The origins of neoliberalism

Andrew Norton wonders how the term ‘neoliberalism’ came to Australia. After searching the literature, he thinks it "probably started in Latin America, and came to Australia via US academia".

Andrew’s probably right. There’s some evidence that, during the 1960s, free market supporters in Latin America used the term to describe themselves. Initially influenced by the German neoliberalism of the Freiburg School, some of them came to embrace the ideas of Milton Friedman and the Chicago School. But when Pinochet regime turned to the free market ideas of Friedman and the Chicago Boys, neoliberalism became associated with political repression, authoritarianism and US imperialism. After that, free market supporters probably decided it was a good idea to choose a different label.

As Reason’s Brian Doherty puts it: "Pinochet and Friedman have been assumed by many to be two sides of some evil right-wing coin in which torture, despotism, and unrestricted free markets are all inextricably linked." Friedman’s 1975 meeting with Pinochet reinforced this impression.

Neoliberalism didn’t start out as a pejorative label and there is some evidence that some free market supporters in Latin America referred to themselves as neoliberals. In his 1965 paper ‘Organization and operation of neoliberalism in Latin America’, Norman A Bailey writes:

Within the last four or five years there has been in Latin America a substantial development of organizations dedicated to the maintenance of political and economic liberty and backed by the relatively new business-professional sector of society.

Bailey called these organizations ‘neoliberal’:

The term "neoliberal" has been used because some members of these organizations refer to themselves as such, and also because the groups under discussion bear many similarities to the neoliberal movement in Europe.

The neoliberal movement in Europe is sometimes called ‘ordoliberalism‘. Associated with the Freiburg School thinkers in Germany, these neoliberals strongly supported free markets. As Henry Oliver writes, they were opposed to government ownership of industry, central planning, rent ceilings, food subsidies, housing subsidies and any other measures that interfered with market allocation. But at the same time, they argued that governments sometimes need to take action to foster competition. According to Carl Friedrich, "the movement not only is opposed to cartels and other manipulations, but vigorously supports fair trade practices legislation as well."

According to Bailey, Latin American neoliberal organisations hosted lectures by European thinkers including Wilhelm Roepke, Friedrich Hayek and Ludwig von Mises.

Bailey’s account is supported by US graduate studentsTaylor Boas and Jordan Gans-Morse. As they write in their 2006 paper ‘From Rallying Cry to Whipping Boy: The Concept of Neoliberalism in the Study of Development‘:

In the 1960s, groups of Latin American (particularly Chilean) right-wing intellectuals began to take notice of both the ideas of the Freiberg School and their implementation in postwar Germany under Ludwig Erhard. These intellectuals used the Spanish term neoliberalismo—a direct translation of the German neoliberalismus—to refer to this school of thought, along with other phrases such as neocapitalist and social market economy. Right-wing intellectuals in Latin America were particularly impressed by Erhard’s “German miracle” and speculated about the possibility of accomplishing similarly rapid growth and development in their own countries. Given this close connection between the term as used in Latin America and its original formulation by the Freiberg school, neoliberalism in 1960s Latin America meant essentially the same thing as it had in postwar Germany—a philosophy that was moderate with respect to classical liberalism and sought to use state policy to temper the social inequality and tendency toward monopoly that were seen as threatening the survival of capitalism and facilitating the rise of communism in Europe.

Boas and Gans-Morse argue that after the overthrow of the Allende regime in Chile, left wing academics attached the term ‘neoliberalism’ to Pinochet’s market-oriented reforms while free market supporters abandoned the term.

According to Boas and Gans-Morse, free market supporters "may have been reluctant to attach this label to their own project in Chile, particularly if they saw the Chilean reforms as being more radical than those in Germany." And once adopted by left wing writers who were largely unaware of Freiburg School neoliberalism, "it is clear that the term diffused into the English-language study of development directly from the Spanish-language scholarship of the 1980s, carrying with it the negative and radical connotation that the concept had acquired among Chilean and other Latin American academics."

It’s likely that the Latin American neoliberals were not all as moderate as Boas and Gans-Morse suggest. Norman Bailey, in a paper titled, ‘In another paper, ‘The Colombian "Black Hand": A case study of neoliberalism in Latin America ‘, he explains that while all Latin American neoliberals supported free markets and opposed collectivism, there had a variety of views:

… specific idea-systems espoused range from the philosophy of Ayn Rand through the strict market economics of a Ludwig von Mises or a Friedrich Hayek to the "social market economy" of Wilhelm Ropke and Jacques Rueff. These differences lead to fissures and controversies within Neoliberalism, but heavy concentration of power and membership in the "social" wing permits a fair degree of united action.

