The Rise and Fall of the Neoliberal Order: America and the World in the Free Market Era

The battle between America’s left and right has come to a very polarizing moment with the election of President Trump. The left wants U.S. government to spend more on social issues related to education, healthcare, and efforts to reduce social inequality, while the right wants to reduce regulation and hold free market ideology to the extreme. Going back to the period following World War II, Gary Gerstle discusses the rise and fall of the New Deal Order between 1930s and 1970s, which was followed by the (dying) Neoliberal Order we know today. This book offers a balanced view of the necessity of fostering innovation through maintaining liberal order and the free market, while at the same time allowing government intervention to solve problems that the free market is unable to fix – a lesson for this period of the century.

In the last hundred years, America has had two political orders: the New Deal order that arose in the 1930s and 1940s, crested in the 1950s and 1960s, and fell in the 1970s; and the neoliberal order that arose in the 1970s and 1980s, crested in the 1990s and 2000s, and fell in the 2010s.

The New Deal order was founded on the conviction that capitalism left to its own devices spelled economic disaster. It had to be managed by a strong central state able to govern the economic system in the public interest. The neoliberal order, by contrast, was grounded in the belief that market forces had to be liberated from government regulatory controls that were stymieing growth, innovation, and freedom.

Political orders, in other words, are complex projects that require advances across a broad front. New ones do not arise very often; usually they appear when an older order founders amid an economic crisis that then precipitates a governing crisis. “Stagflation” precipitated the fall of the New Deal order in the 1970s; the Great Recession of 2008–2009 triggered the fracturing of the neoliberal order in the 2010s.

The fear of communism made possible the class compromise between capital and labor that underwrote the New Deal order. It made possible similar class compromises in many social democracies in Europe after the Second World War.

being tagged with the kiss-of-death label, “soft on communism.” But the threat of communism, I argue, actually worked in a quite different direction: It inclined capitalist elites to compromise so as to avert the worst. American labor was strongest when the threat of communism was greatest. The apogee of America’s welfare state, with all its limitations, was coterminous with the height of the Cold War. The dismantling of the welfare state and the labor movement, meanwhile, marched in tandem with communism’s collapse.

The New Deal order gained its power not just from dependable electoral and business constituencies but also from its ability to implant its core ideological principles on the political landscape. One article of faith was that unfettered capitalism had become a destructive force, generating economic instability and inequalities too great for American society to tolerate. The lack of jobs was calamitous; across a decade, the United States struggled with unemployment rates that hovered around and often exceeded 20 percent. This level of market breakdown drove a stake through the ideology of laissez-faire, a shibboleth of American economic life in the late nineteenth and early twentieth centuries. Large majorities of Americans now agreed that some force was necessary to counterbalance the destructive chaos of markets and to manage capitalism’s growth in the public interest. Those pushing for change looked to the federal government as the one institution with the size, resources, and will to perform that role.

If the New Deal order rested on durable electoral constituencies, a class compromise between capital and labor, and a hegemonic belief in the value of government constraining markets, it also brought into politics a distinct moral perspective: first, that public good ought to take precedence over private right; second, that government was the instrument through which public good would be pursued and achieved; and third, that the goal of government action—and a central part of the pursuit of the public good—ought to be to enhance every individual’s opportunities for personal fulfillment.

A commitment to the public good over private right; happiness and expressiveness through consumption; the capacity of the marketplace to deliver on America’s egalitarian promise; and a faith in the ability of expertise to nurture individuality: These were the components of the New Deal order’s moral perspective.

To ensure success in the fight against communism, those in the mainstream of the Republican Party actually acquiesced to the core principles of the New Deal, thereby facilitating the New Deal’s transition from political movement to political order.47 The capitulation of Republicans to the New Deal can best be grasped by a glance at the contrasting fortunes of its two leaders during this time. The first was Robert Taft, senator from Ohio, who desperately wanted to restore laissez-faire and small government to America but could find no way, in a world organized around the Cold War, to persuade enough Republicans and Americans to go along with him. The second was Dwight D. Eisenhower, whose willingness to support the New Deal as president ensured the ascendance of his star as Taft’s faded.

