Neoliberalism and its Intellectual Forebears: Friend or Foe? An Insight into Critics of the Modern Neoliberal State vs. its Ideological Roots
Joey Simnett (2016)
The political economy of classical liberalism, or libertarianism, as personified by thinkers such as Milton Friedman, Friedrich von Hayek and Ludwig von Mises, is seen as the bedrock of neoliberalism. Their philosophy of an impartial state and the use of markets as social institutions to direct economic activity has strong parallels with the rhetoric of political movements that initiated the transition away from the post-war consensus. This has generated much controversy, with political critics from both left and right commenting on the effects of this allegedly free market consensus. However, the relationship between neoliberalism and its ideological roots is not so clear. This paper argues that, far from the free market picture of society that critics paint, the state of contemporary affairs deviates considerably from the vision of its intellectual predecessors, and thus the criticisms levelled at neoliberalism as endemic of a failure in free market theory are misguided. This is achieved by strictly defining the ideological vision of Hayek, Friedman et al. and comparing it with heavily criticised ‘crises of neoliberalism’ to highlight a fundamental departure from the principles that they value, and show neoliberalism to be fundamentally of a different character that its critics portray it to be.
The term ‘neoliberal’ has been loosely used, mostly by its critics, as the defining feature of the contemporary Western state; that we are steeped in ‘free market ideology’. It is asserted that the majority of economic, political and social problems can be ascribed to this prevailing consensus, exemplified by protesters such as the Occupy movement decrying ‘unregulated capitalism’ (Chang, 2011), and students objecting to modern economics courses being biased to the free market neoclassical tradition (Inman, 2013), Thus, in turn, the critique of the so-called ‘neoliberal paradigm’ attacks classical liberalism, libertarianism and laissez-faire capitalism, the resurgence of which supposedly shaped neoliberalism.
However, the intellectual roots of neoliberalism often come into conflict with what it has come to be associated with. By examining the academic literature that has influenced the developments of neoliberalism, one can gauge whether critiques are accurate. The goal of this paper is to dissect what is seemingly careless and generalised use of semantics by the modern media and academics to attack a political category, and to tighten the analysis of contemporary policy. This shall be done by exploring the intellectual heritage of neoliberalism and its relationship to policy developments, leading to clarity of whether critiques of neoliberalism are necessarily critiques of laissez-faire capitalism, and whether the terms are even synonymous.
The Importance of Semantics
In order to evaluate the relationship between the current state of affairs and its intellectual roots, definitions must be established: capitalism, free markets and neoliberalism. There are two main reasons for this: neoliberalism is used by critics as a ‘packaged deal term’ to imply both ‘the current state of affairs’ and ‘laissez faire capitalism’ as idealised by Hayek, Friedman et al., while others separate the two terms into discrete categories; both fog the potential for critical analysis. Secondly, critics on the left may see different forms of private ownership such as keynesianism and laissez-faire as being categorically homogenous, whilst proponents of laissez-faire may see keynesianism and socialism as stemming from the same ideological tradition (Raico, 2010) – accurately defining schools of thought, especially with regard to means versus ends, will bring clarity.
It is common knowledge that the West is predominantly capitalistic – there has always been a mixture of government planning and markets. A commonly accepted definition of capitalism is:
‘an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market’ (Merriam-Webster, 2015).
Note ‘mainly by competition in a free market’. This references the idea that capitalism is primarily about ownership, hence why there are distinctions made between concepts such as state capitalism, keynesianism or laissez-faire capitalism. The term ‘free market’ refers to whether economic actors are coerced or influenced by non-market parties, and that agents can act for mutual benefit and self-interest in a private sphere – it is laissez-faire (Rothbard, 2006). This accounts for ideologies such as ‘market socialism’, where ownership may be commonly held, either democratically or by states, but economic action within that paradigm is unhindered. In short, different amalgamations of capitalism, socialism, free markets and directed markets are favoured by different political and economic theories according to their distinct ideological values.