According to Bailey, the neoliberals did not limit their activities to hosting lectures and disseminating information. In his ‘Organization and operation of neoliberalism’ paper he discusses "direct action activities" which included blacklisting employees, infiltrating trade unions and forming anti-guerilla militias. Bailey also credits a neoliberal group — the Instituto de Pesquisas e Estudos Sociais (IPES) — with a role in the Brazilian military coup of 1964.

The Latin American experience has come to define neoliberalism — Chile under Pinochet is the paradigm case. And the fact that leading figures in the free market movement have expressed sympathy for the Pinochet regime has reinforced this view. For example, when asked about totalitarian regimes in Latin America in 1981, Friedrich Hayek replied, "Don’t confuse totalitarianism with authoritarianism. I don’t know of any totalitarian governments in Latin America. The only one was Chile under Allende. Chile is now a great success".

John Quiggin argues that Hayek’s support for Pinochet’s authoritarian dictatorship "was a natural consequence of his system of thought and not an aberration." And there are aspects of Hayek’s work that invite this interpretation. In The Constitution of Liberty he argues that the antithesis of the democratic ideal is authoritarianism while the antithesis of the liberal ideal is totalitarianism. He writes:

Neither of the two systems necessarily excludes the opposite of the other: a democracy may well wield totalitarian powers, and it is conceivable that an authoritarian government may act on liberal principles (p 103).

Hayek made it clear that he would prefer an authoritarian government that upheld the rule of law to a totalitarian but democratic government that acted arbitrarily. But it’s a mystery why anyone would think that the Pinochet regime had any respect for liberal principles (except, in some narrow economic sense).

By linking thinkers like Hayek and Friedman to Latin American dictatorships, the ‘neoliberal’ label forces the free market movement to confront ideas and events some would rather pass over in silence.

Note: Taylor Boas points to a more recent version of his paper on neoliberalism — ‘Neoliberalism: From New Liberal Philosophy to Anti-Liberal Slogan‘ (with Jordan Gans-Morse). Studies in Comparative International Development 44, no. 2 (Summer 2009, forthcoming).

20 thoughts on “The origins of neoliberalism

  1. “By linking thinkers like Hayek and Friedman to Latin American dictatorships, the neoliberal label forces the free market movement to confront ideas and events some would rather pass over in silence.”

    Not really. The striking historical fact about market institutions is that they have shown themselves compatible with a wide range of political ideologies and systems: from authoritarian regimes like Chile and China, to large but benign welfare states in Scandinavia, to social democratic governments like Hawke-Keating or Blair-Brown, to mild conservatives like Howard or Thatcher.

    Except illegally or marginally, they have failed to operate in traditional societies, communist countries, and (largely) the Arab Muslim world.

    There are interesting arguments about whether economic freedom creates pressures for social and political freedoms, but clearly there is no automatic relationship.For example, my CIS colleague John Lee argues that the Chinese communists have succesfully co-opted the middle class that would create political pressure in other countries.

    The relationship between market institutions and authoritarian regimes in Chile and China does not raise questions for market liberals, because the authoritarianism is not coming from the liberalism – it is coming from local political factors that are unrelated.

  2. I’m surprised by this comment. Almost all of the major figures in the free market movement presented their free market ideas as part of a broader liberal or libertarian philosophy.

    Market institutions may be “compatible with a wide range of political ideologies and systems” but the movement’s arguments have never been confined to selling markets as a useful technology for improving efficiency — have they?

    When Hayek says that Chile under Pinochet is “a great success” it’s natural to read this as an endorsement of the whole package, not just the nation’s economic performance.

    The problem with the comments about the Pinochet regime is their implications for how Hayek’s abstract liberal or libertarian principles should be interpreted in practice. If Quiggin’s interpretation is right, then the free market movement has been taking unfair advantage of the ambiguity of words like liberty and freedom.

    Personally, I think there’s a fair bit of tension between the liberal principles Hayek sets out in books like the Constitution of Liberty and his comments about Chile. If I had to choose between Hayek and his principles, I’d choose the principles.

