Intervention – We have never been neoliberal

Kean Birchby Kean Birch, York University

This is a slightly revised version of an article that originally appeared on the New Left Project website

This article was originally written as a response to a piece on the New Left Project website by anthropologist Jason Hickel. He wrote an article, ‘A short history of neoliberalism (and how we can fix it)’, which contained a number of problematic generalizations about neoliberalism. Now, while I have sympathy with some of Hickel’s arguments (and have actually made similar ones in the past myself), I take issue with the way he characterizes certain aspects of neoliberalism in his argument, especially how he characterizes monetarism. What it represented was the way that neoliberalism and associated terms like monetarism or ‘Volcker Shock’ are often used indiscriminately and without proper explanation. In this brief essay I seek to illustrate this claim in order to point out that it is too simplistic to classify the transformation of Anglo-Saxon political economies over the last few decades as the exemplar of neoliberalism. In fact, we could even argue that they are not neoliberal after all.

Starting with Hickel’s argument; he claims that:

Neoliberalism has a specific history, and knowing that history is an important antidote to its hegemony, for it shows that the present order is not natural or inevitable, but rather that it is new, that it came from somewhere, and that it was designed by particular people with particular interests.

This is a laudable aim for any take on our current political-economic system, and not one that I want to dispute here. Rather, I’d like to outline how Hickel’s presentation of core elements of neoliberal thinking and policy prescriptions is flawed when it comes to monetarism and monetary policy. Aside from historical accuracy, this is important because understanding these things in more detail actually problematizes the notion that we have ever been, or are now, neoliberal.

A concern with monetary policy – or the control of the money supply and inflation – is the foundation on which much of later, supposedly neoliberal thinking and policies have rested. Many things that are now identified as neoliberal – including privatization of national industries and public utilities, liberalization of trade and capital movement, and deregulation – have one thing in common: they are premised on a particular understanding of the economy in which the stability of money and the dangers of inflation are key concerns. Hence, understanding monetarism and monetary policy is central to understanding wider neoliberal processes and policies – if we accept that those other things are neoliberal in themselves, which is a topic for another day.

My argument necessitates two things: first, the ability to put aside political preferences for a minute or two in order to learn to think like a neoliberal (difficult I know, but important nevertheless); and, second, learning a bit of monetary theory. The latter may actually be trickier than the former.


‘Neoliberals’ – and I apologize for using scare quotes here but I think it is important to do so – like Friedrich von Hayek and Milton Friedman were concerned with money and monetary issues because they had a particular (and peculiar I might add) take on capitalism; they viewed the capitalist market as something that is ‘natural’ and necessary for ensuring freedom – see Friedman’s book Capitalism and Freedom for a prime example of this way of thinking. This means that anything that disturbs the (assumed) natural functioning of the market mechanism – which is itself dependent on private property and individual transacting – not only counts as unnatural, liable to fail and therefore incredibly costly, but also represents an assault on human freedom. Hence why neoliberals are so vociferously against government intervention – it not only disturbs the market mechanism, but it ultimately leads down the ‘road to serfdom’ as Hayek so stridently put it. Why is this important? Well, when it comes to money and monetary policy, thinkers like Friedman and Hayek – plus adherents to the Chicago, Austrian and other neoliberal schools – place a particular emphasis on taking politics and politicians out of the picture when it comes to the money supply. According to Friedman, this lifeblood of capitalism needs to be “free from irresponsible governmental tinkering” in order to “prevent monetary policy from being subject to the day-to-day whim of political authorities” (Capitalism and Freedom, p. 51).

This helps to explain what it was about Keynesianism that got the goat of monetarists like Friedman. The key to understanding their overall concerns, and hence the ‘neoliberal’ perspective, is their fear that the Keynesian policy of full-employment would entrench an inflationary cycle as inflation was used to control real wages in response to pressures from trade unions, because wage restraint or moderation could not be used without the threat of industrial conflict. In the Keynesian model, then, inflation helped to meet the growing demands of an increasingly powerful labour movement, but was always dependent upon the maintenance of rising industrial productivity and ultimately demand. A good discussion of these fears can be found in Richard Cockett’s book Thinking the Unthinkable. To neoliberals, this meant that inflation was inevitable and that the inflationary pressures produced by the concentrated power of labour would mount over time as wages ratcheted up, leading to the erosion of the natural and proper functioning of the market, as well as political freedom. In these circumstances, neoliberals argued that governments would have no choice but to intervene, regulate and interfere more in the market as there would be no other mechanism to curb inflation, and this would gradually erode economic, and hence political, freedom. The shared concern with this prospect is what helped to bring together a wide array of often different thinkers – including the Austrian School, Freiburg School, first and second Chicago Schools, British intellectuals from Manchester and the LSE, business foundations, and so on – in a ‘neoliberal’ mélange.