Too many Americans had seen their livelihoods destroyed in the 1930s, the longest period of market failure in American history. National security now required a managed capitalist system; it demanded that the New Deal be maintained, even expanded. Social programs once anathema to Republicans were now legitimate, for they would help to contain the Soviet threat—both at home, so that Americans would have no cause to find communism appealing, and abroad, by demonstrating the success of the American system to the emerging nations of Asia and Africa.

Under Cold War pressure, Eisenhower made the Republican Party a supporter of Democratic Party programs. This was the moment when the New Deal transitioned from political movement to political order, when all meaningful players in the political arena felt compelled to abide by its principles.

The 1960s and 1970s were the New Deal order’s moment of reckoning. As race and Vietnam became the two most important issues in American politics, they created divides among Democratic Party constituents that the New Deal order could not bridge. These divisions were followed by the long economic recession of the 1970s, a recession whose consequences endured because they were associated with underlying changes in the world economy. These three forces—race, Vietnam, and economic decline—battered the New Deal order in the 1960s and 1970s beyond a point where it could repair itself.

The rivalry between the United States and the Soviet Union for the loyalty of what was coming to be called the Third World was fierce. Both sides understood how much the outcome could turn on race. Already in the 1940s the Soviet Union was taking delight in embarrassing the United States internationally, by showing how the institutions of white supremacy in the southern states contradicted America’s professed commitment to the proposition that all men are created equal. The Soviet press was disseminating in Africa and Asia stories about black children in the South being denied adequate schooling, black accident victims dying because no white hospital in the South would admit them, and African diplomats being refused access to white restaurants and washrooms while traveling south of the Mason-Dixon line. The State Department worked hard to counter this image but its efforts would count for little as long as the American South remained segregated. The United States, its foreign policy establishment concluded, had to demonstrate through deeds a commitment to dismantling segregation to achieve racial equality. The Cold War was helping to make civil rights a paramount issue in America.

Prior to 1954, the US Justice Department had begun filing amicus curiae briefs in support of NAACP lawsuits challenging the legality of segregation in the South. In these briefs, the government repeatedly stressed the embarrassment that race discrimination was causing America abroad and the damage it was doing to national security. In the amicus brief filed in Brown, the Justice Department reproduced a statement from former secretary of state Acheson declaring that “hostile reaction [to American racial practices] among normally friendly peoples . . . is growing in alarming proportions” and jeopardizing the “effective maintenance of our moral leadership of the free and democratic nations of the world.”

It compelled members of the American establishment to realize that they had to do something on the American race question, not so much because African American citizens deserved equal rights but because the failure to act would harm the country in its life-and-death international struggle with the Soviet Union.

The anti-government dimensions of Carter’s incipient neoliberalism dominated his presidential rhetoric. “There is a limit to the role and the function of government,” he declared in his 1978 State of the Union address. “Government cannot solve our problems, it can’t set our goals, it cannot define our vision. Government cannot eliminate poverty or provide a bountiful economy or reduce inflation or save our cities or cure illiteracy or provide energy. And government cannot mandate goodness.”41 These declarations constituted a quite extraordinary rejection of the pro-government creed that lay at the heart of the New Deal order. Carter was giving voice to neoliberal stirrings. In concrete terms, they manifested themselves in the deregulatory legislation aimed at the airline, trucking, and railroad industries that Carter pushed through Congress. These laws removed restrictions that had hampered the entry of new providers into these sectors, thereby intensifying competition and stimulating innovation. The changes were most immediately visible in the airline industry, where Congress shifted regulatory responsibility from a lumbering Civil Aeronautics Board (CAB) to a Federal Aviation Administration far more open than the CAB had been to licensing new carriers, to reducing costs, and to expanding service.

Politically, liberty signified a determination to limit government and thereby to maximize individual freedom. In the twenty years following 1776, it became fundamental to American political thought and integral to the system of government set up under the US Constitution, ratified in 1789. That system fragmented the authority of the central government into three branches—the executive, the legislative, and the judicial—so as to prevent any one of them from accumulating sufficient power to reproduce the tyranny of George III. The first ten amendments to the Constitution, adopted in 1791, further strengthened the liberal character of American governance by elaborating a set of individual rights—to freedom of speech, assembly, and religion; to petition the government without fear of reprisal; to a swift and fair trial if charged with a crime—that could not be abrogated except under extreme circumstances. The rights enumerated in these ten amendments came to be known as the Bill of Rights and arguably they constitute the greatest liberal document ever produced by the United States. This bill identified a core area of human freedom, asserted its inviolability, and protected it from the exercise of arbitrary government power. This emphasis on human freedom and its protection was foundational to classical liberalism—and to the American republic.