  3. Don – This whole Chile-Hayek connection revolves around one very obscure quotation; it is not part of his broader intellectual work or framework. Nor are classcial liberals obliged to take on all of Hayek’s ideas (much less remarks) – to use a personal example, his material of on spontaneous order was very influential for me, but I don’t think the rest of it has affected my thinking.

    Indeed, as my recent survey showed classical liberals are on the democratic side of debate in Australian politics, with social democrats and to a lesser extent libertarians wanting to transfer power to unelected judges.

    On selling markets on efficiency grounds, most classical liberals (though not all, if my survey is a guide) do have a comprehensive view of liberal ideas and institutions. However, in practical politics a whole package is almost never adopted, and there are no mass conversions of opinion. Things have to be taken issue by issue, as opportunities arise. Given most people are not ideological liberals, often ideas have to be sold on efficiency grounds.

  4. When Hayek says that Chile under Pinochet is a great success its natural to read this as an endorsement of the whole package, not just the nations economic performance.

    Indeed Don. A better example of von Hayek plugging Pinochet’s qualities as a protector of not just economic but individual rights was a letter of his in the London Times (3 Aug 1978, p15:)

    I have certainly never contended that generally authoritarian governments are more likely to secure individual liberty than democratic ones, but rather the contrary. This does not mean, however, that in some historical circumstances personal liberty may not have been better protected under an authoritarian than under a democratic government. This has occasionally been true since the beginning of democracy in ancient Athens, where the liberty of the subjects was undoubtedly safer under the “30 tyrants” than under the democracy which killed Socrates and sent dozens of its best men into exile by arbitrary decrees.
    In modern times there have of course been many instances of authoritarian governments under which personal liberty was safer than under many democracies. I have never heard anything to the contrary of the early years of Dr Salazar’s early government in Portugal and I doubt whether there is today in any democracy in Eastern Europe or on the continents of Africa, South America or Asia (wiih the exception of Israel, Singapore and Hong Kong), personal liberty as well secured as it was then in Portugal. More recently I have not been able to find a single person even in much maligned Chile who did not agree that personal freedom was much greater under Pinochet than it bad been under Allende.

  5. This is much as I am saying – this is an historical judgment on particular circumstances. There is no inherent logical reason why a non-democratic state could not also offer considerable levels of freedom (pre-democratic Australia and England also offered high levels of freedom).

    History does however suggests that generally democracies have far better records on liberty than non-democracies, and therefore liberals should be (and are) overwhelmingly on the side of democracy against authoritarian alternatives. In the Australian context, as I noted, classical liberals are firmly against the major threat to democratic decision-making, the move to judicial decision-making on ‘rights’.

  6. I think Mises explained it well. Essentially democracy is not the question, the question is about the rule of law and the minimalist state. In societies without democracy, civil war and strife is more likely. Democracy ameliorates one cause of disruption of freedoms and the market, but it is not an end in itself. Liberalism trumps democracy.

  7. Andrew, are you arguing that “there is no inherent logical reason why a non-democratic state could not also offer considerable levels of freedom”? If so, I too am as bemused as Don.

    A state like Pinochet’s is quite “incompatible” with market liberalism, as “unwanted” people are disposed of or imprisoned on mere suspicion of guilt. Would you also endorse Saudi Arabia (often lauded as a truly classical liberal economy) even though it does not allow women to work as freely as they want to (things are a little on the improve)? You object to trade unions which at least have a reasonable case for intervention but you then half-endorse Pinochet?

  8. “Andrew, are you arguing that there is no inherent logical reason why a non-democratic state could not also offer considerable levels of freedom? If so, I too am as bemused as Don.”

    Yes, I am. Pinochet’s Chile was not one, however. Hong Kong under British rule perhaps. Even today, Hong Kong has reasonably high levels of freedom, despite being formally under an authoritarian regime.

    Market liberals advocate market institutions, and these can and do exist in a wide variety of social and political systems.

  9. Certainly market institutions can exist under varying political/social systems, Andrew. That’s no great insight. The classical liberal market economy and the rule of law essential to personal freedom in Great Britain formed under conditions of extreme anti-democracy, as you say; their ruling class kept the property franchise long after it went stale. Without the threat of working-class violence and religious dissent, the classically liberal market might have evolved quite nicely without capital-R Reform.
    The question Don’s raising by mentioning Hayek’s support for Pinochet isn’t whether market freedoms can co-exist with an undemocratic political system—of course they can—it’s whether the neoliberals of the post-1960 era based their political project on removing existing individual rights, foremost, that of association. In anti-Communist South America, the free market has been most often a military, not a liberal, institution.
    A market liberalism that protects market institutions without regard to political violence and the removal of social freedoms arising from their protection doesn’t sound like a Hayekian liberalism to me. Wasn’t his insight that economic and personal freedoms worth fighting for were the ones that marched together?