Within this, neoliberalism is much harder to define, as it is used by different political groups to mean different things for political purposes. However, the main possibilities are as follows:
- The ideas of Hayek, Friedman et al. per se
- The ideas of Hayek, Friedman et al. that are predominant in modern society
- Whatever is predominant in modern society
Using ‘A’ as a definition for neoliberalism is redundant as the ideas of Hayek, Friedman et al. can be encapsulated by the term ‘libertarian’ as a more focussed political and economic category, neither is it useful as it obfuscates the potential differences between their ideas and contemporary economic policy. Using ‘B’ is also redundant as it creates a contentious equivalence through expressing it as the ‘packaged deal term’, which will be the main focus for discussion of this paper; there are clear divergences between the contemporary state of affairs and libertarian ideas. Using ‘C’ is contentious as it can dilute the term to a pejorative by anyone who rejects the status quo, which will mean different things to both left and right. However, what is useful about using this as a definition is that there has been a notable shift to broadly market-based policies which is commonly identified as neoliberalism, but does not necessarily invoke the allegation that these are part of the libertarian tradition.
The Principles of Libertarianism
The word Libertarian per se pertains to the political and economic concept of individual freedom, and is a wide intellectual tradition that encompasses left wing and right wing variants with differing perspectives and philosophical starting points – it is thus a fluid concept that has no strict or discrete political prescriptions.
However, for the purpose of this essay, the word ‘libertarian’ will be used to refer to the ‘right-libertarian’ variant or laissez-faire, which contains the ideas of British classical liberalism, American anarcho-capitalism, and free market thought such as the Austrian School and Monetarism, a much more focussed political and economic ideology. Certain thinkers, such as Hayek, whose literature will be relevant, may not explicitly identify as such, owing to the possibility that their stricter societal prescriptions may be extended into areas they do not intend. However, it falls into the same tradition for the purposes of comparison and will thus be encompassed by the word. The reason for this is to avoid conflation with the American use of the word liberalism which is opposed by libertarians – American liberalism points more towards a socially democratic model of society. References to liberal thinkers that fall in the libertarian tradition are referred to as ‘classical liberals’.
The differences between the schools of thought are broadly methodological and epistemic – the Austrian school base their observations on a priori economic reasoning through axioms while neoclassicals and monetarists are empirical and positivist (Huerta de Soto, 2010). They have different politico-economic focus and the level of radicalism with regard to how much state intervention in society at large they will tolerate – some see stateless capitalism as a goal.
Whilst it may seem like a large selection of intellectual traditions to categorise in the same vein, what makes them apt for representing a political category is that they all share these common tenets:
- Individuals act and make choices, which means reconciling environmental information with individual needs; this is to gain and use knowledge in order to make rational economic calculation and realise utility. The best way to facilitate this is through open competition in an unhampered market, also known as laissez-faire capitalism (Mises, 2012; Rothbard, 2006; Mises, 1998; Hayek, 1958).
- At a macro level, the pursuit of goals by people left unhindered at the micro level under the rule of law, form a ‘catallaxy’, or nexus, of stable, self-ordering economic outcomes which are harmonious and desirable: commonly accepted to have begun with Smith’s observation in The Wealth of Nations that “[by] pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it” and his description of the invisible hand of the market co-ordinating activity, which was revised by Hayek. (Smith, 1904), (Hayek, 1958).
- Private property rights are thus the defining institution that surround interpersonal interaction. Action and results in the marketplace with private property as sovereign can be termed the ‘economic means’ of acting and acquiring wealth whilst the force of government in directing action and results can be termed the ‘political means’ (Oppenheimer, 1922, pg. 25).
- State intervention into economic life provides artificial and arbitrary distortions that can cause iniquitous results or make problems worse, either through reducing subjective utility which would have been gained ex ante through intervention into market activity (Rothbard, 2006), problems of bounded rationality by state actors in policy (Pennington, 2011) or the self-interest of state actors (Pennington, 2011) and the changing of incentives.