This is the reason why monetary concerns are central to neoliberal thought. They became a key part of neoliberal policy-making as the 1970s progressed, since the ideas of people like Friedman seemed to become increasingly self-evident as inflation accompanied growing stagnation (i.e. ‘stagflation’), and it was hard to explain this rising unemployment alongside rising inflation using Keynesian ideas. As an aside, rather than the orthodox view that US government spending on the Vietnam War and then the 1973 oil crisis caused these inflationary pressures, I have made the argument elsewhere that an important and overlooked reason for rising inflation was the emergence of the state-less Eurodollar market which enabled financial institutions to increasingly raise and lend money outside of national regulatory control, leaving governments with no instrument to restrain the creation of money. The recent book by Nicholas Shaxson, Treasure Islands, provides an illuminating insight into this international financial market and the problems it has caused elsewhere. This, though, is a yet another topic for yet another day.


It is important to remember that neoliberals, to continue using that fuzzy term, have a point – or at least a point of view. It is somewhat hard to appreciate this, however, without some grounding in the basics of monetary policy. This is where I feel the need to correct Hickel’s argument (and those of others). My main concern is with his characterization of the Volcker Shock – named after Federal Reserve Chairman Paul Volcker – and monetary policy. I would suggest reading Geoff Mann’s article here for an accessible and detailed explanation of monetary policy and its evolution.

Hickel follows David Harvey’s arguments in A Brief History of Neoliberalism that neoliberalism is really about the restoration of class power as the top 1% reasserted themselves politically and ideologically during the 1970s, 1980s and beyond. Obviously, this restoration is geographically specific in that there are major differences between countries, as this blog by Timothy Taylor illustrates. So, it is important to note that Harvey concentrates on the USA context, making his claims very country-specific – a great website called The World Top Incomes Database enables you to look at the differences between countries. That issue aside, the discussion of the Volcker Shock by Hickel (and often others) misses some crucial points and misunderstands some monetarist arguments when it comes to monetary policy back in the 1970s.

The key to remember is that monetary policy concerns the money supply; literally this means the amount of money in an economy. For a more detailed discussion see the website New Economic Perspectives and especially their ‘primer’ on modern monetary theory, or the New Economics Foundation booklet Where does money come from? There are different ways to measure the money supply and these are called monetary aggregates. They can be crudely split between M1, M2 and M3. Each refers to a different form of money: M1 represents actual cash (i.e. coins and notes) as well as deposits in current accounts which can be accessed immediately; M2 represents M1 plus money in savings accounts and mutual funds that take longer to access; and M3 represents M1, M2 and even larger and longer-term deposits (e.g. certificates of deposit). It is important to note that monetarists expected M1 to circulate about six times in any year; this is called the velocity of money and can be worked out by dividing GDP by M1. Monetarists also assumed – in contrast to Keynesians – that any increase in the money supply would lead to a subsequent increase in incomes as more money circulates thereby driving up inflation – see Michael Barratt Brown on this.

Unlike what Hickel argues in his article, monetarists do not want governments to use interest rates to cut inflation – that is not the point monetarists are trying to make. Instead they want governments to stop using interest rates as a way to influence inflation (or unemployment) and instead to focus on controlling the money supply by literally stabilizing the amount of money in an economy. Governments can do this by not increasing the amount of money in circulation. That would mean that governments simply stop printing more money to resolve their economic problems (e.g. wage demands, fiscal crises, etc.) and, more importantly, that governments let the market function properly to find the ‘correct’ price for money in any economy; that is, the amount that people are willing to pay for money (i.e. price) that then reflects the scarcity of money at any given time. This will mean that as money becomes scarcer (i.e. gains value) it will become more expensive (i.e. have higher interest rates), and vice versa. This was the theory at least…

What happened with Volcker illustrates the wrong-headedness – or perhaps naivety, to choose a kinder word – of monetarists and is important to appreciate if you want to criticize so-called neoliberalism. The best outline of these issues is in William Greider’s magnificent book Secrets of the Temple which covers, in great detail, the evolution of Federal Reserve policy during the Carter and Reagan administrations. The first thing to note is that the Federal Reserve is independent of the government, and so it is incorrect to imply that Volcker worked at the behest of either Carter (who appointed him in 1979) or Reagan (who reappointed him in 1983, despite concerns). Second, it is more accurate to claim that Volcker tried to institute monetarism, but important to note that this meant that he sought to let interest rates rise or fall in relation to the demand for monetary aggregates (see above) rather than simply raising interest rates.

