The Downfall of Neoliberalism: It Worked

Modern Political Ideology Part 1

The Downfall of Neoliberalism: It Worked

The story of neoliberalism is one of triumph and controversy, a tale of bold economic ideas that reshaped the global economy and profoundly impacted the political landscape. Born from the intellectual fervor of the mid-20th century and brought into practice during the late 20th century, neoliberalism sought to unleash market forces, reduce government intervention, and champion individual freedom. By many measures, it worked. From driving unprecedented global trade and economic growth to lifting millions out of poverty, the neoliberal framework achieved its primary objectives. Yet, the very successes that defined neoliberalism ultimately sowed the seeds of its downfall.

I. Origins of Neoliberalism

Neoliberalism’s intellectual foundations emerged in the mid-20th century as a reaction against the prevailing Keynesian economic model. Figures such as Friedrich Hayek, Ludwig von Mises, and Milton Friedman championed ideas of free-market capitalism, individual liberty, and limited government. They argued that centralized economic planning and heavy government intervention led to inefficiencies, corruption, and the erosion of personal freedoms.

The 1970s presented the perfect storm for neoliberal ideas to gain traction. The decade was marked by stagflation—a toxic combination of stagnant economic growth and high inflation—that discredited Keynesian economics. Policymakers in the West, particularly in the United States and the United Kingdom, sought a new approach. Enter Ronald Reagan and Margaret Thatcher, the political standard-bearers of neoliberalism.

Government’s first duty is to protect the people, not run their lives.

— U.S. President Ronald Reagan

Reagan and Thatcher implemented sweeping reforms aimed at deregulating industries, reducing taxes, and privatizing state-owned enterprises. Their policies were framed as a return to economic dynamism and individual liberty, appealing to electorates disillusioned by perceived government overreach. What followed was a global wave of neoliberalism, as nations around the world embraced free-market principles.

II. Core Pillars of Neoliberalism

Neoliberalism rested on several key tenets. While generally viewed as a package, the policy frameworks could bend and stretch in various directions based on expediency and feasibility.

Market Liberalization

Neoliberalism sought to remove barriers to trade and investment, believing that free markets would allocate resources most efficiently. Trade agreements like the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO) embodied this philosophy, fostering an era of globalization.

Deregulation

By rolling back government oversight, neoliberal policymakers aimed to reduce costs and increase efficiency. Industries such as finance, telecommunications, and energy experienced significant deregulation, leading to innovation and growth but also exposing vulnerabilities. In the words of Ronald Reagan, “Government’s first duty is to protect the people, not run their lives.”

Privatization

State-owned enterprises were transferred to private hands under the assumption that market competition would improve performance. Privatization campaigns were particularly prominent in the United Kingdom, where Thatcher’s government privatized utilities, airlines, and other key industries.

Monetary Policy and Fiscal Austerity

Central banks, particularly the Federal Reserve, focused on controlling inflation rather than prioritizing full employment. This shift in monetary policy, combined with fiscal austerity measures, sought to stabilize economies by reducing government debt and deficits.

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Sidebar: Austerity Around the Globe

Neoliberalism often championed austerity measures, emphasizing reduced government spending, lower public debt, and smaller welfare states. Between 1980 and 2010, this approach was central to the economic policies of many governments influenced by neoliberal thought. Below are some key examples of austerity during this period:

1. United States

Reagan Administration (1981–1989): President Ronald Reagan’s neoliberal policies included significant cuts to welfare programs, such as food stamps and housing assistance, alongside reductions in federal funding for education and urban development. While defense spending increased, non-defense discretionary spending was curtailed to align with his vision of limited government.

Clinton Administration (1993–2001): Although less explicitly neoliberal, President Bill Clinton embraced austerity through his 1996 welfare reform, which significantly reduced federal assistance to low-income individuals and families by imposing stricter work requirements and time limits on aid.

2. United Kingdom

Thatcher Government (1979–1990): Prime Minister Margaret Thatcher implemented severe austerity measures, cutting public spending and subsidies for industries. Her administration reduced welfare benefits and implemented tight fiscal policies to control inflation and reduce public debt.

