NEOLIBERALISM: HISTORY, CHARACTERISTICS, CONSEQUENCES, REPRESENTATIVES - ECONOMY - 2025

The neoliberalism or neoliberal model is an economic and political doctrine which advocates absolute free market without any state intervention in its operation. It is an evolution of the classical liberalism of the 18th and 19th centuries, although it claims that the regulations are even lower than those proposed by authors such as Adam Smith.

The Great Depression of 1929 caused liberalism to lose face. The Keynesian policies used to overcome this crisis forced the state to intervene in the economy, while continuing to defend free trade. In addition, the fear that communist ideas would spread led Western countries to create welfare states with state social measures.

Milton Friedman - Source: http://www.thefamouspeople.com/profiles/milton-friedman-167.php / CC BY-SA (https://creativecommons.org/licenses/by-sa/4.0)

The paradigm shift began in the 60s and 70s of the 20th century. A generation of economists reworked liberal theory to totally eliminate state involvement in the economy. One of the first places its principles were implemented was in Chile, during the Pinochet dictatorship.

Neoliberalism established itself as the predominant economic system in the early 1980s of the 20th century. The assessment of its results varies enormously depending on the ideology of the experts. On the one hand, it is pointed out that the economy improves notably, but on the other it is pointed out that it only benefits a few and that it causes a large increase in inequality.

Origin, establishment and history

Neoliberalism shares many of the economic and social doctrines of the so-called classical liberalism of the 19th century. However, important differences can also be found.

The origin of the term neoliberalism dates from the 30s of the 20th century, in a context in which the consequences of the crisis of 29 were still being felt. Liberalism had been singled out as one of the culprits of the Great Depression, and some European authors tried to develop an economic theory that would correct some of its flaws.

The author of the term neoliberalism was Alexander Rüstow, in 1938. However, its definition at that time was very different from the current one. At the time, Rüstow and other scholars were looking for a third system between classical liberalism and socialism.

In this way, neoliberalism had to translate into the implementation of a system of free enterprise and trade, but with a strong State that controlled excesses.

Mont Pelerin Society

The change in the conception of neoliberalism occurred in the 1940s, with the publication of The Road to Serfdom, by Friedrich Von Hayek. Seven years later, Hayek himself called a meeting in Switzerland that other thinkers such as Karl Pepper and Von Mises attended.

The result of this meeting was the founding of the Mont Pelerin Society. This was set as an objective to develop a new theory within liberalism that advocated the elimination of any state interference.

The context in which the reformulation of neoliberalism took place was postwar Europe, after the Second World War. The vast majority of the countries of the continent were creating the so-called welfare state, with the intention of improving the standard of living of their citizens and providing them with a series of basic services.

Education, health or the pension system were implemented in almost all the West, without the disasters that Hayek had predicted in his work. For this reason, the ideas of neoliberalism were not taken into account for a long time, beyond in some academic centers.

Decades of the 60s and 70s

Experts say that the first country to implement neoliberal ideas was West Germany in 1966. Despite obtaining some success in helping to rebuild the country, the experience did not last long.

Neoliberalism re-emerged in 1974, in Chile. After the coup that had brought Augusto Pinochet to power, the country was going through a serious economic crisis. To overcome it, the new government sought help from the so-called Chicago School, a group of economists headed by Milton Friedman.

The measures implemented in Chile totally followed neoliberal ideas. Public companies were privatized and the private sector was given primacy.

Margaret Thatcher and Ronald Reagan

The impulse to the neoliberal policies of Margaret Thatcher, British Prime Minister, and Ronald Reagan, President of the United States, was essential for neoliberalism to spread throughout the planet.

Thatcher came to power in 1979 and Reagan in 1980. From their positions in government they exercised great control over the policies of the IMF and the World Bank, which helped them to impose a series of structural reforms on the rest of the countries. In this sense, one of the first affected countries was Mexico.

The general consequence was an increase in the accumulation of wealth by the elites of the industrialized countries. In addition, the speculative economy increased compared to the productive one.

