Neoliberalism, Hayek, and the Austrian School of Economics
Introduction: Hayek and the Austrian School
Friedrich von Hayek (1899–1992) is probably the single most influential individual economist or political philosopher to shape what is now understood as neoliberalism, although he is best regarded, and considered himself, as a classical liberal. Hayek’s own theoretical direction sprang out of the so-called Austrian School established by Carl Menger, Eugen Boehm-Bawerk, and Ludwig von Mises during the first decade of the early twentieth century. What distinguished the Austrian School from the classical school of political economy pioneered by Adam Smith and David Ricardo was their “subjective,” as opposed to the “objective,” theory of value. Leon Walras (1834–1910) of the French Lausanne school presented economics as “the calculus of pleasure and pain of the rational individual,” and Carl Menger, developing the “subjective” theory of value, launched what some have called a “neoclassical revolution” in economics (see Moser 1997). Menger questioned the notion of perfect information that was seen to underlie homo economicus by both classical and neoclassical economists.
It was Mises’ strong anti-socialism that informed the corpus and theoretical direction of Hayek’s work, particularly his work on business cycles. Hayek became the director of the Institute for Business Cycle Research, which he and Mises set up, in 1927. Shortly thereafter in 1930, Hayek was invited to the London School of Economics (LSE) to lecture on trade cycles, where he was soon after appointed to a chair in economics and statistics. While at the LSE, Hayek was involved in two famous debates, first, with Keynes over interventionism (and, in particular, Keynes’ alleged failure to understand the role that interest rates and capital play in a market economy) and, second, during the early 1920s, with Oskar Lange and others over the nature of socialist planned economy. However, Keynes star was on the rise during the 1930s and Hayek’s criticisms were downplayed by the international economic community.
Hayek addressed himself again to the problems of the nature of the planned socialist economy in one of his most famous and populist works The Road to Serfdom (1944), a book that suggested that the absence of a pricing system would prevent producers from knowing true production possibilities and costs. It also warned about the political dangers of socialism, in particular, totalitarianism, which he thought came directly from the planned nature of institutions. After the Second World War in the year 1947, Hayek set up the very influential Mont Pelerin Society, an international organization dedicated to restoring classical liberalism and the so-called free society, including its main institution, the free market. Hayek was concerned that even though the Allied Powers had defeated the Nazis, liberal government was too welfare oriented, a situation, he argued, that fettered the free market, consumed wealth, and infringed the rights of individuals. With the Mont Pelerin Society, Hayek gathered around him a number of thinkers committed to the “free market,” including his old colleague Ludwig von Mises as well as some younger American scholars who were to become prominent economists in their own right – Rose and Milton Friedman, James Buchanan, Gordon Tullock, and Gary Becker – and went on to establish the main strands of American neoliberalism: the Chicago School (see, e.g., Friedman 1962), public choice theory (see, e.g., Buchanan and Tullock 1962), and human capital theory (e.g., Becker 1964). Hayek’s liberalism was also very influential in Britain, especially with the Institute of Economic Affairs and with Margaret Thatcher, who came to power as the leader of the British Conservative Party, in 1979. We might say that neoliberalism, historically, was at its strongest during the era of the transatlantic partnership between Ronald Reagan and Margaret Thatcher, during the decade of the 1980s, and its dominance began to wane in the 1990s.
In 1950, Hayek moved to the University of Chicago, where he wrote The Constitution of Liberty (1960), his first systemic treatise on classical liberal political economy. In 1962, Hayek moved to the University of Freiburg where he developed his theory of spontaneous order. The market, he argued, was a spontaneously ordered institution that had culturally evolved in the same way that the institutions of language and morality had evolved. They were not the product of intelligent design; such social institutions, like their counterparts in the physical world (crystals, snowflakes, and galaxies), had evolved as spontaneously ordered institutions. The market, then, while the result of human actions over many generations, was not the result of human design.
Hayek, then, emphasized the limited nature of knowledge: the price mechanism of the “free” market conveys information about supply and demand that is dispersed among many consumers and producers and cannot be coordinated. In addition, Hayek’s liberalism emphasized methodological individualism; homo economicus, based on assumptions of individuality, rationality, and self-interest; and the doctrine of spontaneous order.