Thus, according to libertarians, the role of the state, if any, is to have minimal activity in the market and enforce property rights and the rule of law, where all economic actors adhere to the same set of facilitatory ‘rules of the game’ – it is strong and impartial, and interventionism represents alternative reasoning.
Neoliberalism – Historical Context
Neoliberalism was original coined in 1938 by the German ordoliberal Alexander Rüstow at the Walter Lippman Colloquium (Kundnani, 2015), a convention aimed at constructing a new form of liberalism to compete with the competing forces of socialism, collectivism and fascism; at the time it was a rejection of the old laissez-faire liberalism which was deemed to have failed to achieve economic progress. The term was used to label various camps in quick succession, including adherents to ordoliberalism and the ‘social market economy’ such as Rüstow and his contemporaries, those who advocated laissez-faire capitalism, to those who sought to modernise the liberal model with perfectionist state intervention (Hartwich, 2009).
However, the de facto use of neoliberalism generally refers to the transition, most famously in the 1980s, away from keynesian and socially democratic models of state-market relations that allegedly failed. This model was characterised by ‘modern tools of monetary policy (control of interest rates) and fiscal policy (control of government spending and taxes)’ (Palley, 2004), where the state was integrated into society and played a large role in directing and fine tuning the economy. This turned towards sweeping economic reforms that introduced liberalisation in areas such as labour reform, the lowering of taxes, privatisation and championing free enterprise and individual responsibility – ‘big government’ was the enemy. This was most notably seen in the election of Margaret Thatcher and Ronald Reagan in the United Kingdom and United States respectively.
Thatcher and Reagan were both influenced by the ideas of libertarian thinkers such as Friedman, Hayek and Mises who all advocated the said laissez-faire view of the state and economy – Thatcher saw Hayek’s The Constitution of Liberty as an ideal blueprint for a society (Brooks, 2013), and Friedman was an advisor to both political figures (Bourne, 2013). Thus, the parallels between the Reagan/Thatcher political movement (and the continuation under proceeding Labour and Conservative governments) and its intellectual underpinnings are clear – it is assumed that neoliberal developments reflect libertarian ideas, and that society had started to reduce government interference into the economy to allow market forces to decide economic outcomes.
One of the transitions was from demand side to supply side economics. That is to say, instead of government intervention directing economic activity and inducing demand, the supply side of the economy should be made more efficient through deregulation and tax cuts in order to spur economic growth and wealth creation (Harper, 2016).
Markets would be made more contestable i.e. maximising the potential for firms to compete by removing barriers to entry, government privilege and redirecting spending towards facilitatory projects such as infrastructure rather than direct industry support. Privatisation of state industry or introducing market forces is also recommended, as are floating exchange rates, conservative monetary policy, removal of tariffs and state regulation (in the hopes that markets will regulate through competition). The evidence that neoliberal reform took place is clear: corporation taxes in the UK were at 42% for small profit rates and 52% for the standard rate of tax in 1979, the year of Thatcher’s election, and declined steadily to lows of 19% and 30% in 2006 (Figurewizard, 2012). Large scale privatisation also occurred, with ‘British Steel, British Petroleum, Rolls Royce, British Airways, water and electricity [being] among the major utilities for sale’ (Seymour, 2012). During Reagan’s tenure, starting from 1981, ‘the top income tax rate was slashed from 70% to 28%’ (Sahadi, 2010).
Critics – Neoliberalism is Libertarian
The connection between the rhetoric and image of the neoliberal and the theoretical roots of the ideology has led critics to attack the concepts that supposedly underwrite it. For instance, take this extract from a piece that writer George Monbiot published about neoliberalism:
Neoliberalism sees competition as the defining characteristic of human relations. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. It maintains that “the market” delivers benefits that could never be achieved by planning (Monbiot, 2016).
