NEOLIBERALISM

A spectre is haunting the world, just as Karl Marx and Friedrich Engels wrote in the Communist Manifesto of 1848. This time, however, it is not the spectre of communism but that of neoliberalism.(1) Just as Marx and Engels reported of ‘a holy alliance to exorcise this spectre,’ there is once again an alliance, whether holy or unholy, that has formed to chase the ghost of neoliberalism from the world stage.

In any case, it is a curious alliance that has committed to fighting neoliberalism: Religious leaders and artists, environmental activists and globalisation critics, politicians of the left and the right as well as trade unionists, commentators and academics. They all share a passion to unmask neoliberalism as an inhuman, anti-social, and potentially misanthropic ideology or as a cynical exercise by strangely anonymous forces that wish to exploit the world to their own advantage.

The members of this colourful alliance against neoliberalism are as united in their opposition to neoliberalism as they are diverse. This suggests that neoliberalism cannot be too clearly defined as a concept. Rather, it is a broad umbrella under which very different groups with various points of view can meet. In the church of anti-neoliberalism, there is a place for anyone who believes that neoliberalism stands in the way of reaching his or her political goals. This may also explain the lack of any clear and coherent definition of neoliberalism among its dissenters.(2)

Yet the most curious characteristic of neoliberalism is the fact that these days hardly anyone self-identifies as a neoliberal. In former times, ideological debates were fought between, say, conservatives and socialists, collectivists and individualists. While there may not have been any other agreement between these opposing groups, at least they would have agreed about their respective identities. A socialist would not have felt offended by a conservative calling him a socialist and vice versa.

In present-day debates around neoliberalism, on the other hand, most accused of holding ‘neoliberal’ views would not accept being called ‘neoliberal.’ Either they would insist on being something else (whether it is ‘liberal,’ ‘classical liberal,’ or ‘libertarian’), or they would simply claim to be misunderstood by their opponents. In any case, scarcely anybody wants to be a ‘neoliberal’ any more. For example, in an online survey of the readers of Andrew Norton’s blog, out of more than 1,200 participants not a single person self-identified with the term, while ‘classical liberal,’ ‘conservative,’ and ‘libertarian’ were strong responses.(3) These are strange debates indeed when the enemy you are fighting claims he does not exist.

Maybe this is not so strange after all. If neoliberalism is hardly ever defined, if it can mean anything you wish to disagree with, then it is understandable that it results not from an attempt to gain theoretical knowledge but from the desire to defame your political opponents. In this way, the neoliberal label has become part of political rhetoric, albeit as an almost meaningless insult.

It was not always like this. At the beginning of neoliberalism, when the term was invented, it was quite the opposite of what we think of it today. The shallowness with which we use neoliberalism in a pejorative way corresponds inversely with the depth of thought by its original users. Even more surprisingly, the original ‘neoliberals’ have little in common with those who are nowadays called ‘neoliberal.’

Crisis and neoliberalism
Times of crisis naturally induce a wide-ranging critique of hitherto unchallenged concepts. So it is unsurprising that times of economic crisis, too, have provoked re-examinations of the way markets work. Two quotes may exemplify this.

There is one author who writes about the economic turmoil of his time: ‘[The crisis] has called into question the prevailing ... neo-liberal orthodoxy that has underpinned the national and global regulatory frameworks that have so spectacularly failed to prevent the economic mayhem which has now been visited upon us.’ He goes on to claim that ‘in the past year we have seen how unchecked market forces have brought capitalism to the precipice’ and concludes: ‘Neither governments nor the peoples they represent any longer have confidence in an unregulated system of extreme capitalism.’

Another commentator is equally clear. He diagnosed the ‘chaos of a pluralist, predatory economy’ and the ‘failure of economic liberalism.’ What was needed, he insisted, was ‘a strong state, a state above the economy, above the interest groups where it belongs.’

Although both commentators seem to come from similar points of view, they could not be more different. They are separated not only by some 70 years but also by their political persuasions, professional backgrounds, and nationalities. Furthermore, the first author claims to be a fierce critic of neoliberalism while the second one is the original inventor of the term neoliberalism.