It was during the decade of the 1980s that Hayek’s political and economic philosophy was used by Thatcher and Reagan to legitimate the neoliberal attack on “big government” and the bureaucratic welfare State with a policy mix based on “free” trade and the establish of the “open” economy: economic liberalization or rationalization characterized by the abolition of subsidies and tariffs, floating the exchange rate; the freeing up of controls on foreign investment; the restructuring of the State sector, including corporatization and privatization of State trading departments and other assets, “downsizing,” “contracting out,” the attack on unions, and abolition of wage bargaining in favor of employment contracts; and, finally, the dismantling of the welfare State through commercialization, “contracting out,” “targeting” of services, and individual “responsibilization” for health, welfare, and education. On this view there is nothing distinctive or special about education or health; they are services and products like any other, to be traded in the marketplace.
These policies, sometimes referred to as “the Washington Consensus,” were designed to “restructure” or adjust national economies to the dramatic changes to the world economy that have occurred in the last 20 years: the growing competition among nations for world markets, the emergence of world trading blocs and new “free trade” agreements, an increasing globalization of economic and cultural activities, the decline of the postwar Keynesian welfare State settlement in Western countries, the collapse of actually existing communism and the “opening up” of the Eastern bloc, and the accelerated worldwide adoption and development of the new information and communications technologies.
…increased exports, reduced domestic demand, various constraints on government spending and some privatization; with a few notable exceptions, it has not entailed policies that greatly increase inequality or poverty. Rather, many of the richer economies have focused on “self-adjusting” mechanisms to rationalize production and the public infrastructure that serves productive and social functions. Their educational systems have not suffered and, in general, their education professionals have made income gains. In the best of cases, education has improved and teachers have participated in making that improvement happen. (Carnoy 1995, p. 654)
Drawing upon this difference in practice, Carnoy surmises that there are several categories of structural adjustment and that in the case of the richer nations, the term stands for a set of policies which originated in the USA during the 1970s as the dominant view of how economies in crisis, typically those of developing countries characterized by high indebtedness, should reorganize to achieve growth. Such policies called for cuts in public expenditure on services, including education, precisely at the point when a shift to a global information economy required massive public investment in an information infrastructure – with an attendant emphasis on mass education – necessary to take advantage of changes in the nature of the world economy.
Carnoy attributes the emergence of the dominant view to two factors: the richer nations of the OECD already enjoyed favorable conditions which allowed them to self-adjust and to respond positively to rapidly changing technology, and the paradigm shift from Keynesianism to neoliberal monetarism led to “a dramatic increase in real interest rates to reduce inflationary tendencies… and to sharp cuts in foreign loans” (p. 655). The neoliberal monetarist paradigm also became the dominant view at the international level, shaping the outlook of world institutions such as the International Monetary fund (IMF) and the World Bank (WB), which imposed structural adjustment policies (SAPs) on developing countries as a response to their continuing and exacerbating debt problems.
Neoliberalism has been associated most in the popular imaginary with policies of privatization. Indeed, it is privatization that has provided the basis for strategies to reduce the size of the State (while, paradoxically, often strengthening its constitutional powers), to reduce the accumulated national debt, while at the same time encouraging foreign investment and, advocates claim, inaugurating the age of popular capitalism. Privatization can be a complex phenomenon. Le Grand and Robinson (1984, p. 3) comment, “… any privatisation proposal involves the rolling back of the activities of the state.” Privatization, thus, involves three main kinds of activity which parallel the three main types of State intervention: a reduction in State subsidy, a reduction in State provision, and a reduction in State regulation. Privatization can take many forms: schemes differ not only in the type of State intervention whose reduction or elimination they require but also in what is proposed in its stead and the replacement of the State by the market, by another form of State activity, or by nonprofit-making organizations such as charities or voluntary organizations which are neither private firms nor State enterprises (Le Grand and Robinson 1984, p. 6).
A number of commentators have pointed out privatization does not take only the form of the sale of State-owned assets and enterprises: other parallel forms include contracting out, deregulation, user fees, voucher systems, and load shedding. Others (e.g., Heing et al. 1988) have concluded on the basis of comparing recent experience in Britain, France, and the USA that privatization is more of a political strategy than an economic and fiscal technique. While the case for privatization is based upon well-known theories, the drive for privatization is more complex and often involves political factors such as reducing public sector borrowing or reducing government financial risk. Pitelis and Clarke (1993, p. 6) note that the case for privatization policies is often strong on a priori theorizing and weak in empirical confirmation.