Surveying the dreams unleashed by liberalism in the nineteenth century, the prominent twentieth-century journalist and cultural critic Walter Lippmann, writing from the perspective of the 1930s, declared that liberalism had been nothing short of revolutionary. Liberalism changed “the condition in which men lived,” Lippmann declared. “It was no accident that the century which followed” liberalism’s appearance, Lippmann argued, “was the great century of human emancipation. In that period, chattel slavery and serfdom, the subjection of women, the patriarchal domination of children, caste and legalized class privileges, the exploitation of backwards peoples, autocracy in government, the disfranchisement of the masses and their compulsory illiteracy . . . were outlawed in the human conscience, and in a very substantial degree they were abolished in fact.” Lippmann followed Smith in arguing that this march of human freedom was grounded, first and foremost, in the progress of economic freedom. The advance of economic freedom was rooted, in turn, in liberalism’s success in lifting barriers to individual initiative and in unshackling Smith’s division of labor dynamic, triggering both economic growth and new confidence in the scope of human individuality.10

As they turned toward order, some liberals also began to suggest that not all peoples were equipped with the tools necessary to cultivate their individuality, and thus, that they were not ready for full participation in liberal projects. Modern peoples, the prominent English liberal, Herbert Spencer, argued, were engaged in a Darwinian struggle for freedom in which only the fittest would survive. Not every nation and race, therefore, would succeed in constructing a liberal polity and in handling freedom responsibly. Those who were deemed unfit for such freedom were to be excluded from polities or denied full participation in them.

Both Roosevelt and Wilson rejected the notion that the free market constituted a natural order whose energies were beyond the capacity of humans to manage or redirect. They believed that unregulated markets had produced an intolerable imbalance in power and wealth between employers and employees. The human casualties of a capitalist system had grown too numerous, their injuries too disabling. The time had come for a strong central state to intervene in economic processes, to create a level playing field in which workers and employers could engage each other on more or less equal terms, and to provide a cushion for those who, through injury, unemployment, and poverty, had been cast aside. The Progressive era (1900–1920) was defined by efforts to curb corporate power, to grant labor unions rights to collective bargaining, to inaugurate schemes of social insurance, and to establish a welfare state.

What drew Rougier to The Good Society was Lippmann’s condemnation of laissez-faire, which Lippmann and many others held responsible for liberalism’s early twentieth-century decline. In Lippmann’s eyes, the fatal mistake made by laissez-faire advocates was to think that markets were founded in nature and needed no superintending. To the contrary, Lippmann insisted, markets had never existed in the natural world. They had to be built by human hands and actively maintained. Market malfunctions would inevitably occur and require repair. By insisting that markets were natural creations and in need of no superintendence, laissez-faire dogmatists, Lippmann charged, had unwittingly freed up political space for the superficially attractive but actually wicked collectivisms of the right and left to take hold.

In fact, we can discern in American neoliberalism three quite distinct strategies of reform, or clusters of policy initiatives, each crystallizing in the twenty years between the first meeting of the Mont Pelerin Society and the late 1960s, when the crackup of the New Deal order gave neoliberal reformers their opportunity to gain influence in American politics. The first strategy of reform was to encase free markets in rules governing property and exchange and the circulation of money and credit. Encasement required strong government interventions in economic life, both domestically and internationally. The second strategy was to apply market principles not just to those two areas traditionally identified as market driven (work and production, on the one hand, and income and consumption, on the other) but to all areas of human endeavor. Some neoliberals began extending market analysis into the private realm of family and morality, reimagining these spheres not, in Smithian terms, as preserves of human association and sensibility located at a safe distance from market forces, but as behavior best understood in economistic terms of inputs and outputs, investments and returns. The third strategy sought to recuperate the utopian promise of personal freedom embedded in classical liberalism. This strand privileged not order and control and the analysis of inputs and outputs, as did the first two strategies, but the thrill and adventure of throwing off constraints from one’s person and one’s work. Foucault had argued in his 1978–1979 Sorbonne lectures on neoliberalism that this last strategy became particularly influential in America, drawing support from the left as well as the right, its “utopian focus . . . always being revived.”