To solve this riddle, let us lift the curtain and reveal their identities. The first quotes are taken from the essay ‘The Global Financial Crisis’ by Australian Prime Minister Kevin Rudd, which he published in the journal The Monthly in early 2009. It was seen as Rudd’s broad sweeping attack on neoliberalism.(4)

The second commentator is Alexander Rüstow, a German sociologist and economist, and the quotes are from a speech(5) he delivered to the Verein für Socialpolitik (Social Policy Association), a German economics association, in 1932 and the title of one of his books that was published in 1945.(6) It was the very same Alexander Rüstow who, in 1938, coined the term neoliberalism.

If Rudd and Rüstow sound so similar, yet one of them rejects the concept of neoliberalism while the other invented it, then either there must be some sort of misunderstanding or the term itself has undergone a transformation over the past decades.

In a way, one could argue that what happened in a small, far-away country almost a century ago (i.e. early twentieth century Germany) should hardly matter for contemporary Australian politics. The world has moved on and today’s debates are not the same as, say, those of the 1930s. On the other hand, it is more than just a vain exercise in intellectual archaeology when we are dealing with the birth of neoliberalism. We can see that early neoliberalism recognised both the power of markets and their limitations. Today’s critics of ‘neoliberalism’ are probably unaware that one of the defining features of early neoliberal conceptions was to put a check on unfettered markets and market power. This may well hold some ideas for policy makers today simply because neoliberals distinguished between areas in which the state could and should intervene and others in which it should not.

The invention of neoliberalism
The year in which the neoliberal program was first formulated was 1932. Germany’s leading economics association, the Verein für Socialpolitik, had invited the young economist Alexander Rüstow to its annual conference in Dresden. The Verein’s long-serving president was Werner Sombart, the leader of the so-called Kathedersozialisten (‘catheder socialists’) from the Historical School of Economics. Sombart, an open supporter of national-socialism, lacked any sympathies for liberalism. He had planned to make the Dresden meeting a rallying cry for his cause. But to his dismay, the relatively little known Rüstow delivered the most noticed speech at the conference, which was later published and republished many times. Until the present day, it is widely regarded as the founding document of neoliberalism.(7)

The speech was titled ‘Freie Wirtschaft, starker Staat’ (Free Economy, Strong State), and in these four words we can already see Rüstow’s basic economic creed. Far from supporting Sombart’s national-socialist visions, Rüstow blamed excessive interventionism for the economic crisis. He also warned of burdening the state with the task of correcting all sorts of economic problems. His speech was the clear rejection of a state that gets involved with economic processes. In its place, Rüstow wanted to see a state that set the rules for economic behaviour and enforced compliance with them. It was a limited role for the state, but it required a strong state nonetheless. Apart from this task, however, the state should refrain from getting too engaged in markets. This meant a clear ‘No’ to protectionism, subsidies, cartels—or what today we would call ‘crony capitalism,’ ‘regulatory capture,’ or ‘corporate welfare.’ However, Rüstow also saw a role for a limited interventionism as long as it went ‘in the direction of the market’s laws.’

Throughout his later life as an academic Rüstow further developed this vision of neoliberalism, as he himself called the idea, and published numerous books and essays in which he elaborated the system of a market economy under the rules of law and limited government. Many of them were written in exile: After the Gestapo, Hitler’s secret police, had searched Rüstow’s home in 1933, he decided to leave Germany and accepted a teaching position in Istanbul. He remained in Turkey until he returned to (West) Germany in 1949 to lecture at the University of Heidelberg.

In his essay ‘Between Capitalism and Communism’, Rüstow explicitly argues for a ‘Third Way’ between the two ideologies.(8) He acknowledged that markets generally worked well under complete competition. However, he accused Adam Smith of holding a polemical grudge against the state that had made him neglect the necessary state-determined institutions of markets. This, so Rüstow claimed, caused the degeneration of the market economy into a system of untenable capitalism. In a long footnote, he went on to explain that he needed to insist on a differentiation between ‘the truly free market economy of complete competition’ and its ‘subventionist-monopolist-pluralist degeneration,’ which he thought of as a ‘pathologically degenerate variety’ of true market competition and for which he suggested the term ‘capitalism.’