The Main Elements of Neoliberalism
For neoliberals the commitment to the free market involves two sets of claims: claims for the efficiency of the market as a superior allocative mechanism for the distribution of scarce public resources and claims for the market as a morally superior form of political economy. Neoliberalism as a political philosophy involves a return to a primitive form of individualism, an individualism which is “competitive,” “possessive,” and construed often in terms of the doctrine of “consumer sovereignty.” It involves an emphasis on freedom over equality where freedom is construed in negative terms and individualistic terms. Negative freedom is freedom from State interference which implies an acceptance of inequalities generated by the market. Neoliberalism is both anti-state and anti-bureaucracy. Its attack on big government is made on the basis of both economic and ethical arguments (see Peters and Marshall 1996).
In the following list, I have identified 12 features of neoliberalism from a viewpoint heavily influenced by Michel Foucault’s (1979) notion of governmentality. Foucault uses the term “governmentality” to mean the art of government and, historically, to signal the emergence of distinctive types of rule that became the basis for modern liberal politics. His starting point for the examination of the problematic of government is the series security, population, and government. He maintains that there is an explosion of interest on the “art of government” in the sixteenth century which is motivated by diverse questions: the government of oneself (personal conduct), the government of souls (pastoral doctrine), and the government of children (problematic of pedagogy). Foucault says that the problematic of government can be located at the intersection of two competing tendencies: a State centralization and a logic of dispersion. This is a problematic that poses questions of the how of government rather than its legitimation and seeks “to articulate a kind of rationality which was intrinsic to the art of government without subordinating it to the problematic of the prince and of his relationship to the principality of which he is lord and master” (Foucault 1991, p. 89). It is only in the late sixteenth and early seventeenth centuries that the art of government crystallizes for the first time around the notion of “reason of state,” understood in a positive sense whereby the State is governed according to rational principles that are seen to be intrinsic to it. In charting this establishment of the art of government, Foucault thus details the introduction of “economy” into political practice (understood as “the correct manner of managing goods and wealth within the family”). In line with this analysis, Foucault defines governmentality in terms of a specific form of government power based upon the “science” of political economy, which over a long period, he maintains, has transformed the administrative State into one fully governmentalized and led to the formation of both governmental apparatuses and knowledges (or savoirs). In elaborating these themes, Foucault concentrates his analytical energies on understanding the pluralized forms of government, its complexity, and its techniques. Our modernity, he says, is characterized by the “governmentalization” of the State. He is interested in the question of how power is exercised, and, implicitly, he is providing a critique of the contemporary tendencies to overvalue the problem of the State and to reduce it to a unity or singularity based upon a certain functionality. This substantive feature – the rejection of State-centered analyses – has emerged from the governmentality literature as it has become a more explicit problematic.
Classical liberalism as a critique of State reason: A political doctrine concerning the self-limiting state; the limits of government are related to the limits of State reason, i.e., its power to know; and a permanent critique of the activity of rule and government.
Natural versus contrived forms of the market: Hayek’s notion of natural laws based on spontaneously ordered institutions in the physical (crystals, galaxies) and social (morality, language, market) worlds has been replaced with an emphasis on the market as an artifact or culturally derived form, and (growing out of the “callaxy” approach) a constitutional perspective that focuses on the judicio-legal rules governing the framework within the game of enterprise is played (see Buchanan 1991).
The politics-as-exchange innovation of public choice theory (“the marketization of the state”): The extension of Hayek’s spontaneous order conception (callactics) of the institution of the market beyond simple exchange to complex exchange and finally to all processes of voluntary agreement among persons (see Buchanan and Tullock 1962).
The relation between government and self-government: Liberalism as a doctrine which positively requires that individuals be free in order to govern; government as the community of free, autonomous, self-regulating individuals; “responsibilization” of individuals as moral agents; and the neoliberal revival of homo economicus, based on assumptions of individuality, rationality, and self-interest, as an all-embracing redescription of the social as a form of the economic.