Neoliberals readily justified giving the government powers it had formerly lacked if such power could be demonstrated to ensure the smooth operation of markets. This strategy was built on a paradox: namely, that government intervention was necessary to free individuals from the encroachments of government. Another way of framing the paradox is to note that the establishment of economic order, or what Hayek called a “constitution of liberty,” was a prerequisite for making possible liberty of individuals from government.

The second neoliberal strategy was more genuinely innovative: expand the terrain of human activities subject to market principles. In classical liberalism, homo economicus, “economic man,” was defined as a man of exchange, who swapped his labor for a wage. The resulting income he then exchanged for goods in the marketplace that he either needed or desired. Much economic analysis revolved around how the two economic spheres of “production” and “consumption” were to be structured on both a micro and macro scale. Other realms of human existence—the family, religion, and politics—were thought to stand apart from these two major arenas of economic exchange and outside the realm of activity encompassed by homo economicus. Neoliberals, however, began to argue that economic man could not be comprehended in such narrow terms. Rather, economic man was himself a repository of capital. He was the producer of his own wants and needs; he was what Foucault would later call “an entrepreneur of himself,” “being . . . his own capital.”34 The concept of homo economicus, therefore, had to be expanded to include the various investments that such a man and others had made in his personhood. A capitalist of the self, homo economicus was always being called on to make decisions about how to deploy his capital so as to satisfy his needs and wants.

Terminology will be something of a problem as we go forward, because so many of the advocates of free markets in America would end up calling themselves conservatives, largely a result of the theft of the liberal label by the Rooseveltian New Dealers fifty years earlier. That theft qualifies as one of history’s great terminological heists.70 Many of the principals in the story of neoliberalism’s rise, as a result of the heist, ended up identifying themselves as conservatives. But conservative is not a good descriptor of the commitment to free market capitalism that lay at the heart of their worldview. Free market capitalism connotes dynamism, creative destruction, irreverence toward institutions, and the complex web of relations that imbed individuals in those institutions. This sort of capitalism, in other words, is the enemy of what conservatives in the classical sense value: order, hierarchy, tradition, embeddedness, continuity.

Powered to the presidency in 1980 by constituencies he had peeled away from the Democrats (whites in the South and white urban ethnics in the North), Reagan began to implement his neoliberal vision for American life across a broad front: deregulating the economy; stripping the government of power and resources; reshaping the courts and their jurisprudence; establishing new rules to “free” political conversation from the grip of establishment, and allegedly, New Deal–oriented, media; and cultivating a neo-Victorian moral code to gird Americans against the temptations of excess that were forever present in an economy given over to market freedom. Reagan’s two terms were not sufficient to transform everything. But by the time he left office in 1989, he had profoundly altered the landscape of American politics. Money, votes, policies, jurisprudence, media influence, and a strong moral stance: These were all part of the architecture of an ascending neoliberal order. They came together under the presidency of Ronald Reagan.

Corporate political action committees (PACs) constituted a second new form of business mobilization. Campaign finance law changes in the 1970s had made it possible for individual corporations to ask their employees to contribute to a company’s PAC, with decisions about which policies and political campaigns to support left in the hands of firm owners and executives. This rule change dramatically increased the potential for corporate influence, as the ceiling on the size of PAC contributions permitted by law was much higher than the amount a single wealthy individual could donate to a candidate.