Monbiot goes on to say that ‘Like Mises’s book Bureaucracy, [Hayek’s] The Road to Serfdom was widely read’ (Monbiot, 2016), implying that neoliberal policy and its intellectual underpinnings are ideologically aligned, such as how he says the neoliberal state ‘cut taxes, [privatised] remaining public services, [ripped] holes in the social safety net, [deregulated] corporations and [re-regulated] citizens’ (Monbiot, 2016). Another example is Michael Higgins, President of Ireland, who posited that ‘[neoliberalism] has, from the first meetings of Ludwig [von] Mises, Hayek and Milton Friedman, been a conscious ideological project’ (O’Brien, 2013). It is, however, a common pattern; the legacy of Thatcher and Reagan are often assumed to be synonymous with libertarian ideas, regardless of whether key targets for criticism such as the financial sector resemble them.
The State of Contemporary Affairs – Not Libertarian?
Simply citing policy reform is not sufficient to gauge whether neoliberalism does or does not adhere to the ideas of libertarians; critics on the left are given the excuse that any move towards market reform can constitute ‘free market ideology’, while supporters of libertarianism will be guilty of arguing that incomplete implementation, or other illiberal policies undertaken, necessitate per se that there is an ideological distinction (Rothbard, 2004) – much like the relationship between Marxists and the allegation that the Soviet Union was ‘State capitalism’. Therefore, in order to gauge whether it is just the case that libertarians think we are just ‘not neoliberal enough’, or that is a different political category, one must A) See if neoliberalism adheres to the strict principles of libertarians and B) analyse areas where the relationship between state and market are distinctly of a certain character.
Whilst there has been significant change with regard to how much the state outright owns or taxes, the relationship between state and economy does not appear to be separate. Whilst easily visible and symbolic policies such as the lowering of corporation tax and privatisations of key industries has indeed happened, there is still a fundamentally integrated state-market relationship.
Words such as ‘crony capitalism’, ‘mercantilism’ and ‘economic fascism’ have been used by contemporary free marketeers to describe this paradigm (Misesmedia, 2012). It has been observed that while there is no longer a trend of the outright ownership of industry en masse or explicit aggregate demand management—there is still broadly capitalist ownership—the state still colludes with industry, either as a ‘pro-business’ initiative from the right wing or as a form of social democracy from the left wing through regulatory capture, political favouritism, bailouts, inflationism and other distortionary intervention (Misesmedia, 2012). The ensuing results of such private/public partnerships as seen as contrary to ‘actual’ market outcomes based on free market disciplinary forces and prices, rather politically incentivised ones to favour certain interest groups over another.
The Character of the Neoliberal State
The neoliberal state cannot be said to be operating under the laissez-faire libertarian tradition that critics claim to be present. A key distinction lies in that, while libertarians hold the rule of law to be sovereign, under which economic actors operate at all times, neoliberalism has merely introduced and imposed markets or quasi-markets for the purposes of efficiency and outcome on an ad hoc basis. The character of the state still fosters both market reforms and deviations from libertarian free market principles as and when it is politically advantageous or necessary – markets are seen as a policy tool, rather than a holistic expression of social and economic law, resulting in practices that may be considered contra to libertarian prescriptions – there may be the repeal of state regulation, but no impartiality that libertarians claim enforces market discipline and internalised costs.
Unfortunately, critics often conflate the two and postulate that we essentially live in a free market paradigm which permeates everywhere. This is not the case; neoliberalism and social democrats both end up with the state qua manager. A resurgence in free market ideas is not synonymous with a libertarian view of the role of the state – it is merely to give the state’s finances breathing space. Favoured targets of those critiquing ‘free markets’ are the American healthcare system and the financial crash of 2008, these will be discussed below.
