Neoliberalism’s ‘unfailures’

Economic policies enacted under neoliberalism have often failed to meet their objectives, but have remained unchallenged. Why do certain policy failures have so little impact?

Political economists are fascinated by crises and the failures that they so often reveal: the collapse of the Gold Standard, the Great Depression, the stagflation crisis, the Great Recession. We see them as the inflection points in our economic history—the moments when the failure of one economic order is made visible and another takes its place.

Yet economic failures—even very big ones—do not always have this kind of political salience. The 2008 global financial crisis began as a massive, highly public failure for contemporary neoliberal theory and practice. A decade on, however, what is most striking is how little the very evident failures of neoliberalism have translated into meaningful changes.

This is not the first time that significant economic failures did not have the kind of political effects that we might expect. Such “unfailures” are actually a crucial, but often overlooked, part of our political economic history.

The late 1970s and early 1980s are a moment in time that is often seen as a resounding success for neoliberal theory and practice—when Margaret Thatcher and Ronald Reagan swept into power and turned their back on decades of Keynesian orthodoxy with a series of dramatic and ruthless policies that put Friedman and Hayek’s ideas into practice. Monetarism, supply side economics and the rational expectations revolution turned economic theory and policy upside down. Or did they?

In fact, this particular narrative of the early success of neoliberal ideas, which is not only common in popular accounts but also makes its way into many textbooks and serious political economy scholarship, is largely a fabrication. These ideas were all failures—and yet they have been rewritten as successes after the fact.

Why do some policy failures lead to dramatic changes in economic theory and practice, while others are ignored or forgotten? Why are some failures quiet, while others resonate loudly through history?

These are some of the central research questions that I tackled during my time as a Leverhulme Visiting Professor at SPERI. I communicated some of my initial findings on “unfailures” in a Leverhulme Lecture and the Annual IPE Lecture at the University of Warwick, and also continued to explore the issue through research at the National Archives in London during my stay in the UK.

What were the early failures of neoliberalism?

Monetarism was introduced with great fanfare and then quietly abandoned just a few years later. The early supply-siders’ promises that lower taxes would spark a massive spurt in growth without producing a large deficit quickly turned out to be wrong. Meanwhile, the quick shift in the public’s expectations that policymakers had counted on to provide a relatively painless transition to a lower inflation economy simply didn’t materialize. In other words, the three key theories underpinning the early Reagan and Thatcher economic revolutions—monetarism, supply side economics and rational expectations—all failed the initial transition from theory to practice.

What’s more, the archival record in both countries shows very clearly that policymakers were very well aware of these failures at the time, even as they struggled to understand them (and even if they denied them in later years).

One of the more entertaining letters that I found in the National Archives make it clear that although the Americans and the British were on the same ideological side, they were also quite capable of levelling the charge of failure against each other.

The US Treasury Secretary, Donald Regan, gave a speech to Congress in which he labelled the British efforts to control their money supply an abject failure, inspiring Sir Kenneth Couzens, a senior British civil servant, to write a very testy letter to his American counterpart. After enumerating the many obvious mistakes that Regan had made in describing the British economy (including suggesting that “practically 60% of the population in Great Britain … was working for the government”), he concluded:

“it is unhelpful, and also unrealistic to suggest that we have failed because of policy mistakes whereas you won’t because you won’t make any”.

Of course, the Americans did make lots of mistakes, and even admitted a few of them—mostly in confidential documents, although sometimes more publicly—at some personal cost. The US Budget Director, David Stockman, lost his job after he was quoted in The Atlantic arguing that, when it came to both the Reagan Administration and the Congressional Democrats’ budget proposals, “none of us really understands what’s going on with all these numbers.”

Why then did the failure of the early days of Thatcher and Reagan’s brave new neoliberal experiment not lead to the rejection of their economic vision?

Part of the answer lies with the success of key politicians’ discursive strategies of denial, rebranding and mythologizing. The US Undersecretary for Monetary Affairs, Beryl Sprinkel, a Milton Friedman student, gave speech after speech denying the failure of monetarism. His argument was identical to the one made by Ben Bernanke, after the global financial crisis—which was to argue that the problem was not the economic theory itself but its operationalization (although Sprinkel blamed the Fed Chairman of the time, Paul Volcker, whereas Bernanke, being the Fed Chairman himself, had to find someone else to blame).

In the UK, the preferred strategy deployed by Thatcher’s cabinet members was to rebrand monetarism as a more general belief in “sound money” which remained core to the Conservative’s mission, even as it gave up on actually targeting the money supply.

But no matter how silver-tongued the early neoliberal advocates may have been, they would not have succeeded if the world itself did not also change in important respects. Inflation did come down in the end. Not because of monetarism, supply-side economics or rational expectations – but because of massively painful and deflationary recessions in both countries—the worst since the 1930s.

Why should we care about the early days of neoliberalism today?

When we see the Teflon-like resilience of neoliberalism in the face of its very obvious failures, building a more sustainable and just economy can seem beyond reach. It is easy to start treating the rise, spread and persistence of neoliberalism as almost inevitable.

If we instead see neoliberalism for the messy, failure-ridden experiment that it was in its early days, we might also begin to understand its ongoing influence as contingent rather than inevitable—and to imagine a life after neoliberalism.

This blog was originally posted on the SPERI blog, 5 June 2019.

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