A new relation between government and management: The rise of the new managerialism, “New Public Management”; the shift from policy and administration to management; the emulation of private sector management styles; the emphasis on “freedom to manage”; and the promotion of “self-managing” (i.e., quasi-autonomous) individuals and entities.
A “degovernmentalization” of the State (considered as a positive technique of government): Government “through” and by the market, including promotion of consumer-driven forms of social provision (health, education, welfare), “contracting out,” and privatization.
The promotion of a new relationship between government and knowledge: “Government at a distance” developed through relations of forms of expertise (expert systems) and politics, development of new forms of social accounting, an actuarial rationality, referendums and intensive opinion polling made possible through the new information and computing technologies, privatization and individualization of “risk management,” and development of new forms of prudentialism.
An economic theory of democracy (“the marketization of democracy”): An emerging structural parallel between economic and political systems – political parties have become entrepreneurs in a vote-seeking political marketplace; professional media consultants use policies to sell candidates as image products; voters have become passive individual consumers. In short, democracy has become commodified at the cost of the project of political liberalism and the State has become subordinated to the market.
The replacement of “community” for “the social”: The decentralization, “devolution,” and delegation of power/authority/responsibility from the center to the region, the local institution, and the “community”; the emergence of the shadow State; the encouragement of the informal voluntary sector (and an autonomous civil society) as a source of welfare; and “social capital.”
Cultural reconstruction as deliberate policy goal (“the marketization of ‘the social’”): The development of an “enterprise society,” privatization of the public sector, the development of quasi-markets, marketization of education and health, and a curriculum of competition and enterprise.
Low ecological consciousness (Anthony Giddens): “Green capitalism,” “green consumerism,” linear as opposed to ecological modernization, “no limits to growth,” and market solutions to ecological problems.
Promotion of a neoliberal paradigm of globalization: World economic integration based on “free” trade; no capital controls; and International Monetary Fund (IMF), World Bank (WB), and World Trade Organization (WTO) as international policy brokers.
By the 1980s neoliberalism both as a political philosophy and policy mix had taken deep root. During that decade many governments around the world supported the modernizing reform thrust of neoliberalism, particularly the exposure of the State sector to competition and the opportunity to pay off large and accumulating national debts. By contrast, many developing countries had “structural adjustment policies” imposed upon them as loan conditions from the IMF and WB. The reforming zeal soon ideologizes the public sector per se and ended by damaging key national services (including health and education). By the mid-1990s, the wheel had turned again – this time toward a realization that the dogmatism of the neoliberal right had become a serious threat to social justice, to national cohesion, and to democracy itself. Large sections of populations had become structurally disadvantaged, working and living, on the margins of the labor market; rapidly growing social inequalities had become more evident as the rich had become richer and the poor, poorer; companies were failing and underperforming; public services had been “stripped down” and were unable to deliver even the most basic of services; many communities had become split and endangered by the rise of racism, crime, unemployment, and social exclusion. National governments throughout the world looked to a new philosophy and policy mix – one that preserved some of the efficiency and competition gains but did not result in the forms of social splitting and exclusions.
One model advocated by the current British prime minister, Tony Blair, and the US president Bill Clinton, called the “Third Way,” aims to revitalize the concern for social justice and democracy while moving away from traditional policies of redistribution, to define freedom in terms of autonomy of action, demanding the involvement and participation of the wider social community. Some commentators see nothing new in the “Third Way,” regarding it as a return to the ethical socialism of “old labor.” Other critics see it as a cover for the wholesale adoption of conservative policies of privatization and the continued dismantling of the welfare State. Still others suggest that the “Third Way” is nothing more than a spin-doctoring exercise designed to brand a political product as different from what went before. Sloganized as “market economy but not market society,” advocates of the “Third Way” see it as uniting the two streams of left-of-center thought, democratic socialism and classical liberalism, where the former is said to promote social justice with the State as its main agent and the latter said to assert the primacy of individual liberty in the market economy. Understood in this way, the “Third Way” is a continuance of classical liberalism, born of the same political strategy of integrating two streams as the New Right (neoliberalism and neoconservatism), but this time the “other” stream is social democracy rather than conservatism.
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