The End of the Neoliberal Era

These graphs show that there was a period of approximately 35 years, around 1945-1980, of low income inequality. In this period, also, tax rates for the top income bracket were the highest ever. Furthermore, during those years, the United States experienced economic growth higher than it did subsequently in the high-inequality, low-tax years of 1980-2010. GDP growth averaged 3.9% from 1950 to 1980 but only 2.7% from 1980 to 2010. Growth has been lower still since, 2.4% from 2000 to 2023 – a period of exceptionally high inequality and low taxes.

This does not square with the neoliberal narrative; in fact, far from it. Low taxes are supposed to spur innovation and economic growth. This may, however, cause income and wealth inequality because a disproportionate part of the gains go to the innovators and their financiers, who are a small percentage of the population. But this did not happen. Economic growth was highest when taxes were high, and in spite of a high rate of innovation during that era, income inequality was low.

One explanation may be found in David Leonhardt’s book, Ours Was the Shining Future: The Story of the American Dream, which I recently reviewed. Toward the end of World War II there was concern that the millions of returning soldiers would be unemployed, and that could cause another depression.

But a consortium of business executives led by automobile magnate Paul Hoffman believed the economy could be supercharged, though they would need to pay employees high wages. This made sense, because employees who were paid high wages would be good consumers for the new products that would be produced. This formula for spurring the economy proved to be magical, bringing about the high growth and low inequality of the post-war era.

The end of the New Deal era

But toward the late ’70s, that era, which Gary Gerstle, an emeritus professor of American History at the University of Cambridge, calls the New Deal era (which itself had been new, starting in the early 1930s) began to be replaced by another new era. Gerstle calls this new new era the neoliberal era, in his book, The Rise and Fall of the Neoliberal Order: America and the World in the Free Market Era.

Gerstle feels he needs to explain his use of the term “neoliberal.” It stems from the fact that, beginning during the Roosevelt era, the meaning of the term “liberal” began to diverge between the U.K. and the U.S. In the U.K., especially among intellectuals, “liberal” usually means “classical liberal,” someone who believes in a laissez-faire economy, limited government, and free trade – closer to the U.S. use of the term “libertarian” – while in the U.S., “liberal” means something closer to “social liberal,” denoting a more left-leaning philosophy. Gerstle uses the term “neoliberal” not to distinguish it from “classical liberal,” but to revive the original meaning of liberalism.

Gerstle’s book is actually about not one but two new eras, one after another. He says, “In the last hundred years, America has had two political orders: the New Deal order that arose in the 1930s and 1940s, crested in the 1950s and 1960s, and fell in the 1970s; and the neoliberal order that arose in the 1970s and 1980s, crested in the 1990s and 2000s, and fell in the 2010s.”

The two eras (or “orders”) are almost direct contradictions of each other. “The New Deal order,” says Gerstle, “was founded on the conviction that capitalism left to its own devices spelled economic disaster. It had to be managed by a strong central state able to govern the economic system in the public interest.” The neoliberal order, by contrast, “was grounded in the belief that market forces had to be liberated from government regulatory controls that were stymieing growth, innovation, and freedom.”

Prior to the New Deal order, there was a previous order that was much more of a classical liberal order, with free trade, little government regulation of industry, and high levels of immigration. It also, as Piketty’s graphs show, coincided with high levels of inequality. The New Deal order was initiated because of the evident failure of that previous order, which had led to the Great Depression.

The neoliberal order, by contrast, was initiated because of a perception that government regulation had gone too far. In his 1981 inaugural address President Reagan is often quoted as saying “government is not the solution to our problem, government is the problem.” But this quote is taken out of context.

What he said was “In this present crisis, government is not the solution to our problem, government is the problem.” (Emphasis added.) The nation had been subjected to an energy crisis, which was the proximate cause of the 1973-74 stock market drop and rising inflation, and which was made worse by government price controls on petroleum and natural gas.

It is interesting that the onset of each new era was preceded by a 50 percent-plus drop in the stock market, in 1929-1932, and 1973-1974. And the next new era, the one we may already have begun, the nature of which Gerstle doesn’t predict (because he is a historian not a prognosticator), was preceded by yet another 50 percent drop, in 2008-2009.

In Gerstle’s estimation, we are evolving from the neoliberal era into yet another new order. The backlashes against many of the principles of neoliberalism, in such areas as opposition to free trade and immigration on the one hand, and too light financial regulation on the other, are growing stronger and are likely to lead to an accelerating breakdown in the neoliberal order.

It is interesting that, when Gerstle speaks of the political personalities arising in the U.S. in this trend, he speaks almost in the same breath of Donald Trump and Bernie Sanders; one might even assume they are in the same camp. Both gained popularity because of backlash against the neoliberal order.

Tweaking and revolution

The other two books of the three I mentioned at the outset are not about evolution of the system like Gerstle’s. Rather, they are about, respectively, tweaking the system little by little to alleviate its problems, and overturning the system. I found neither of these books as interesting as Gerstle’s.

