Neoliberalism is a term for a set of ideas and policies that favor market forces over state direction of the economy, typically including privatization of state-owned firms, deregulation, free trade, open capital flows, low inflation backed by independent central banks, and limits on public deficits and spending. These policies spread across many countries from the late 1970s to the 2000s, starting with the UK, the US, Chile and New Zealand and reaching much of the developing and post-communist world.
Unlike most labels on this site, "neoliberalism" is rarely used by its supposed supporters; it is mainly applied by critics and by historians and political scientists. Its meaning varies by speaker, from a precise intellectual movement to a loose description of the economic order since 1980. It overlaps with free-market economics, the Chicago school and supply-side economics, and differs from 19th-century laissez-faire in seeing an active state role in building and protecting markets.
Neoliberalism in plain terms
Imagine a town that once ran its own bus company, phone service and steelworks, set many prices, and kept out goods from neighbouring towns. Over a few decades it sells the businesses, lets companies compete, removes the import barriers and hands control of the money supply to an independent body told to keep prices stable. That shift, repeated across many countries, is roughly what people mean by neoliberalism.
Supporters say the town became richer and more efficient. Critics say some residents lost secure jobs and services, and that the gains went mostly to those already well off. Much of the debate is about how to weigh those two stories.
Origins
The word dates from a 1938 meeting in Paris, the Walter Lippmann Colloquium, where liberal economists and thinkers looking for an alternative to both old-style laissez-faire and central planning adopted "neo-liberalism" as a name. In 1947 Friedrich Hayek founded the Mont Pelerin Society, whose early members included Ludwig von Mises, Milton Friedman, Karl Popper and George Stigler, linking the Austrian school and Chicago thinkers. In West Germany, "ordoliberal" economists such as Walter Eucken argued for a strong legal framework to keep markets competitive, influencing the post-war social market economy.
Policies and spread
After the stagflation of the 1970s, governments led by Margaret Thatcher in the UK (from 1979) and Ronald Reagan in the US (from 1981) cut taxes, curbed trade-union power, privatized or deregulated industries and tightened monetary policy. New Zealand's reforms from 1984 and Chile's after 1975 went further. For developing countries, the economist John Williamson summarized ten common reforms in 1989 as the Washington Consensus, and IMF and World Bank lending often required structural adjustment along these lines. After 1989 many former communist states followed rapid liberalization programmes, and China and India opened their economies on their own terms.
Evidence and debate
Supporters credit the period with ending the high inflation of the 1970s, raising efficiency in privatized industries, expanding trade and contributing to globalization, during which the share of the world's population in extreme poverty fell sharply. Critics point to rising inequality in many rich countries, weaker job security (see precariat), repeated financial crises, and painful outcomes in some transition and debt-crisis economies. The 2008 financial crisis in particular revived arguments that financial deregulation had gone too far, and led to tighter bank capital and liquidity rules worldwide.
The debate has reached mainstream institutions. In 2016 three IMF economists, Jonathan Ostry, Prakash Loungani and Davide Furceri, published "Neoliberalism: Oversold?", arguing that unrestricted capital account liberalization and rapid austerity had brought smaller growth gains and larger risks than expected, while noting the benefits of trade and foreign investment. Others reply that the countries that grew fastest generally combined market reforms with strong institutions, so the lesson is about sequencing rather than direction.
Criticism from several directions
- From the left, writers such as the geographer David Harvey (A Brief History of Neoliberalism, 2005) describe it as a project to restore the power of wealth holders.
- From economic nationalists and the populist right, critics blame free trade and open borders for lost manufacturing jobs; since the late 2010s many governments have turned back towards tariffs and industrial policy.
- From free-market economists, some argue the term is a vague insult, and that most rich countries never shrank the state much: public spending as a share of GDP stayed high or rose.
- From scholars, some argue the concept is used so loosely that it explains little.