Examples of Deviation from Libertarian Prescriptions
Compared to the National Health Service in the United Kingdom, an outright socialist form of production, the American healthcare system is seen as an example of market forces causing destructive outcomes through high prices of insurance and drugs, and lack of accessibility – it has thus been a target of much scrutiny. Whilst American healthcare is relatively capitalist in the sense there are price signals and private ownership of a sort, the market outcomes and rising costs can be attributed not to free market forces, rather a combination of private and government privilege and direction creating distortions that are reflected through said prices.
Boyapati notes that in 1943, and later solidified in 1954, employer-provided insurance was made tax exempt, allowing this to be a relatively advantageous bargaining chip to compete for labour owing to wage and price controls present at the time (Boyapati, 2010). Thus, if medical costs are put to third parties (the firm), the consumers (the firm employees) are less likely to discriminate compare to normal market activity where costs are internalised. Boyapati goes on to say that with the dawn of Medicare, the government supplied ‘employer-provided health insurance to all citizens above the age of 65. However, the “employer” in this case was the US government, which does not have the same economic incentives as a business, but rather has political incentives’ (Boyapati, 2010). Thus, instead of consumers choosing their own insurance providers in a private market, the state has actively directed consumers into patronising certain privileged firms.
On the supply side, interest groups, including the aforementioned insurance companies, have incentives to use the state to benefit themselves the expense of consumers, instead of being subject to the force of supply and demand under the rule of law. Licensure has been a favoured target of free marketeers, in particular Friedman who noted that ‘licensure is the key to the medical profession’s ability to restrict the number of physicians who practice medicine…to its ability to restrict technological and organizational changes in the way medicine is conducted’ (Friedman, 2002, pg. 154). The American Medical Association drives up wages of physicians through restricting supply, and thus makes the provision of healthcare expensive while having questionable benefits with regard to professional quality. An objection to the allegation that the AMA is an anti-free market institution would be to retort that this falls into the category of what Adam Smith would term ‘erecting and maintaining certain public works and public institutions intended to facilitate commerce’ (Smith, 1904, (vol. 2) Pg. 150) in order to guarantee that market actors can choose with meaningful quality control. However, Friedman notes that AMA licensure practices do not guarantee quality as they are ‘one off’ quality checks upon permitting individuals to legally practice medicine, and that, far from being passive institutions, they have come to influence market outcomes by raising the price of medical practice through legal monopolistic privilege – a political protection racket of sorts (Friedman, 2002, pg. 148). Thus, the state of American healthcare does not reflect a conception of open competition that is attributed to it, rather government directed market relationships.
The Financial Crisis – Free Market Meltdown?
One of the repeating accusations of the age of neoliberalism is how financial deregulation paved way for ‘casino capitalism’ to run rampant, which ‘led some economists and political leaders to reject the neoliberals’ insistence on maximally free markets’ (Smith, 2016), and that ‘greedy bankers’, through their self-interest, unhindered by government oversight, ‘made fortunes by selling mortgages to poor people who could not really afford them’, resulting in them selling them in packages with complicated financial instruments, that inevitably went bust after the house of cards fell down and caused economic hardship to others (Butler, 2009, p. 51). Butler goes on to note that the supposed moral of the story is that ‘capitalism has failed’ and that we need ‘tougher rules to curb bankers’ greed’, at least, according to critics of neoliberalism (Butler, 2009, p.51). Gregg notes that Germany’s finance minister at the time claimed that ‘“Anglo-Saxon” capitalism was finished’ and that the Archbishop of York compared short-selling to “bank robbers” (Gregg, 2009, p. 145).
However, what these critics fail to grasp is that financial systems have not been acting under what they term neoliberal or libertarian principles, rather, under the same ‘crony capitalist’ principles discussed previously – the market outcomes are the result of ‘political intervention in the mortgage and banking markets, wild extravagance by the official monetary authorities, and unfocused and inept government regulators’ (Butler, 2009, pg. 51), and cannot be attributed to non-existent incentives of a free market setup.