One of them, The Crisis of Democratic Capitalism, is written by the noted pillar of capitalism, Martin Wolf, the Financial Times’s chief economics commentator. The other, Invisible Doctrine: The Secret History of Neoliberalism, is written by anti-capitalist George Monbiot, an environmental and political activist, and film-maker Peter Hutchinson.

Wolf doesn’t use the word neoliberalism, but speaks of democratic capitalism, which is not the same thing but has been captured by neoliberalism in its recent iteration. Wolf believes that democracy and capitalism are necessarily in tension, and their uneasy synthesis is what he calls “democratic capitalism.” Democracy is national while capitalism is global, and “democratic politics are based on the egalitarian idea of one person, one vote, while market economics is founded on the inegalitarian idea that successful competitors reap the rewards.” Hence, integrating the two is a delicate task. He says this synthesis is now in crisis.

Wolf’s solution is to tweak the system carefully. He says, “We must act radically and yet incrementally, learning from experience as we go.”

Wolf obviously reads very widely and is extremely knowledgeable. That is why it is disappointing that his book is not more engaging and enlightening.

He does, however, provide one of the most complete takedowns I have seen of Milton Friedman’s claim in a famous 1970 New York Times opinion piece that the only responsibility of business is to maximize the profits of its shareholders.

This gives me an opportunity to point out the weasel-wording that is intrinsic to Friedman’s article, and constitutes its fundamental flaw. In 1970, as Wolf says, Friedman declared that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” (Emphasis added.)

What does Friedman consider deception? For example, suppose a financial advisor or investment manager, speaking to a prospect, trots out a complicated-looking mathematical exhibit, implying that by using the Nobel Prize-winning theory embodied in the exhibit the advisor or manager will enable the client to outperform the market? Is this not deception? Or suppose a used-car salesman tells a prospective buyer that a car is in perfect running condition and has never had any problems. Is this not deception? As George Akerlof and Robert Shiller explained in their insightful and enjoyable book, Phishing for Phools, deception is part and parcel of a capitalist economy – and probably of any other kind of economy, too. So Friedman’s admonition actually applies to very little.

Throw the whole thing out

I added the Monbiot and Hutchinson book, Invisible Doctrine, to my reading about neoliberalism because, unlike Wolf’s, which avoids the word neoliberal or neoliberalism, Monbiot’s uses it 266 times. While the book contains some accurate characterizations of neoliberalism, too much of it is a polemic that is at times downright silly.

For example it says, “neoliberalism is neither inevitable nor immutable. On the contrary, it was conceived and fostered as a deliberate means of changing the nature of power.” What exactly this means I don’t know.

About capitalism, they have a dim view. Some quotes:

• “…capitalism, under our definition, ‘turns shared resources into exclusive property’…”
• “Invariably, public services were sold (in some cases gifted) to private owners at far less than their real value…”
• “As a general rule, privatization is legalized theft from the public realm…”

Whether capitalism turns shared resources into exclusive property by means of legalized theft is highly debatable.

But they also say:

• At no point, however liberal its pretensions, has the fundamental condition of capitalism been altered: it is, and has always been, ‘an economic system founded on colonial looting’

Presumably, the “colonial looting” of which they speak refers to the violence that was inflicted on native populations in the age of the European conquerors, most of which happened before capitalism was a thing. Interpreting them generously, they seem to be conflating capitalism with colonial conquests.

Most absurd for me is their off-the-wall discussion of capitalism’s origins. They say, “When capitalism’s origins are disputed, we believe there is a case for tracing them to the island of Madeira.” Portuguese explorers landed on Madeira, a pristine island with no human or mammal inhabitants, in the 1420s. Then, in Monbiot’s and Hutchinson’s telling, they proceeded to rape it of its principal resource, wood (“madeira” means wood in Portuguese), then left and went to the island of Sao Tomé to rape that one too. “There the pattern that had been established on Madeira was repeated: Boom, Bust, Quit.” They conclude, “In the end, all the world is Madeira. Capitalism is not the only economic system to have scorched and poisoned the planet.”

Well, I live on the island of Madeira for about seven months each year, and let me tell you, it is not scorched and poisoned. I wonder if Monbiot or Hutchinson have ever been there.

As to the solution to what they perceive as the curse of capitalism, they say, “a fair, prosperous, sustainable society cannot materialize under current conditions. We need a radical transformation.”

Needless to say, this is not much help in solving the problems of neoliberalism. I recommend reading Professor Gerstle’s book (and Leonhardt’s) and skipping the other two.

Economist and mathematician Michael Edesess is an adjunct professor and visiting faculty at the Hong Kong University of Science and Technology. In 2007, he authored a book about the investment services industry titled The Big Investment Lie, published by Berrett-Koehler. His new book, The Three Simple Rules of Investing, co-authored with Kwok L. Tsui, Carol Fabbri and George Peacock, was published by Berrett-Koehler in June 2014.

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