  10. Liam – If you click on the link in Don’s post, you’ll see that he left out the crucial contextual sentence – Hayek was talking about what he regarded as Chile’s ‘economic miracle’. I don’t know whether that was true or not, but clearly he was talking about the economy, and not the general political situation.

    This is nothing more than giving a tick to a regime that has done something right, which is done frequently without people inferring endorsement of the whole lot.

    What I don’t think Don or you have shown is any real evidence that there is – as per Naomi Klein’s theories – some real link between ‘neoliberal’ ideas and authoritarian governments, or as I would argue that in a contintent that has had more coups than we’ve had elections the authoritarian regimes simply reflect the weaknesses of the local political culture.

  11. Except illegally or marginally, they have failed to operate in traditional societies, communist countries, and (largely) the Arab Muslim world.

    The Grand Bazaar, Istanbul: trading pretty much continuously for over 500 years to the present day, under Muslim rule. Of course, slaves were not allowed to trade (they were the merchandise) so maybe that’s a free market, maybe not, but certainly free enough for basic economics and supply/demand optimisation to take effect. Constantinople before that was a trade hub, and the Muslims were smart and determined enough to not just take it, but keep the trade wealth intact.

    Really, the entire Caliphate was a trade-oriented empire, read any story from the Arabian Nights and you see trade and wealth as central themes. Admittedly, they were also a stratified and status oriented society, but merchants were a well-understood and well-accepted part of that system. Modern Islam has taken a few steps toward puritanism for reasons best known to the Arabs. Every Feudal society hits this conceptual stumbling block when they discover that a row of worthless peasants carrying nothing but cheaply mass produced machine guns can obliterate the best of the best elite warriors. After that comes some redefinition of self-worth, and the Arabs decided to go for piety and self-sacrifice. *shrug* My best guess anyhow.

    Come to think of it, most likely Istanbul turned to a constitutional secular government at just the right time to save it from a dose of 20th century Puritanism, be that as it may, Turkey is a Muslim country and has been for a very long time.

    As for traditional societies, it’s pretty hard to find a village without a village marketplace, and inter-village trade fairs are a well established part of both history and folklaw. Now this type of trade is not well developed, as compared with the big imperial trade but if you think about it, trade and transport go hand in hand; empires build military forces, military forces build high-quality roads (and clobber the bandits). Nothing to do with the political system, nor the inclination of people to exchange goods, everything to do with available infrastructure.

  12. More recently I have not been able to find a single person even in much maligned Chile who did not agree that personal freedom was much greater under Pinochet than it bad been under Allende.

    Not a single person who was willing to speak about it in public, and survive long enough to be heard.

  13. A state like Pinochets is quite incompatible with market liberalism, as unwanted people are disposed of or imprisoned on mere suspicion of guilt.

    I guess that depends on the elusive definition of “market liberalism”, whilst I fully agree that Pinochet found it a convenient tool to be able to cause his political opponents to vanish, a successful marketplace does not really require fairness. It merely requires sufficient levels of competition to prevent monopoly takeover and sufficient freedom to keep the wheels turning. If efficiency is the primary directive, then it’s hard to find fault with Hayek’s approach.

    The modern concept that equal opportunity is an end in itself (i.e. a belief in intrinsic fairness) and that people should not be exploited merely because it is possible to do so, would have been laughed at by the vast merchants and traders throughout history. Even in a modern context, it’s much closer to a dream than to reality (a nice dream, but sadly impractical). Can you imagine trying to explain to the head of the Medici family in Medieval Venice that the guys unloading barges would get an equal say in political affairs? You would have been universally regarded as a fruit loop, not even radical enough to be dangerous. Maybe the church would have killed you just on principle, because they liked to have a monopoly on public insanity (unless you could prove you had gone out of your mind through a process of starvation, whipping and sexual desperation, in which case they would perfectly understand).

  14. “Not a single person who was willing to speak about it in public, and survive long enough to be heard.”

    Then how you explain that in 17 years of military government only 1500 socialists were killed?.