Monetary Policy – The Libertarian Position
Monetary theory is a key point of disagreement amongst libertarian economic thinkers, but collusion between banking institutions and governments are one of the most intensely attacked areas in libertarian literature. If we recall the basic economic principle, the ideal yardstick for comparison is a situation in which economic actors pursue their own ends under the rule of law, with market outcomes being the result of ‘economic means’ of open competition – all state intervention must be as passive, facilitatory and impartial as possible.
The more radical Austrian School supports the abolition of fractional reserve central banks and either support a commodity-backed currency such as gold or competing currencies (Hayek, 1990); they see state enforced monopoly of the money supply as as a cause of ‘price inflation, loss of purchasing power of the currency unit, and redistribution of wealth and income’ (Rothbard, 2007, p. 54). Instead of being treated as a commodity like any other good to be bought and sold, fiat currency mandated by the state is seen as an instrument that governments can manipulate for political purposes or in accordance to personal discretion of the managerial board. Ebeling, as an Austrian, posits that:
[The] Federal Reserve pushes interest rates below the point at which the market would have set them by increasing the supply of money on the loan market. Even though savers are not willing to supply more of their income for investors to borrow, the central bank provides the required funds…Investment spending now exceeds the amount of savings available to support the projects undertaken (Ebeling, 2014).
The result of this, according to the Austrians, is financial collapse, resulting from distorted and unsustainable investment patterns, mismanaged savings ratios and a capital structure built on false signals, not something that would reflect free market activity and outcomes (Ebeling, 2014).
Monetarists, while sympathetic to the view that government monetary planning is destructive, are seemingly more tolerant of the idea that central banks can work effectively, or even more effectively than denationalised currencies, as long as the management is tightly scrutinised, depoliticised and made as consistent, open and non-arbitrary as possible. Whilst not as radical as Austrians in the sense they don’t have an imperative to destroy central banks, it can still be categorised in the libertarian camp – state action is limited to being impartial and set in stone as active monetary management affects market signals. An example of this is Friedman’s k% rule, whereby the ‘total stock of money so defined rises month by month, and indeed, so far as possible, day by day, at an annual rate of X per cent’ (Friedman, 1968, p. 193), so that the state mandated framework would be stable while let market forces direct the rest of economic activity. This is clearly distinct to Keynesian prescriptions, under which countercyclical, technocratic and discretionary monetary management provides all sorts of different signals that incentivise different outcomes to the free market process.
Thus, with the distinction between market and state directed financial activity made, we can use real examples to highlight the differences that have unfolded.
Monetary Policy – A Clear Example of Government Intervention
With regards to the financial crisis of 2008, Booth notes that instabilities supposedly caused by a supposedly free market system should instead be looked at as caused by government-controlled monetary policy, and that ‘government failure should be the object of serious attention’ (Booth, 2009, p. 28). If the financial and housing sector represents libertarian free market principles, the role of government should be impartial and facilitatory, with supply and demand for money, mortgages and houses determined and realised through market participants. However, government was actively intervening and directing markets in three main areas: monetary policy, regulation and inducing moral hazard and economic unsustainability through enterprise sponsorship.
Alan Greenspan, chairman of The Federal Reserve from 1987-2006, had supposedly close ties with Ayn Rand – a philosopher who could be categorised as part of the libertarian tradition, who advocated objective and total separation of state and economy (Rand, 1967), and is seen as being associated with and influenced by the Austrian School; he supposedly attended a seminar with Ludwig von Mises in the 1960s, (Bostaph, 2001). Yet, Greenspan’s tenure was marked by actions actively antithetical to libertarian economic principles and expanded monetary policy, fuelling such bubbles as the dot-com boom and facilitating keynesian-style government direction of economic behaviour. In fact, ‘The Federal Reserve and the Bank of England flooded the world markets with credit after the crash of 1987, and repeated this whenever any downturn presented itself’ (Butler, 2009, p. 55), which led to ‘Low interest rates [which] led to monetary aggregates expanding, an asset-price boom, low saving and increased consumption and investment’ (Booth, 2009, p. 27).
