Chapter 14: The Neoliberal Turn

In 1975, inflation in Britain topped 24 percent. Unemployment was rising. The government had to seek an IMF loan—a humiliation for a former imperial power. In the United States, the misery index—unemployment plus inflation—peaked at over 20 in 1980, levels that seemed to mock the promise of managed prosperity. The comfortable certainties of Keynesian management seemed to evaporate. Politicians who had grown up believing that competent government could fine-tune the economy faced a reality that refused to cooperate.

Into this vacuum stepped a set of ideas that had been waiting in the wings for decades. Milton Friedman and the Chicago School. Friedrich Hayek and the Austrian revival. Supply-side economics and its promise that cutting taxes would boost growth. These ideas, once dismissed as ideological relics, suddenly seemed prophetic. If Keynesian intervention had failed, perhaps the answer was less intervention, not more.

The neoliberal turn would reshape global economics. It would dismantle the postwar consensus and construct something different in its place. Four decades later, we live with the results.

The Monetarist Challenge

Milton Friedman's monetarism offered a simple, powerful alternative to Keynesian demand management.

Inflation, Friedman argued, is always and everywhere a monetary phenomenon. Too much money chasing too few goods drives prices up. The solution isn't fiscal fine-tuning; it's controlling the money supply. Central banks should focus on monetary stability, not full employment. Try to boost employment beyond its "natural rate," and you'll just create inflation without lasting employment gains.

Friedman's attack on Keynesianism was both theoretical and empirical. His A Monetary History of the United States (with Anna Schwartz) reinterpreted the Great Depression: it wasn't market failure that caused the catastrophe but Federal Reserve failure. The Fed allowed the money supply to contract by a third, turning a recession into a depression. The lesson wasn't that government should intervene more; it was that government should intervene correctly—by providing monetary stability.

The policy implications were profound. Central banks should target monetary aggregates, not interest rates. Governments should restrain spending, not use fiscal policy to manage demand. Markets, given sound money and clear rules, would find equilibrium on their own.

The Free Market Revival

Beyond monetarism, a broader intellectual movement was gaining momentum. The Chicago School—Friedman's institutional home—had been developing free-market economics for decades. Their arguments reached far beyond monetary policy.

Deregulation: Many industries had been regulated on the theory that markets failed there—natural monopolies, safety concerns, public interest. The Chicago School argued that regulation often caused more harm than good, protecting incumbent firms from competition, raising prices, stifling innovation. Airlines, trucking, telecommunications, finance—all were candidates for deregulation.

Privatization: State-owned enterprises, common in Europe and much of the developing world, were targets. Private ownership, Chicago economists argued, provided stronger incentives for efficiency. Sell the state enterprises and let competitive markets work.

Free trade: Barriers to international trade—tariffs, quotas, subsidies—distorted prices and reduced efficiency. Free trade would allow comparative advantage to operate, raising living standards everywhere. This became especially significant for developing countries, which the Washington Consensus would soon press toward openness.

Labor market flexibility: Unions and minimum wages, in this view, didn't protect workers—they priced them out of jobs. Reducing labor market regulation would increase employment, even if it also increased inequality.

Reagan, Thatcher, and the Political Turn

Ideas require political vehicles. They found them in Ronald Reagan and Margaret Thatcher.

Thatcher came to power in Britain in 1979 determined to reverse what she saw as national decline. Her program was confrontational: breaking union power (most dramatically in the year-long miners' strike of 1984-85, which she won decisively), privatizing nationalized industries (British Telecom, British Gas, British Airways, eventually the railways), deregulating the City of London's financial sector, cutting taxes. "There is no alternative," she declared—TINA, the acronym that captured the ideological certainty of the moment.

TINA was more than a slogan; it was a rhetorical strategy that foreclosed debate. If there is no alternative, then the question is not whether to adopt market reforms but only how fast. Resistance becomes not principled disagreement but mere obstruction. The inevitability of market logic became self-fulfilling: if everyone believes there is no alternative, no one looks for one.

Reagan followed in 1981 with a similar program adapted for American conditions. Massive tax cuts—the top rate fell from 70 percent to 28 percent. Deregulation. Hostility to unions, crystallized when he fired striking air traffic controllers. Military buildup. Supply-side economics promised that tax cuts would pay for themselves through increased growth. They didn't, exactly—deficits exploded—but that was a detail the ideology could absorb.

The political economy of neoliberalism was as important as its economics. Coalition-building united business interests (wanting deregulation and tax cuts), social conservatives (often skeptical of government anyway), and an emerging class of professionals whose incomes placed them in higher tax brackets.

