Classical liberalism had never really vanished; its thinkers and economists toiled on the margins during the reform liberal heyday. But with the crisis of reform liberalism, they once more stepped into the spotlight. Thinkers such as Friedrich Hayek and Milton Friedman argued that the reform liberal state that had developed over the 20th century was bloated, inefficient, and oppressive. The more governments did, the greater the proportion of our lives that fell under the influence of a single, coordinated source of human control. Whereas in a laissez-faire economy, outcomes are determined as a result of a multitude of free and uncoordinated individual choices by producers and consumers, in an economy marked by heavy redistribution and macro-economic management, outcomes that shape our lives are determined by a small number of deciders in government, backed by the coercive power of law. This, Hayek thought, was tyranny, the ‘road to serfdom’ (Hayek, 2014). Meanwhile, Friedman argued that high inflation, caused in part by minimum wage laws and labour union demands driving up wages, distorted price signals and discouraged entrepreneurial dynamism, thereby crushing economic growth (Freidman, 2017).
Both agreed on the answer: much smaller and less active government, much lower taxation, minimal regulation, and a general emphasis on private ownership and market mechanisms. By rolling back government, minimizing redistribution and social programs, and leaving the market alone, we would have a dynamic and innovative economy that spurs higher levels of prosperity and is freer to boot.
Leaders such as U.S President Ronald Reagan (in office from 1980–88) and U.K. Prime Minister Margaret Thatcher (in office from 1979–1990) embraced this approach, a configuration that became known as ‘neoliberalism.’ The agenda called for tax cuts, including to the wealthy and corporations; the privatization of publicly-owned assets and companies; and international and global trading agreements designed to lock in the free movement of capital and, to a lesser extent, labour across national borders (a formula known as ‘free trade’ and, later, ‘globalization’). A tight money supply completed the picture. If the consequence was lower levels of protection for citizens and workers – weakened social programs, diminished unions, reduced job security, possibly stagnating wages, and rising inequality – this would be made up for by greater innovation and economic dynamism, cheaper consumer costs due to increased competition and lower interest rates and taxes, and balanced government budgets.
By the year 2000, even nominally left-tilting governments, such as Tony Blair’s Labour Party in Britain or Jean Chrétien’s Liberal Party in Canada, had embraced much of this recipe. These years were generally marked by sustained (if unspectacular) economic growth. They were also years of enormous technological change, with digitization and the rise of the internet.
Yet neoliberalism perhaps contained the seeds of its own demise. Globalization brought increased levels of inequality in the prosperous countries that embraced it most fervently. Many felt that globalization hollowed out much of the western working classes, as jobs migrated to low-wage countries such as China. The deregulation of the financial sector, in line with the neoliberal preference for less intrusive government, contributed directly to a global economic meltdown in 2008 triggered by irresponsible mortgage lending: the ‘Great Recession.’ Faced with this cascading economic catastrophe, governments frantically rediscovered Keynesianism, launching huge stimulus programs. Meanwhile, under the influence of protests such as the Occupy Movement and progressive economists such as Thomas Piketty, economic inequality returned to the mainstream public agenda after years of being little discussed (see Piketty, 2014). Western governments once again fell into structural deficits, as citizens demanded more active spending without quite being willing to surrender the neoliberal emphasis on low taxation. Trade agreements such as 1994’s North American Free Trade Agreement as well as the much deeper economic and political integration entailed by the European Union (EU) came under attack by populist-nationalist governments, such as the administration of U.S. President Donald Trump (2016–2020) and the ‘Brexit’-supporting U.K. Conservative Party, which pulled Britain out of the EU. Globalization seemed on the retreat, and government spending was back ‘in.’ Keynesian stimulus dominated the 2010s, and then came the dramatic government response to the even more dramatic crisis caused by the COVID-19 pandemic.