The rise and fall of Neoliberalism

This review was first published last Thursday in the Financial Times.

Neoliberalism is frequently portrayed as the malevolent ideology of the super-rich. Its critics contend that its preference for minimal state regulation favours the strong over the weak. The conclusion usually drawn is that state powers need to be strengthened to protect the vulnerable.

Unfortunately the term is rarely defined clearly in such discussions. It often simply suggests a sense that the wealthy are free to abuse their economic power by dominating the rest of society. In that respect it is more often used pejoratively than with an understanding of its true meaning.

Against that backdrop The Rise and Fall of Neoliberal Capitalism should be warmly welcomed. For one thing, it has a whole chapter called “What is neoliberalism?” Supporters and critics of the concept would do well to read it.

David Kotz, a professor of economics at the University of Massachusetts Amherst, rejects one common definition of neoliberalism. He accepts that relative to gross domestic product the size of American government has not decreased since the onset of the neoliberal era in about 1980. Instead it has stayed at more or less the same level once cyclical fluctuations are stripped out.

Indeed, in terms of absolute spending the size of government has increased considerably in real terms. Since the economy is substantially bigger than it was in 1980, the amount of spending is much higher, even though the share has remained steady.

Despite this concession, Kotz maintains his view that the US has become neoliberal. His argument is that the neoliberalism is defined by the state’s withdrawal from key areas of economic intervention. For instance, it has renounced Keynesian demand management and allowed for the deregulation of the financial sector.

But Kotz is too quick to dismiss the significance of the size of American government. According to figures from the International Monetary Fund, the total spending of US government in 2014 amounted to $6.4tn or 37 per cent of GDP (that is, including not just federal government but also state level and local spending). These figures alone raise questions about what the state is doing if not intervening in society or the economy.

Not only does it spend huge amounts on the military — which Kotz concedes — but substantially more on education, healthcare and pensions. Whether such spending is desirable is another matter, but it is certainly inconsistent with a classical liberal view of a minimal role for government.

The activist character of government is also reflected in the huge number of regulations published annually by the federal government. For example, the number of pages devoted to rules in the Federal Register, an official record of federal government, reached 26,417 in 2013. This compares with 21,092 in 1980 and 12,589 in 1976. Such figures may not be a perfect measure of state intervention but strongly suggest government is playing an extensive regulatory role.

Of course Kotz is right to point to important policy changes over the years. Keynesian demand management has certainly gone out of fashion even if high public spending has not. But the changes are more accurately described as a reregulation – a change in the forms of regulation and intervention – rather than deregulation.

For example, monetary policy has become far more activist over what Kotz characterises as the neoliberal period. The Federal Reserve has taken a high-profile role in managing interest rates and more recently quantitative easing. It is richly ironic that the Fed chairman from 1987 to 2006 was Alan Greenspan, an ardent devotee of Ayn Rand, an arch free marketeer.

Kotz is on particularly shaky ground when he refers to the emergency measures enacted in 2008–09 as a return to a “Keynesian moment”. He is forced to accept that the huge bank bailout and the rescue of General Motors were inconsistent with a free market. The same is true of the Dodd-Frank Act for financial reform. It is arguable that such measures were necessary, but they were not an aberration. They were not nearly as great a departure from the previous or subsequent years as Kotz suggests.

Even on the level of rhetoric, the ideas of neoliberalism have little purchase. Outside of a few university seminar rooms and think-tanks it is, for better or worse, pragmatism that reigns.

The Rise and Fall of Neoliberal Capitalism, by David M Kotz (Harvard University Press, 2015). RRP£29.95/$39.95