Free market defined

This is my latest book review for the FT Wealth section of the Financial Times.

Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics, by Daniel Stedman Jones, Princeton University Press, 2012, RRP£24.95

Few appreciate the enigmatic character of free market thinking. The free market has its ardent admirers and its fierce critics but, as a rule, neither side spends much time examining what the term means.

Masters of the Universe does a good job of filling the gap. Daniel Stedman Jones, now a barrister but formerly with Demos, the centre-left think-tank, makes no secret of his opposition to neoliberalism. But, unlike critics such as David Harvey and Naomi Klein, he does not dismiss it as an ideological instrument of class warfare.

Instead, he looks in detail at the ideas, organisations and personalities behind the rise of free market thinking. The book started life as a PhD thesis at the University of Pennsylvania but is clearly written and relevant to a wide audience. It incorporates a wealth of primary material, including insights drawn from the papers of prominent thinkers and interviews with more recent supporters.

The first challenge in tackling the subject is working out how to define, or even label, the free market outlook. Its supporters often favour classical liberalism, while its critics generally prefer neoliberalism or market fundamentalism. However, in the past its supporters have also referred to neoliberalism.

It is easier to define what it is against than what it supports. Historically, neoliberals have opposed what they see as the totalitarianism of the right and the left, the US New Deal of the 1930s, progressivism and contemporary liberalism.

It is also clear that, in the UK and the US at least, neoliberalism goes beyond minimal state involvement in the economy. Typically, its supporters also favour competition, consumerism, deregulation and the price mechanism. Underlying this outlook is the premise that individuals generally try to pursue their rational self-interest.

Stedman Jones shows there is significant variation between time and place. Shortly after the second world war, the neoliberals favoured a minimal social safety net more than they did later. In contrast, German neoliberals backed extensive welfare provision and strong anti-monopoly regulation alongside a market economy. This outlook informed the creation of the Federal Republic of Germany’s social market economy from 1949 onwards.

From the 1920s until about 1950, neoliberalism emerged largely in response to the turmoil in central Europe. Austrian and German thinkers, in particular, reacted against the rise of socialism and of Nazism. The three most influential neoliberals in the mid-20th century were Austrian: Friedrich Hayek, Karl Popper and Ludwig von Mises. All had left Austria before the war and found homes in English-speaking countries.

The main focus of the book is what Stedman Jones identifies as the second phase of neoliberalism from 1950 to the early 1980s. During the 1950s and 1960s the Anglo-American neoliberals were viewed as cranks in academic and policy circles: Keynesian demand management was almost universally accepted and full employment was widely seen as a key policy goal.

The neoliberals developed their ideas in academia while building a network of think-tanks to promote them in the wider world. When a global economic crisis emerged in the 1970s they were in a prime position to supersede the discredited mainstream.

Although the story is well drawn by Stedman Jones, he fails to capture fully the failures or successes of neoliberal thought. Neoliberalism’s great victory was the near-universal public acceptance that there is no alternative to the market economy. Socialism is off the agenda. But the neoliberals have failed in their goal of rolling back the state. Public spending has remained stubbornly high in the US and the UK.

What has changed is more accurately characterised as re-regulation than deregulation. Many old restrictions have gone but new forms of intervention have emerged. For instance, central banks have become active economic players and it turns out that large banks were implicitly underwritten by the state as “too big to fail”.

Whatever advocates and critics of neoliberalism say, western economies are a long way from being free markets.