Major Government (1990–1997): John Major’s government continued Thatcher’s policies, including public sector spending cuts, in the face of a challenging economic climate.

3. Latin America

Structural Adjustment Programs (1980s–1990s): Under the guidance of the International Monetary Fund (IMF) and World Bank, many Latin American countries, such as Argentina, Brazil, and Mexico, adopted austerity measures to address debt crises. These programs included deep cuts to public spending, privatization of state-owned enterprises, and reductions in subsidies for food, fuel, and healthcare.

4. European Union

Post-Cold War Eastern Europe (1990s): Following the collapse of the Soviet Union, many Eastern European countries adopted neoliberal reforms under the guidance of Western institutions. These included austerity measures like reducing public sector employment, cutting social spending, and privatizing state assets.

5. Asia

Asian Financial Crisis (1997–1998): In response to the crisis, countries such as Indonesia, South Korea, and Thailand implemented austerity measures under IMF bailout conditions. These measures included cutting government subsidies, reducing public sector jobs, and slashing social spending.

6. Africa

Structural Adjustment Programs (1980s–2000s): Similar to Latin America, many African countries faced IMF and World Bank-mandated austerity measures, which involved drastic cuts in healthcare, education, and social services in exchange for debt restructuring and financial aid.

7. Greece: Post-2010 Austerity Challenges

Background: Greece’s financial crisis erupted in 2009 when it was revealed that the government had significantly underreported public debt and deficits. This led to a loss of confidence in Greece’s ability to service its debt, forcing the country to seek bailouts from the European Union (EU), the European Central Bank (ECB), and the International Monetary Fund (IMF) — collectively known as the “Troika.”

Austerity Measures:

1. Wage and Pension Cuts: Salaries for public-sector employees were slashed, and pensions were reduced multiple times. These measures were deeply unpopular, especially in a country with an aging population heavily reliant on pensions.

2. Tax Increases: Greece implemented higher value-added taxes (VAT) and introduced new property taxes, which disproportionately affected middle- and lower-income households.

3. Public Sector Layoffs: Thousands of public-sector jobs were eliminated as part of efforts to reduce government expenditure.

4. Privatization: Key state assets, including ports, airports, and utilities, were sold to private investors.

5. Healthcare and Education Cuts: Spending on healthcare and education was significantly reduced, leading to declines in service quality and availability.

Consequences:

• Economic Contraction: Greece’s GDP contracted by about 25% between 2008 and 2016, marking one of the worst recessions in modern history.

• Unemployment: Unemployment peaked at over 27% in 2013, with youth unemployment reaching 60%.

• Social Unrest: The austerity measures sparked widespread protests, strikes, and political instability, leading to the rise of anti-austerity political parties like Syriza.

• Debt Dynamics: Despite austerity, Greece’s debt-to-GDP ratio increased, reaching 177% in 2015, as economic contraction outpaced debt reduction.

• Critiques: Many economists and policymakers argued that the austerity measures imposed by the Troika exacerbated Greece’s economic and social crisis, prolonging recovery and leading to severe hardships for the population.

Across all the different global regions, these austerity measures often led to increased inequality, reduced access to essential services, and public backlash, as they disproportionately affected vulnerable populations.

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III. Neoliberalism’s Achievements

Global Trade and Economic Growth

One of neoliberalism’s greatest triumphs was the expansion of global trade. The integration of developing economies into global supply chains brought significant economic benefits. China’s accession to the WTO in 2001 exemplifies this shift. As China became the “world’s factory,” consumers in developed countries benefited from lower prices on goods ranging from electronics to clothing.

Free trade agreements like NAFTA lowered barriers between nations, increasing the flow of goods, services, and capital. Between 1980 and 2020, global GDP grew at a remarkable rate, and millions of people were lifted out of poverty, particularly in Asia. India, for example, liberalized its economy in the 1990s, spurring rapid growth and reducing extreme poverty.