By forcing interest rates below the levels that would naturally arise from real market behaviour, ‘mortgage lending and borrowing [appeared] riskless and encouraged house price increases’ (Schwartz, 2009, p. 49). The exploding and cheapened mortgage market was further directed by government towards income groups that were less likely to make repayments by the Community Reinvestment Act, which ‘[promotes] home ownership…It made illegal the practice…whereby lenders would simply refuse mortgages in poor…areas’ (Butler, 2009, p. 53).
So, price signals mandated by the government, not the market, through below market level interest rates to stimulate economic activity and the redirection of mortgages towards ineligible income groups were realised. Intervention was also present in directing economic activity with the use of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). These were two government sponsored enterprises that bought and sold mortgages on the open market. In an effort to encourage more people to join the housing market, ‘Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low-and moderate-income borrowers.’ (Schwartz, 2009, p. 46). This was increased over time, with ‘42 per cent of their mortgage financing [having] to go to borrowers with incomes below the median income in their area…[increasing] to 50 percent in 2000 and 52 per cent in 2005’ (Schwartz, 2009, p. 46). This funnelled government-mandated risky loans into a government subsidised enterprise to achieve politically desired results that would potentially not be seen as reasonable by market signals of profit and loss in purely private interactions. Potential costs incurred by lenders were outsourced to these politically backed establishments: ‘Freddie and Fannie—and ultimately the taxpayers—would guarantee their bad loans’ (Butler, 2009, p. 55). This became a revolving door of collusion, with ‘Fannie Mae and Freddie Mac…active politically, extending campaign contributions to legislators’ (Schwartz, 2009, p. 46). Congressman Barney Frank was active in the extension of government involvement in home ownership: quoted as saying ‘I want to roll the dice a little bit more in this situation toward subsidized housing’ and helped to ‘impose what were called “affordable housing” requirements on Fannie Mae and Freddie Mac in 1992’ (Wallison, 2011).
Regulation – Markets Distorted
Regulations were also in place that are seen to have incentivised the ensuing outcomes. Regular banking practices are changed to fit with regulatory requirements, leading ‘banks find more and more opaque ways…leading to the creation of complex financial instruments and structures that few within…understand’ (Booth, 2009, p. 29). Intervention has supposedly clouded the normal ways that profit-seeking firms interact with consumers to trade, causing the concepts that libertarians claim make markets work to cease to exist properly. This dynamic between private organisations and government oversight seemed to be destructive, in that ‘financial institutions’ most important relationships were often with the regulators. The least-regulated financial institutions, it appears, were those that bore least responsibility for and were least affected by the crash’ (Booth, 2009, p. 31). Moreover, far from being a supposedly deregulated capitalist market, ‘Fannie and Freddie had 236 regulators (Butler, 2009, p. 55).
Thus, we can see that, far from being a purely private phenomenon of unregulated business collapsing in on itself, government policy directed economic activity away from that which would be in accordance with price signals provided by the free market and an impartial state, towards activity mandated by political forces and their management. It is therefore not a reflection of the principles that as assumed to be in place but in fact represents the opposite prescription.
Whilst there is significant evidence to suggest that the modern Western state has indeed moved towards market reform of key economic sectors, it does not necessarily suggest that it is a fair reflection of libertarian intellectual prescriptions. The fact that there is significant ad hoc abandonment of libertarian principles when it is not politically favourable, especially in areas most heavily criticised as being so, suggests that the neoliberal state does not resemble free market ideology, rather, resembles the top-down interventionist tradition of other illiberal ideologies. Therefore, it would be fallacious to equate neoliberalism with the intellectual heritage it is claimed to represent.
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