There have been a few recent retrospectives on the neoliberal wave that swept the world in the last quarter of the 20th century. I would like to add the perspective of someone who lived during that time. Many things that seem obvious to us today only seem so in retrospect:
- South Korea has a better economic model than North Korea.
- The UK government should not run car manufacturing companies.
- Airfares should not be set by government officials.
- Income tax rates must not exceed 90%.
These claims may seem obvious today, but they were far from obvious when I entered college in 1973. For example, there is a 1967 CIA report suggesting that North Korea was richer than South Korea, 14 years after the end of the Korean War. (True or falsethat was the perception.) The UK had a top tax rate of 98% on investment income.
It helps to look beyond the United States. The French call 1945-75 “Les Trente Glorieuses”, three decades of meteoric economic growth. And it wasn’t just France. Most of Europe, Latin America and the Soviet bloc experienced very strong growth. There was no obvious need for reform.
Also keep in mind that the Great Depression, World War II and the rise of socialist ideology had pushed the world in a much more state-like direction from 1929 to 1973. So this rapid growth was happening as part of a economic model that rejected the laissez-faire capitalist ideology.
After the mid-1970s, almost the whole world hit a wall. Growth has slowed almost everywhere. Voters grew increasingly frustrated.
But there was one important exception: the “tiger economies” of East Asia. Between the mid-1970s and mid-1980s, places like South Korea, Taiwan, Hong Kong, and Singapore experienced extremely rapid GDPR growth. Japan was no longer an exception, no longer the only prosperous non-white economy. More and more economists began to regard East Asia’s export-oriented model as superior to Latin America’s import-substitution model. I remember reading the Far East Economic Review as a student (yes, I had no life), and deeply impressed by what was being reported.
Today, some experts suggest (wrongly) that places like South Korea have exploded due to state policies. That’s not true, and it certainly wasn’t the perception in the 1970s. When I entered college, the alternative to South Korea wasn’t seen as Hong’s laissez-faire Kong was the state economy of North Korea. And it was still not 100% clear which model was better.
Many things came together to produce the neoliberal wave:
1. Low-tax, export-oriented East Asian economies grew much faster than other countries during the period 1975-85.
2. Voters became increasingly opposed to high taxes in places where living standards were stagnant.
3. Regulations in areas such as transportation and finance were causing increasingly glaring inefficiencies.
4. Western Europe has stopped catching up with America and has stabilized at around 25% below our level of GDP per capita. Inefficient European public enterprises were seen as part of the problem.
5. Communist economies began to stagnate.
Once launched, the neoliberal wave fed on itself. Places like Australia, New Zealand and Chile did better after liberalizing. (Whenever I say “better” I mean compared to other places – almost nowhere did better than 1945-75 in any absolute sense.). Although neoliberalism is often associated with Ronald Reagan, the neoliberal wave was actually more pronounced outside the United States.
Free-market ideologues like Milton Friedman gained additional prestige for making successful predictions on unrelated topics, such as the unreliability of the Phillips Curve model and the importance of monetary policy in controlling inflation. . Indeed, some on the left have mistakenly confused “monetarism” with “neoliberalism”.
The meaning of the term “economic reform” has changed. Prior to the 1970s, this meant an increased role for government. After the 1970s, this meant a diminishing role for government. Indeed, the term “neoliberalism” was necessary because by the 1970s many people (especially in America) had begun to associate liberalism with statism. In this case, what does it mean to “liberalize” an economy?
Brad DeLong suggests that the neoliberal era ended around 2010, which seems about right. But it is too early to have a perspective on these trends. Others have observed that there are counter-trends, with housing, professional licensing and environmental regulations becoming stricter in the neoliberal era. As always, it’s a very complicated picture.
You could write a 1000-word essay on the causes of neoliberalism, or look at a picture:
TH: Doug Irwin