Many businessmen who were intrigued with Reagan were not as radical as Simon and not bent, initially at least, on upending the New Deal order. Quite a number of them had long benefited from the rich set of government-business relations that the New Deal order had engendered. What, then, made them willing to consider the more radical path advocated by Reagan? Three factors stand out. First, the American economy performed poorly for much of the 1970s, its reputation for global preeminence now tarnished, the instruments in the Keynesian toolkit stiff and rusty. Second, the sharp escalation of foreign goods invading the US marketplace made many in corporate ranks less willing to tolerate the power of organized labor. Signing on to high wages and benefits as a matter of course, the precedent set by the 1950 Treaty of Detroit, had become a more costly venture in the age of renewed international competition and minuscule productivity increases.12 Growing suspicions that the Soviet economy was in decline, and thus that the communist system perhaps posed less of a threat, may also have signaled to the corporate titans of America they were now freer to adopt a more antagonistic stance toward labor unions. Indeed, the Business Roundtable’s mobilization to defeat the labor reform act of 1977 was a novel, even shocking, move by corporate America in an industrial relations system still ostensibly governed by the rules hammered out in the Treaty of Detroit thirty years earlier.

Reagan immediately targeted two pillars of the New Deal for deregulatory treatment: federal government support for collective bargaining and progressive taxation. In 1981, he fired more than 10,000 air traffic controllers who had gone on strike for better pay and improved working conditions. Reagan’s bold move stunned the union, the Professional Air Traffic Controllers Organization, which had endorsed Reagan in the 1980 election. It signaled to all public and private employers that he would support a tougher stance toward unions than any administration had since the 1920s. In symbolic terms, his act carried as much significance as the refusal of the Democratic governor of Michigan and President Franklin Roosevelt in 1937 to send National Guard or federal troops to Flint to oust the autoworkers occupying the plants of General Motors. This 1930s refusal signaled that a president and his party were serious about compelling corporations to reach fair agreements with unions that had organized their workers. Similarly, Reagan’s firing of an entire workforce for going on strike was the equivalent of a president sending in the troops to break a strike. It served notice that the president and the dominant party were now ready to eviscerate labor’s power. From that time forward, American workers who went on strike knew that they might well pay for their actions with the loss of their jobs. The American labor movement hemorrhaged members in the 1980s. The decline in labor membership is often not included in accounts of deregulation and neoliberal success. But, in fact, there is no more powerful form of market deregulation than stripping government of its ability to strengthen workers in their negotiations with employers.

Putin desperately wanted the Soviet Union to fight for its life at all costs. Across history, this is what most empires in decline had done. Some went to war. Others tried to save themselves through internal reform, and then repressed their subjects when the reforms unleashed forces of change that no one had anticipated. The Soviet Union could have survived in this manner for decades beyond 1991, especially since no one, outside the mujahideen in Afghanistan, really wanted to fight it. With 500,000 troops in Eastern Europe as late as 1989, and tens of thousands of nuclear warheads spread throughout the country and capable of reaching any destination on earth in an interval ranging from minutes to hours, the USSR still possessed formidable capacity to rain mayhem and destruction on its enemies.

Another consequence of communism’s fall may be less obvious but is of equal importance: It removed what remained in America of the imperative for class compromise. A compromise between capital and labor had been foundational to the New Deal order. Labor had gained progressive taxation, social security, unemployment insurance, the right to organize, a national commitment to full employment, government backing for collective bargaining, and limits on the inequality between rich and poor. Capital had gained assurances that government would act to smooth out the business cycle, maintain a fiscal and monetary environment that would assure reasonable profits, and contain labor’s power. In the 1990s, capital still wanted the US government’s assistance in ordering markets. But in a world cleared of communism, long its most ardent opponent, it felt the need to compromise with labor less and less.

Bush shared Thomas Friedman’s faith in the power of pluralism. And he believed, with Friedman, that pluralism and the free movement of people were the keys to innovation, economic growth, and dynamic capitalism. Freedom in all its forms (to move, to mingle, to communicate, to innovate), Bush remarked in 2003, “unleashes human creativity—and creativity determines the strength and wealth of nations.”43 But what to do in situations where dictators or backward-looking elites had shut off their societies from these neoliberal forces? For Bush, as for Friedman, Arab and Muslim societies in the Middle East had posed this challenge in acute form. In such situations, Friedman had argued, pluralism might have to be imposed on a society, perhaps via American bombs and tanks. Friedman had been an early and ardent supporter of Bush’s war in Iraq. Arab societies, he believed, should not be allowed to opt out of one-worldism. The American invasion, he argued, was designed in part to blow apart the institutions and elites that had closed Muslim societies to the open circulation of ideas, to pluralism, and to opportunity and innovation.