  15. Well Don, after all that, we are none the wiser about how the “neoliberalism” discourse came to Australia. But this attempt to equate Hayek with fascism is even more childish than it is wrong.

    FFS, Hayek’s major contribution to 20th century thought was to reveal the Marxist roots of Nazism!

  16. Then how you explain that in 17 years of military government only 1500 socialists were killed?.

    I’m not sure where you got that number from. Amnesty documents:

    Following the return to civilian rule in 1990, two institutions were created to contribute to establishing the truth about disappearances, extrajudicial executions and deaths from torture by state agents. The National Commission on Truth and Reconciliation and its successor, the National Corporation on Reparation and Reconciliation, documented the cases of more than 3,000 victims of these human rights violations.

    There’s a similar story here: http://www.beyondintractability.org/case_studies/Chilean_Truth_Commission.jsp?nid=5221

    The Rettig Commission was aided in its work by a staff of sixty. It also got assistance from NGOs that provided information (Hayner 2001). It had freedom to move about to gather information and testimony (Quinn 2001), but received little help from the military (Hayner 2001; Quinn 2001). In total, the commission investigated 3,400 cases of death and reached definitive conclusions on all but 641 (Ensalaco 1994). It attributed 95% of the rimes to the military, which Hayner (2001) asserts debunked the military’s justification it was responding to ‘internal war.’ While the commission did not name perpetrators, provisions were made that they would be made public in 2016 (Quinn 2001). They were not able to determine the fate of many other disappeared, largely due to lack of cooperation by the military (Mattarollo 2002).

    Quite likely more people disappeared than were ever investigated, with some families fleeing the country and others too suspicious of the government to speak up, even years later. The work of digging up the dead was done under the watchful and begrudging eyes of the same military who planted them, and who were very insistent that no one would actually carry any blame. The book, “Chile Under Pinochet” (which you can find samples of on google) says,

    The politics of human rights had now become the politics of counting. Sola Sierra’s figures far exceed even those released by the corporation. “There are tremendous discrepancies in the work of the corporation in classifying new cases,” she said. “There are situations in which two people were arrested by the same unit, on the same day, in the same place, but the Corporation does not classify them as human rights violations, or as disappearances. It simply says that there are cases where there are no facts to prove them to be violations.”

    I think it is safe to presume that any official figures are extremely conservative, but they are all bigger than 1500.

    There were also considerably more arrested, beaten up a bit and released, which tends to make people a bit nervous about speaking up. All in all there was a very clear systematic use of violence and fear (including many cases of torture) against political enemies (regardless of exactly which ones might be socialist), and it doesn’t take a genius to work out the chilling effect of such a campaign. Because the military government had control over the court system, people learned that they could not get justice through the system, making them even less likely to speak out (and this situation still remains somewhat in force).

    As I said above, if efficiency is your prime concern, then sacrificing the life of many thousands is small compared with a nation of millions. This is the heart of Socialism — the individual exists to serve the collective, and some individuals serve best as an example to others. It’s a technique that works in some situations (particularly warfare), why else do we celebrate Anzac Day?

    If your prime concern is fairness, justice and the rule of law (in the sense that all citizens are equal under law) then killing even one political opponent is unacceptable.

  17. There’s more here about political detentions and torture in Chile. The original commission carefully covered only state sanctioned murder and avoided any investigation into torture.

    http://www.justiceinperspective.org.za/index.php?option=com_content&task=view&id=78&Itemid=123

    January 2008: On 12 August 2003, President Ricardo Lagos acknowledged the use of torture and offered a formal apology for it, finally giving torture victims the recognition that they needed.

    By March 2005, it was determined that 27,255 Chileans would get government compensation: US$190 per month and free education, housing and health benefits for the victims and their relatives. [HRW]

    It was also made known that Riggs Bank, which had agreed to be bought by the PNC Financial Services Group Inc., will pay $9 million to create a fund for victims of Chilean dictator Augusto Pinochet, who once routed money through the bank [AP]

    Amnesty International has criticised the Commission for its limited mandate (excluding foreigners and those tortured for non-political reasons), and argues that the Commission should also include a truth-seeking aspect, since torture victims were excluded from the Truth and Reconciliation process. [AI]

    So they are basically still digging to the bottom of it. How much of this stuff would or could have been known to Hayek is anyone’s guess. It’s easy to be smart in hindsight (especially w.r.t. economics).

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