Third, it is crucial to highlight the failure of monetarism as a policy tool: it simply did not work because the Federal Reserve (and other central banks) found that their control over monetary aggregates did not translate into control over inflation or the economy. This largely resulted from the instability of the monetary aggregates themselves as – in contrast to what monetarists expected – the velocity of money slowed down and thereby “disrupted all the standard monetary equations” in Greider’s words (Secrets of the Temple, p. 479). Simply put, the aggregate changed as the Federal Reserve sought to control it. This did not mean that inflation lost its position as a central concern, merely that interest rates ended up being used as a mechanism to target a specific inflation level set by the Federal Reserve (and other central banks). This inflation-targeting, however, was not monetarism; see Mann’s article for more on this policy redirection. So, monetarism was a failure – it didn’t work and was abandoned as a way to control inflation to influence the economy. Moreover, and fourthly, it was implemented by Volcker who often ended up in conflict with both the Carter and Reagan administrations as a result. This was even the case in relation to Reagan and especially when it came to Reagan’s very loose fiscal policy. The fact that Reagan could not cut government spending for the first few years of his administration resulted from problems caused by the Volcker Shock itself. For instance, higher interest rates made investment more expensive, which led to a rise in unemployment and thus an increase in people receiving welfare. This outcome was compounded by Reagan’s fiscal policies, especially tax cuts, which led inexorably to the wholesale expansion of US federal public borrowing through the sale of government debt securities and the decision to give up inflation as a mechanism to cut this growing debt. As a result, the national debt tripled during the Reagan administration and, more importantly, doubled in real terms because of falling inflation that came after the Volcker Shock; see John Steele Gordon.

My wider argument – see here – is that inflation was curtailed during this time, not as a result of monetarism but rather through the expansion of national public debt that resulted from the sale of government debt securities and rising real interest rates. The wealthiest 1% benefited enormously as a result of these changes, for sure, but so did anyone with mutual funds, a pension fund, savings, or other forms of asset (e.g. housing). First, real interest rates – that is, interest rates minus inflation – rose again after years of negative real interest rates during the 1970s cutting into the value of all sorts of assets; see graphs for the USA and Canada and the UK. Second, governments ended up owing interest on all the outstanding government debt. According to Miguel Centeno and Joseph Cohen, what is evident here is a shift in government policy from taxing the wealthiest people to fund government expenditure, to simply borrowing money off the wealthiest people and then paying them interest on that debt. This necessitated more than simple supply-side economics; it required the wholesale transformation of the political-economic system, and the enrolment of large swathes of the population in this system as more and more people were enticed by membership of the ‘property-owning democracy’ espoused by Thatcher and the like. The outcome was the emergence of an asset-based economy which tied people closer to a particular form of capitalism, one driven by rising asset values rather than incomes as well as the interest returns on those assets, and not the rise and fall of neoliberal hegemony – despite what I and colleagues have argued elsewhere I might add!

Now, in conclusion, I agree with people like Hickel that what happened was (and is) not inevitable; people made decisions about these issues, they pursued particular policies to promote those decisions, and so on. What I think is important to consider, however, is that these decisions and policies do not necessarily provide evidence of a specifically ‘neoliberal’ restoration of class power. Indeed, the chronic instability of the economic system that has been constructed over the past few decades stands in marked contrast with the early neoliberals’ emphasis on the importance of economic stability. This instability results, in part at least, from the underlying transformation of our societies from income-based to asset-based political-economic systems. This restructuring was driven by the anti-inflation logic of neoliberal thinkers like Friedman who presented the inflationary pressures of organised labour (e.g. rising wage demands) as structurally problematic; as a result, income inflation became the bogeyman of economic policies around the world. In contrast, the logic of asset inflation meant that rising property ownership – whether it be in the form of financial products, housing, pensions, etc. – came to seem natural, liberating and even moral. The key difference between these logics, however, is important to appreciate; this difference is that as the value of an asset goes up so does demand for that asset, feeding a seemingly continual expansion of wealth. This ‘wealth effect’ has tied whole swathes of the population to the interests (pun intended) of the top 1%. However, the downside of the wealth effect is all-too-evident in the ongoing financial crisis and all the other asset bubbles since the 1970s. The asset-based transformation of the economy has in fact led to a much more unstable political-economic system, and not the market stability envisaged by neoliberals all those years ago.

Kean is currently writing a book tentatively titled We Have Never Been Neoliberal, but which he may rechristen Manifesto for a Doomed Youth. It will be published by Zero Books.