Lawrence Summers, a prominent economist in the Clinton administration soon to play an important role in Barack Obama’s first presidential term, gave voice years later to what may have been on Greenspan’s mind in 2005 and 2006. In a 2013 speech to the International Monetary Fund, Summers seemed to be suggesting that “even a great [financial] bubble” of the sort that had enveloped America in the new century’s first decade had not been enough to stimulate full employment and significant inflation. Why not? Was it possible, Summers wondered, that aggregate global demand, even with easy money, was too weak? Had bubbles become necessary to stimulate demand by making it possible for consumers, now encouraged to deepen the debt side of their household ledger sheets, to increase their purchasing power well beyond what their incomes and savings otherwise would have allowed? Did it follow from Summers’s hypothesis that the global economy may have “needed” Americans to spend beyond their means in order to generate sufficient demand to sustain a global production system with enormous capacity?

Obama’s approach to economic recovery damaged that hegemony further by undercutting one of neoliberalism’s core propositions: namely, that “freeing markets” from government oversight would lead to opportunity and prosperity for all. Freeing the banks from government regulation had produced first the housing bubble and then financial and economic collapse. In the aftermath of the crash, almost no one believed that the failing financial markets could repair themselves. Markets, it turned out, required government intervention and regulation. But of what sort? Was it right for the Obama administration to have privileged the banks in its recovery plans? Was it appropriate for it to have given private insurance companies a central role in its design of health care reform? Or did these decisions simply demonstrate that government was deepening rather than easing the rigging of American life in favor of large institutions that were already dominant? On the left, socialists began to make themselves heard for the first time in decades, arguing that government had to bring back the robust regulatory apparatus of the New Deal order. On the right, pundits would soon begin to talk about a “deep state” that engineered outcomes for the rich and powerful and that was impervious to popular and democratic control. The political repercussions of the Great Recession of 2008 were about to explode on America, and they would rock the neoliberal order to its core.

When neoliberalism was hegemonic, the virtues of free trade and globalization were unassailable. To attack these policies during the neoliberal heyday was to mark oneself as marginal and irrelevant at best and as dangerously delusional at worst. That the two most dynamic contestants for president in 2016, one on the left and the other on the right, were both mounting direct challenges to neoliberal orthodoxies reveals the degree to which the neoliberal order itself was coming under challenge and, perhaps, would soon be knocked from its perch.

The ethnonationalist leaders, Trump included, also possessed authoritarian tendencies. They were impatient with parliaments, independent judiciaries, and other aspects of liberal democracy often associated with systems of neoliberal rule. They saw themselves and each other as strongmen determined to take care of the right people and able to make the tough decisions necessary to do so. They wanted the planet to be governed by force rather than by international law and multinational nongovernmental organizations. They sought a world divided into blocs—East Asia, North America, northern Eurasia, the Middle East, and South Asia among them—each controlled by a regional hegemon. This world would be far from flat; rather, tall, jagged, and hard-to-scale walls would separate blocs (and often the nations within them) from each other.

A political order must have the ability to shape the core ideas of political life. It must be able to do so not just for one political party’s most ardent supporters but for people located across the political spectrum. The New Deal order sold a large majority of Americans on the proposition that a strong central state could manage a dynamic but dangerous capitalist economy in the public interest. The neoliberal order persuaded a large majority of Americans that free markets would unleash capitalism from unnecessary state controls and spread prosperity and personal freedom throughout the ranks of Americans and then throughout the world. Neither of these propositions today commands the support or authority that they once possessed.

About Journeyman

A global macro analyst with over four years experience in the financial market, the author began his career as an equity analyst before transitioning to macro research focusing on Emerging Markets at a well-known independent research firm. He read voraciously, spending most of his free time following The Economist magazine and reading topics on finance and self-improvement. When off duty, he works part-time for Getty Images, taking pictures from all over the globe. To date, he has over 1200 pictures over 35 countries being sold through the company.
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1 Response to The Rise and Fall of the Neoliberal Order: America and the World in the Free Market Era

  1. blake77 says:

    So how does all this analysis play out in the practical world? Is there more love? hatred? stability? etc.

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