Thatcher's policies in Britain focused, first, on wresting power from the unions, especially the miners. The prime minister privatized a large number of public companies and deregulated many economic activities. The results were the deindustrialization of the country, the improvement of macroeconomic indicators and the increase in inequality.

Thatcher managed to impose the idea that there was no possible alternative to neoliberalism, which he baptized with the acronym TINA (There is not alternative).

Ronald Reagan, for his part, also developed a neoliberal economic policy. Among its measures were the reduction of taxes and financial deregulation. However, the fiscal deficit did not stop growing.

Present

The term neoliberalism has acquired a negative connotation during the last decades. In addition, practice demonstrated the difficulty of applying all his ideas and the existence of adverse results for the bulk of the population.

For this reason, most governments have chosen to promote broad market freedom, but without eliminating state intervention in correcting excesses and deficiencies.

Many experts have blamed neoliberal policies for the outbreak of the last great economic crisis, between 2007 and 2008. The deregulation of finance, the commitment to speculative economy and the tendency to provoke bubbles, all characteristics of neoliberalism, are some of the the reasons for said accusation.

Characteristics of neoliberalism

Although the definition of the term has changed over time and, today, there are several currents, some general characteristics of neoliberalism that all its followers share can be listed.

Free market

The first characteristic of neoliberalism is its defense of the free market. His followers argue that it is the best way to allocate resources.

The neoliberals argue that prices should not be regulated at all, but must be set according to supply and demand. The lack of state intervention must occur both in the national and international markets, which is why they are against establishing tariffs on imports.

Privatization

For neoliberal economists, the private sector is the only one that should have a presence in the economy. This implies the privatization of all public companies, including health, banking and basic services (electricity, gas or water). There is even a current that advocates the privatization of education.

The opponents of this ideology point out that there must always be some sectors in the hands of the State. In addition, total privatization causes capital to be concentrated in an elite and supposes an increase in the prices of services. The richest will be able to access health or education much better than the rest of the population.

Deregulation

According to this doctrine, governments should not establish any type of regulation that affects economic activities. For them, total freedom of trade improves investment.

This deregulation includes the almost total reduction of taxes, in addition to other measures that may interfere with supply and demand.

Critics, for their part, argue that the lack of regulation causes a total lack of protection for workers.

Tax reduction

As noted above, neoliberalism advocates that taxes on economic activities are as low as possible.

The main consequence is the reduction of state resources and, therefore, that social programs decrease. The neoliberals, however, do not consider this to be a problem, since they argue that public spending is minimal.

Individual responsibility

The philosophy on which neoliberalism is based upholds legal equality between all individuals. Beyond the law, neoliberals maintain that each person has different capabilities, which should be rewarded differently according to their productivity.

In this way, neoliberals put all the responsibility on the individual. In the event that good healthcare cannot be afforded, for example, it will be the fault of your poor earning abilities, without the state having to do anything to provide it.

Consequences

The identification between neoliberalism with a sector of the political right causes the analysis of the consequences to depend, many times, on the ideological orientation of each expert.

Reduction of workers' rights

The extreme economic liberalization that this doctrine seeks is accompanied by much greater wage flexibility. This tends to lead to lower wages, lower public employment and lower unemployment protection measures. Workers lose a good part of their rights in the event of possible dismissal.

Elimination of public health

Health is usually one of the sectors that neoliberals seek to privatize. According to his ideas, the private sector better manages all health services, in addition to privatization saving the state budget.

On the negative side, privatizing healthcare leaves many citizens who cannot afford private assistance unprotected.

Global trade expansion

In recent decades, neoliberalism has been closely linked to globalization. The different international organizations have tried to eliminate tariffs to boost international trade.

This expansion of trade has meant that many workers in developing countries have been able to improve their living conditions. Many industries have moved their factories to countries with lower wages, which has led to an increase in unemployment in certain parts of the developed nations.

Growth of the financial economy versus the productive economy

Although it is not only due to the introduction of neoliberalism, experts affirm that there has been a great increase in the financial economy compared to the productive one.

It is an economic growth that is not based on producing products, but on the sale and purchase of complex financial products. One of the triggers of the last crisis was precisely one of these products: subprime mortgages.

