this by not increasing the amount of money in circulation. That would mean that
governments simply stop printing more money to resolve their economic problems (e.g. wage demands, fiscal crises, etc.)
and, more importantly, that governments let the market function properly to find the correct price for money in any
economy; that is, the amount that people are willing to pay for money (i.e. price) that then reflects the scarcity of money at
any given time. This will mean that as money becomes scarcer (i.e. gains value) it will become more expensive (i.e. have
higher interest rates), and vice versa. This was the theory at least
What happened with Volcker illustrates the wrong-headedness or perhaps naivety, to choose a kinder word of
monetarists and is important to appreciate if you want to criticize so-called neoliberalism. The best outline of these issues is in
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William Greiders magnificent book Secrets of the Temple which covers, in great detail, the evolution of Federal Reserve
policy during the Carter and Reagan administrations. The first thing to note is that the Federal Reserve is independent of the
government, and so it is incorrect to imply that Volcker worked at the behest of either Carter (who appointed him in 1979) or
Reagan (who reappointed him in 1983, despite concerns). Second, it is more accurate to claim that Volcker tried to institute
monetarism, but important to note that this meant that he sought to let interest rates rise or fall in relation to the demand for
monetary aggregates (see above) rather than simply continuing 'to jack up interest rates' as Hickel suggests.
Third, it is crucial to highlight the failure of monetarism as a policy tool: it simply did not work, because the Federal Reserve
(and other central banks) found that their control over monetary aggregates did not translate into control over inflation or
the economy. This largely resulted from the instability of monetary aggregates themselves, as in contrast to what
monetarists expected the velocity of money slowed down and thereby 'disrupted all the standard monetary equations' in
Greiders words (Secrets of the Temple, p. 479). Simply put, the aggregate changed as the Federal Reserve sought to control
it. This did not mean that inflation lost its position as a central concern, merely that interest rates ended up being used as a
mechanism to target a specific inflation level set by the Federal Reserve (and other central banks). This inflation-targeting,
however, was not monetarism; see Manns article for more on this policy redirection. So, monetarism was a failure it didnt
work and was abandoned as a way to control inflation to influence the economy. Moreover, and fourthly, it was implemented
by Volcker who often ended up in conflict with both the Carter and Reagan administrations. This was especially the case when
it came to Reagans very loose fiscal policy. The fact that Reagan could not cut government spending for the first few years of
his administration resulted from problems caused by the Volcker Shock itself. For instance, higher interest rates made
investment more expensive, which led to a rise in unemployment and thus an increase in people receiving welfare. This
outcome was compounded by Reagans fiscal policies, especially tax cuts, which led inexorably to the wholesale expansion of
US federal public borrowing through the sale of government debt securities and the decision to give up inflation as a
mechanism to cut this growing debt. As a result, the national debt tripled during the Reagan administration and, more
importantly, doubled in real terms because of falling inflation that came after the Volcker Shock; see John Steele Gordon.
My wider argument see here is that inflation was curtailed during this time, not as a result of monetarism but rather
through the expansion of public debt that resulted from the sale of government debt securities and rising real interest rates.
The wealthiest 1% benefited enormously as a result of these changes, for sure, but so did anyone with mutual funds, pension
fund, savings, or other forms of asset (e.g. housing). First, real interest rates that is, interest rates minus inflation rose
again after years of negative real interest rates during the 1970s that cut into the value of all sorts of assets; see graphs for the
USA and Canada and the UK. Second, governments ended up owing interest on all the outstanding government debt.
According to Centeno and Cohen, what is evident here is a shift in government policy from taxing the wealthiest people to
fund government expenditure, to simply borrowing money off the wealthiest people and then paying them interest on that
debt. This necessitated more than simple supply-side economics; it required the wholesale transformation of the politicaleconomic system, and the enrolment of large swathes of the population in this system as more and more people were enticed
by membership of a property-owning democracy, espoused by Thatcher and the like. The outcome was the emergence of an
asset-based economy which tied people closer to a particular form of capitalism, one driven by rising asset values rather than
incomes as well as the interest returns on those assets, and not the rise and fall of neoliberal hegemony despite what I and
colleagues have argued elsewhere, I might add!
Now, in conclusion, I agree with Hickel that what happened is not inevitable; people made decisions about these issues, they
pursued particular policies to promote those decisions, and so on. What I think is important to consider, however, is that
these decisions and policies do not necessarily provide evidence of a specifically neoliberal restoration of class power.
Indeed, the chronic instability of the economic system that has been constructed over the past few decades stands in marked
contrast with the early neoliberals' emphasis on the importance of economic stability. This instability results, in part at least,
from the underlying transformation of our societies from income-based to asset-based political-economic systems. This
restructuring was driven by the anti-inflation logic of neoliberal thinkers like Friedman who presented the inflationary
pressures of organized labour (e.g. rising wage demands) as structurally problematic; as a result, income inflation became the
bogeyman of economic policies around the world. In contrast, the logic of asset inflation meant that rising property
ownership whether it be in the form of financial products, housing, pensions, etc. came to seem natural, liberating and
even moral. The key difference between these logics, however, is important to appreciate; this difference is that as the value
of an asset goes up so does demand for that asset, feeding a seemingly continual expansion of wealth. This wealth effect has
tied whole swathes of the population to the interests (pun intended) of the top 1%. However, the downside of the wealth effect
is all-too-evident in the ongoing financial crisis and all the other asset bubbles since the 1970s. The asset-based
transformation of the economy has in fact led to a much more unstable political-economic system, and not the market
stability envisaged by neoliberals all those years ago.
Kean Birch teaches social science at York University, Canada. He is currently writing a book tentatively titled 'We Have
Never Been Neoliberal, but which he may rechristen Manifesto for a Doomed Youth, forthcoming from Zero Books.
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About this article

Published on 19 April, 2012
By Kean Birch

New Left Project

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