When the Democratic and Labour parties returned to power in the 1990s, they largely accepted the new framework rather than reversing it. Clinton's "New Democrats" and Blair's "New Labour" triangulated: they would be tougher on crime, friendlier to business, less beholden to unions. Clinton signed NAFTA, deregulated telecommunications, repealed Glass-Steagall banking restrictions. Blair embraced the Private Finance Initiative, kept Thatcher's union laws, maintained tight fiscal policy. They promised to manage neoliberalism more humanely—a "third way" between old-style socialism and raw capitalism—but not to replace it.

The significance of Clinton and Blair was profound: they removed the political alternative. When even center-left parties accepted the basic premises of market fundamentalism, opposition collapsed. TINA had won.

The Washington Consensus

The neoliberal program went global through what came to be called the Washington Consensus—a package of policies promoted by the U.S. Treasury, the IMF, and the World Bank for developing countries seeking assistance.

The standard prescription:

1. Fiscal discipline (balanced budgets)
2. Redirecting public spending toward education, health, and infrastructure
3. Tax reform (broadening the base, lowering rates)
4. Market-determined interest rates
5. Competitive exchange rates
6. Trade liberalization
7. Openness to foreign direct investment
8. Privatization of state enterprises
9. Deregulation
10. Secure property rights

Countries in crisis—facing debt, inflation, balance-of-payments problems—had little choice but to accept these conditions. Structural adjustment programs attached liberalization requirements to emergency lending. The result was rapid, often wrenching transformation of economies across Latin America, Africa, and Asia.

The results were mixed at best. Some countries grew; others stagnated. Some reduced poverty; others saw it spike during adjustment. What was consistent was the ideological frame: markets good, government bad, liberalization necessary.

What Neoliberalism Delivered

Four decades on, we can assess the results.

On growth: The neoliberal era saw substantial global growth, particularly in countries like China and India that integrated into world markets. But growth rates in the developed world actually slowed compared to the postwar decades. The thirty years before 1980 saw higher growth in the U.S. and Europe than the thirty years after.

On inflation: Here neoliberalism succeeded. Inflation, the demon that had killed the Keynesian consensus, was tamed. Central bank independence, inflation targeting, and monetary discipline brought price stability to most of the developed world.

On inequality: Inequality increased dramatically. In the U.S., the share of income going to the top 1 percent more than doubled. Wage growth for ordinary workers stalled while compensation for executives exploded. Wealth concentration reached levels not seen since the Gilded Age. Globally, inequality between countries may have decreased (as China and India grew), but inequality within most countries increased.

On financial stability: Deregulation produced recurrent crises: savings and loan, Asian financial, dot-com, and finally 2008. Minsky's warning came true: stability bred instability. The very success of inflation control may have encouraged the risk-taking that produced financial disaster.

On legitimacy: The neoliberal order rested on promises of growth and prosperity. When growth accrued to the few while the many stagnated, legitimacy eroded. The political upheavals of the 2010s—Brexit, Trump, populist movements across Europe—reflect in part the exhaustion of neoliberal legitimacy.

The Coherentist Critique

From a coherentist perspective, neoliberalism made a fundamental error: it treated one coordination mechanism—the market—as universally appropriate.

Markets create resonance under specific conditions: when transactions are voluntary, when prices reflect true costs, when information is roughly symmetric, when competition is genuine. Outside these conditions, markets generate dissonance: externalities accumulate, power concentrates, communities fray.

Neoliberalism extended market logic into domains where those conditions didn't hold. Healthcare markets struggle with information asymmetry; financial markets are prone to bubbles and panics; labor markets involve human beings who cannot be treated as inputs without social consequences.

The result was not simply inefficiency but delegitimization. When people experience the economy as rigged—when gains flow to the already-wealthy while their own prospects dim—they lose faith in the system. The consent that legitimizes any coordination mechanism erodes. What remains is not free-market dynamism but resentment and backlash.

The Thread Forward

The neoliberal order is now contested in ways it hasn't been for decades. Industrial policy is respectable again. Governments intervene in markets with less apology. The assumption that markets know best is no longer unquestioned.

But what replaces neoliberalism remains unclear. The old Keynesian synthesis cannot simply be restored; conditions have changed too much. Something new is struggling to be born.

Before we can envision that something new, we must understand more precisely what went wrong. The next chapter examines Thomas Piketty's contribution: the data on inequality, the argument that capitalism tends toward concentration, and the implications for economic coordination and social legitimacy.