Inequality

In general terms, the introduction of neoliberal measures has led to an improvement in the macroeconomic data of the country in question. Thus, aspects such as deficit or productivity have grown, as has the number of employees.

However, this has been accompanied by a large increase in inequality. The rich tend to improve their situation, while the workers lose purchasing power. In recent years a new social class has emerged: those who do not (or narrowly) do not pass the poverty line despite having a full-time job.

Advantage

Higher market growth

One of the advantages of neoliberalism is that it causes great market growth. By removing regulations and restrictions, companies can expand their business networks around the world and reach more consumers.

In addition, as there is no type of price control, profits will only be determined by the demand and supply of each product.

Greater competition

Competition between companies will also benefit from applying neoliberal measures. This, in principle, should bring benefits to consumers, as producers will have to strive to improve quality and prices to outcompete the competition.

Improving macroeconomic data

Experience in countries that applied neoliberal recipes has shown that some economic indicators tend to improve. They are, in general, those related to the macroeconomy, such as the Gross Domestic Product, fiscal balances or employment data.

However, the behavior of the microeconomics, those that most affect citizens, is not so positive: salaries are reduced, inequality increases and social programs that help the most disadvantaged are eliminated.

Disadvantages

Social crisis

One of the most important disadvantages of neoliberalism is the risk of social crises.

These types of economic policies tend to end up causing bubbles that, when they explode, trigger serious economic crises. Social unrest increases and, as many scholars point out, it can lead to significant social imbalances. One of the risks is the appearance of populist political groups that manage to come to power due to the discontent of the population.

Wealth concentration

One of the most frequent accusations critics make of neoliberalism is that it enhances the concentration of wealth in a few hands. Furthermore, on many occasions, the most benefited are not related to the productive economy, but to the financial and speculative.

The direct consequence of this concentration of wealth is the increase in inequality. In some cases, the privatization of health and educational services exacerbates this problem.

Creation of monopolies

Although neoliberalism is against the formation of monopolies, the reality is that its measures favor their creation.

This, which already happened with classical liberalism, is due to the fact that economic power is concentrated in a small group that, to increase its profits, ends up reaching agreements and forming monopolies.

This circumstance not only hurts the population, but also small companies, unable to compete with these large conglomerates.

Environmental and rights issues

The economic power accumulated by business elites allows them to pressure governments to legislate in their favor. The main consequence is the reduction of workers' rights, since neoliberals consider that there should be no general regulatory frameworks.

On the other hand, in recent times concern about the environment has become more acute. The lack of regulations that neoliberalism defends prevents any control of the damage that is caused to nature.

Representatives of neoliberalism their ideas

Friedrich Von Hayek (1899-1992)

The Austrian economist and philosopher is considered one of the fathers of neoliberalism. His book The Path of Serfdom contains the main bases of this current and made him the leading figure of the Austrian school.

In his work, Hayek was totally against the state having any participation in the economy. For him, the market had to regulate itself. Otherwise, economic and political freedom would be threatened.

Milton Friedman (1912-2006)

Milton Friedman was an American economist who was awarded the Nobel Prize in Economic Sciences in 1976. His main contribution was monetary theory.

According to his work, the free market is the only way to make the economy grow in a stable manner, without inflation. For the author, market forces are more efficient than any public participation.

Wilhelm Röpke (1899-1966)

This German economist and sociologist was one of the components of the Mont Pelerin Society. His influence on economic policy in West Germany gave him great prestige.

Despite the fact that his work is framed within neoliberalism, Röpke admitted some participation of the State. His theories, thus, were used to develop the so-called social market economy, in addition to being one of the intellectuals who promoted the so-called "German miracle"

Ludwig von Mises (1881-1973)

Von Mises was another of the most important theorists of neoliberalism during the 20th century. His theories were framed within the liberal-libertarian movement, which defended the free market. As Hayek he belonged to the Austrian School.

This author claimed that any government intervention in the economy was harmful. His theory pointed out that if such an intervention occurred, the result would not be natural and would generate chaos in the long term.

References

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