Consumer Price Deflation

Globalization and technological innovation led to significant price deflation in many sectors. The cost of consumer goods, from household appliances to smartphones, plummeted, increasing accessibility and improving living standards for billions of people. Walmart, Amazon, and other retail giants capitalized on these trends, offering a wide array of affordable products.

Technological Advancements

Neoliberal policies fostered an environment conducive to technological breakthroughs. Deregulation in the telecommunications industry, for instance, paved the way for the internet revolution. Venture capitalists thrived in a deregulated financial ecosystem, funding startups that would become global tech giants.

Economic Expansion and Wealth Creation

Neoliberalism created immense wealth, particularly for investors and corporations. Stock markets boomed, with the S&P 500 rising nearly 9,700% between 1980 and 2020. The financialization of the economy allowed for unprecedented capital flows, further fueling growth.

Decline in Global Poverty

Perhaps neoliberalism’s most widely celebrated achievement is the dramatic reduction in global poverty. According to the World Bank, extreme poverty (defined as living on less than about $2.00 a day) fell from nearly 43% of the global population in 1981 to just 9% by 2022. This shift was driven largely by economic growth in developing countries, many of which adopted market-oriented reforms.

IV. Cracks in the Foundation

Even as neoliberalism achieved its core objectives, cracks began to appear in its foundation. These would eventually grow into the structural weaknesses that spurred widespread criticism.

Unequal Benefits

While globalization created wealth on an unprecedented scale, the benefits were not evenly distributed. Corporations, shareholders, and urban elites reaped the lion’s share of the rewards, while working-class communities, particularly in deindustrialized regions, were left behind.

Dependence on Global Supply Chains

The emphasis on global trade created a dependency on international supply chains, leaving economies vulnerable to disruptions. The COVID-19 pandemic starkly illustrated this weakness, as shortages of essential goods exposed the fragility of just-in-time manufacturing systems.

Erosion of National Sovereignty

Critics argued that free trade agreements and global institutions like the WTO prioritized corporate interests over national sovereignty. Countries were often forced to comply with trade rules that undermined domestic industries and workers.

V. Prelude to the Downfall

The early 21st century saw growing discontent with neoliberalism. Anti-globalization protests, such as those during the 1999 WTO meeting in Seattle, highlighted the mounting opposition. However, it was the 2008 Financial Crisis that truly marked a turning point.

The crisis exposed the vulnerabilities of deregulated financial markets and the dangers of excessive risk-taking. It shattered the illusion of neoliberalism as a universally beneficial framework, sparking debates about inequality, corporate power, and the social costs of unfettered capitalism.

At the same time, populist movements on both the left and right began to challenge neoliberal orthodoxy. One such movement, Occupy Wall Street, was a left-wing populist movement against economic inequality, corporate greed, and big finance that began in New York City’s Financial District, and lasted for fifty-nine days in the fall of 2011. On February 19, 2009, populism on the right took off following a call by CNBC reporter Rick Santelli on the floor of the Chicago Mercantile Exchange suggesting that government bank bailouts deserved a “tea party” protest. From Bernie Sanders’ calls for economic justice to Donald Trump’s “America First” agenda, the political landscape shifted toward questioning the very foundations of globalization and free markets.

VI. Conclusion

Neoliberalism was, in many ways, a resounding success. It achieved its core objectives of fostering global trade, driving economic growth, and reducing poverty. Yet, these achievements came at a cost, as the benefits were unevenly distributed and the system’s inherent vulnerabilities became increasingly apparent.

As we reflect on the era of neoliberalism, we must grapple with the paradox of its success: a framework that worked so well for some also deepened inequalities and exposed systemic flaws. The seeds of its eventual downfall were sown in its triumphs. Part 2 of this series will explore these side effects in greater depth, examining how the cracks in the neoliberal model have reshaped political and economic discourse in the 21st century.

Notes:

The Common Sense Papers are an offering by Common Sense 250, which proposes a method to realign the two-party system in the United States with the creation of a new political superstructure that circumvents the current dysfunctional duopoly. The goal is to heal political divisions and reboot the American political system for an effective federal government.