If laissez faire and Adam Smith style liberalism were so bad according to Rüstow, would he then have preferred a planned economy? His answer was a resounding no. With the same rhetorical verve he used to condemn capitalism, he equally rejected the promises of socialism and communism. They were no viable economic systems, and they were also incompatible with democracy, freedom, and human dignity.

All of this led him to call for a middle way between laissez faire and socialism, a ‘Third Way.’ ‘We should be happy,’ Rüstow wrote, ‘that we do not have to make a difficult choice between “capitalism” and “communism”, but that there is a “Third Way”.’(9) Ironically, it is the very same logic that makes today’s critics of neoliberalism claim that one no longer had to choose between Hayek and Brezhnev, as Prime Minister Kevin Rudd expressed it in an address to the Centre for Independent Studies in 2008.(10)

Although contemporary supporters of a ‘Third Way’ claim to be fighting neoliberalism, to Rüstow this very same ‘Third Way’ was neoliberalism. He called it neoliberalism to differentiate it from earlier liberalism, for which Rüstow frequently used derogatory terms such as ‘vulgar liberalism,’ ‘Manchester liberalism,’ or ‘paleo-liberalism.’ Rüstow wanted to break with this old liberal tradition to put a new liberalism in its place—hence the prefix ‘neo’.

Rediscovering neoliberalism
We should see the current attacks on neoliberalism in this wider historical context.

It seems to be a reflex to blame problems in the markets as problems of the markets. On closer inspection, some of the perceived market failures may well turn out to be failures of economic policy. Where Rüstow and the German neoliberals, for example, thought that cartelisation and monopolisation of the economy were the result of a degenerate market economy, historical analysis rather shows that they were the direct consequences of protectionism and interventionism—which Rüstow and his colleagues heavily criticised.

In a similar way, we ought to be careful when it comes to identifying the causes of the current crisis. Again, there are good reasons to look at both suspects, the government and the market. While there are good reasons to assume that there was indeed some market failure leading up to the crisis, there are at least as many reasons to think that they were preceded by government failures. Even where and when markets fail, however, this does not give governments a blank cheque to correct market results. First, it would need to be demonstrated that corrections can actually improve the situation.

It is a fine balance that needs to be found between the state and the economy. Although there are good reasons to be critical of the German neoliberals’ original historical analysis, their policy prescriptions nevertheless remain valuable discussion points. Rüstow’s differentiation between the state as the guarantor of economic order, as the rule-giver that stands above economic processes, and the failed interventionist state that meddles with economic processes and gets easily captured by special interests, are still valid. It would be worth to rediscover them, especially today.

The discussions about the proper political reactions to the global financial crisis are, sadly, not as nuanced as they could be. For example, when we read Kevin Rudd’s ‘anti-neoliberal’ essay we find some strong language right from the first paragraph where he blames ‘free-market fundamentalism,’ ‘extreme capitalism,’ and ‘excessive greed’ for our economic problems.

Nevertheless, if we look behind this rather shrill rhetoric, we can read in Rudd’s essay about his recognition of ‘the great strengths of open, competitive markets.’ In fact, Rudd explicitly warned not to ‘throw the baby out with the bathwater’ as ‘the pressure will be great to retreat to some model of an all-providing state and to abandon altogether the cause of open, competitive markets both at home and abroad.’

Taken together, the criticism of laissez faire plus the recognition of the power of markets and scepticism of state power is the core of the neoliberal project as it was once formulated. This would almost make the Prime Minister a neoliberal in the original meaning of the word, although he would probably be surprised if he found out. However, Rudd’s policies suggest that he is less aware of the limits of government than he is aware of the limits of markets.

If there is one lesson that we could draw from dealing with the early history of neoliberalism for our political debates today, it is this: Neoliberalism is a far richer, more thoughtful concept than it is mostly perceived today. First and foremost, it emphasised the importance of sound institutions such as property rights, freedom of contract, open markets, rules of liability, and monetary stability as prerequisites for markets to prosper and thrive. It seems that the global financial crisis has once again demonstrated how important these core insights of neoliberalism are.

To those criticising neoliberalism today, the answer may well be just that: We need more of this kind of neoliberalism, not less. What we would need less of is only the rhetorical abuse of neoliberalism for political purposes