A Brief History Of Neoliberalism

In Chapter 1, Harvey further defines neoliberalism and describes its political and ideological origins. Harvey begins with a discussion of the concept of “freedom” and its importance to social movements and societies, especially within the United States. He takes as an example the US invasion of Iraq after the 9/11 attacks. In the absence of evidence that Saddam Hussein was developing nuclear weapons, the Bush administration publicly stated that its reason for the invasion was to bring “freedom” to the Iraqi people. This freedom took the form of forced economic liberalization by privatizing public assets, opening Iraqi institutions such as the banks to foreign trade, eliminating trade barriers like taxes and tariffs, and disciplining the labor market by restricting unionization and strikes. Only oil, as a key resource, remained a publicly held asset. A conservative “flat tax” policy was also enacted. These policies were imposed by the US-led Coalition Provisional Authority and then confirmed by the interim Iraqi government in 2004.

Harvey describes this set of policies developed by the United States and imposed on Iraq as emblematic of a “neoliberal state” (7). These policies privilege private property and financial capital. Harvey then describes the history of one of the United States’s first attempts at “neoliberal state formation” (7), in Chile. In 1973, the US-backed General Pinochet carried out a coup against the socialist democratically elected President Salvador Allende. Under Pinochet, a group of economists known as “the Chicago boys” who had been trained at the University of Chicago under neoliberal economist Milton Friedman were brought in to restructure the Chilean economy. They privatized many government services and economic sectors, including social security, and privileged foreign investment and exports. Like oil in Iraq, the country’s key resource, copper, remained under public control. In 1982, the Latin American debt crisis forced Chile to moderate some of these neoliberal policies. However, it was an important example for those in the United States and the United Kingdom who supported neoliberalism.

In the section, “Why the Neoliberal Turn?,” Harvey describes how neoliberalism replaced the classical liberalism of the post-World War II order. After WWII, there was a “class compromise between capital and labour” (10), where many countries pursued a blend of capitalism and communism through the Bretton Woods agreements and related treaties. The policies of many countries at this time, including in the United States, were designed to ensure its citizens’ welfare and employment, sometimes by intervening in the economy to avoid recessions through economic stimulus spending and similar measures inspired by Keynesianism. This system is known as “embedded liberalism.” From 1945, this system worked well in “advanced capitalist countries,” but not in most of the developing world (11). However, in the 1960s, embedded liberalism no longer assured economic growth and the system began to break down. This left two possibilities: socialist and communist solutions, such as those pursued in Portugal, Italy, and Sweden, or the reassertion of market capitalism.

Market capitalism, and the neoliberal order, became dominant for a variety of reasons, but Harvey stresses that a key reason was that socialism or communism was a political and financial threat to the ruling class. In the 1960s, the elite faced political threats from the left as well as an economic crisis: Growth had slowed, and they were losing assets during the crisis. The elite learned from Chile and Argentina that forced privatization could redistribute wealth upward—to them—and increase income inequality. Other historical examples in the 1990s such as post-Soviet Russia and NAFTA-era Mexico confirm this pattern of the upward redistribution of wealth. Harvey concludes that neoliberalism is a political project to reinforce the power of elites.

In the section “The Rise of Neoliberal Theory,” Harvey discusses the intellectual foundation of neoliberalism, beginning with the work of Austrian political philosopher Friedrich von Hayek and his colleagues at the Mont Pelerin Society. They described themselves as liberals, because they valued personal freedom, and as neoliberal, because of their belief in free market principles. They opposed Keynesian theory and state interventions generally. Harvey notes that the neoliberalism that emerged with Hayek and his colleagues is not an entirely coherent theory: While it emphasizes the importance of free markets unimpeded by state intervention, it also requires a strong state to enforce, sometimes violently, property rights and market functions. The Mont Pelerin Society and its theories were supported and adopted by business elites and their ideas were promoted by think-tanks, such as the Heritage Foundation, and university programs, such as the University of Chicago economics department. In 1979, these policies were adopted by Margaret Thatcher in the United Kingdom and by Paul Volcker in the United States. Under Volcker, the United States no longer concerned itself with full employment and focused solely on bringing down inflation. (The author references without explaining the classic economic theory, “the Phillips Curve,” which holds that high inflation is correlated with low unemployment and vice-versa; so by increasing unemployment, inflation can be reduced.) To reduce inflation and increase unemployment, Volcker reduced the supply of money, under a political theory known as “monetarism.” This raised the interest rate to historical highs and triggered a recession, known as the “Volcker shock.” In 1980, Reagan supported Volcker’s work and pursued other neoliberal policies such as breaking unions, deregulation, and reducing corporate taxes.

This domestic policy was supported by foreign policy. During the 1970s, Saudi Arabia and other oil-producing states, under pressure from the US, agreed to send its petrodollars to New York investment banks, leading to enormous reserves that these banks wanted to invest globally by lending to foreign governments. To create new markets internationally, the United States has historically used its “imperial tradition” to install sympathetic leaders through coercion or force, who would then open their countries to American and other foreign investment (27). As an example: In 1953, the United States backed the coup of the democratically elected government in Iran to install the US-friendly Shah. In the 1980s, the United States tested a new model of this imperial tradition in Mexico. Mexico defaulted on its loans from the United States because of the rise in interest rates set off by the Volcker shock. The United States, along with the International Monetary Fund (IMF) and World Bank, agreed to restructure the loan repayments if Mexico agreed to implement a series of neoliberal economic measures. This practice, known as “structural adjustment,” included high interest rates that allowed the elite to make a lot of money.

In the section “The Meaning of Class Power,” Harvey sets out the definition of class under neoliberalism. While class means different things in different places, under neoliberalism the economic elite class have the privileges of both ownership and management and derive most of their wealth from finance rather than production. In other words, they make money off of money and complex financialization instruments rather than from the production of goods and services. They also have a close relationship to state power, or people in the government, whether through familial ties or lobbying efforts. These economic elites operate internationally, but also typically have ties to particular national governments, which gives them much more power than ordinary people. In contrast to these economic elites, the working class are those who primarily make money through the production of goods and service. Members of the economic elite hire them for their labor; in exchange, the economic elite enjoy the profits of these goods and services while the working class receives a wage as compensation for their labor.

In the section “Freedom’s Prospect,” Harvey analyzes a definition of freedom as described in 1944 by Hungarian political scientist Karl Polanyi, a definition that deviates from the one created by the free market system. Polanyi notes that, insomuch as there are “good freedoms,” there are bad ones, too, such as “‘freedom to exploit’” or the freedom of corporations to create panics (36). He criticizes Hayek for ignoring the possibilities of these bad freedoms under liberalism and says such an order can only be maintained through force and coercion. Harvey states that this analysis describes the contemporary world well.