Market fundamentalism

Hayek by Bill Leak
Andrew Gamble

Neo-liberalism became the ruling orthodoxy in many countries in the 1980s, reshaping policy agendas, and transforming all parties, social democratic, conservative and liberal alike.

Neo-liberalism was not just the product of ideas but was a practical response to a new set of circumstances in the global economy, just as Keynesianism had been a response to the experience of the depression in the 1930s and war in the 1940s.

Friedrich Hayek became one of the most important intellectual figures in the rise of neo-liberalism, a strange twist of fate for him, since after disputing with Keynes in the 1930s about the best remedies for the Great Depression, Hayek had become an isolated figure in the economics profession after the tidal wave of Keynesianism swept all before it and helped justify the great expansion of the state which the war economy bequeathed. In 1947 he helped found the Mont Pelerin society, a small band of true believers in classical liberalism, which included many liberal economists, but Hayek himself soon after abandoned economics and devoted himself to political, legal and philosophical studies.

In the 1970s and 1980s the collapse of the international monetary system established at Bretton Woods, the acceleration of inflation and a major downturn in the global economy discredited Keynesianism and paved the way for a new set of doctrines to justify the new policies for managing the global economy and domestic economies. These gradually coalesced into the neo-liberal mantras with which we are familiar.

"As Kevin Rudd has pointed out, it was not only the intellectual foundations of much of twentieth century social democracy that were undermined by the new phase in the history of the global economy which opened in 1971, but also much of twentieth century conservatism as well."

Hayek was jubilant. 'Let us shout from the rooftops' he once declared, 'that the intellectual foundations of socialism have all collapsed.' But as Kevin Rudd has pointed out, it was not only the intellectual foundations of much of twentieth century social democracy that were undermined by the new phase in the history of the global economy which opened in 1971, but also much of twentieth century conservatism as well.

Neo-liberal doctrine was 'market fundamentalist' because it was absolutist and universalist in its claims, attacking all forms of government intervention, subsidy and protection, unleashing a process of change which has affected many groups important to the electoral support of parties of the centre-right, as well as those of the centre-left.

In seeking to sweep away the obstacles to free markets which had been erected as the result of democratic pressures from both left and right in the course of the twentieth century, neo-liberalism was often uncompromising. It promoted major reshaping of both private and public sectors, wholesale deregulation, privatisation and marketisation, and a drastic redrawing of the boundaries between the public and private sectors whose consequences have been reverberating ever since.

Hayek was an acute social theorist, but also an ideologue. He developed one of the most sophisticated theories of markets in social science, but he was also a market fundamentalist with a deep-rooted distrust of all forms of state regulation and state intervention, which tended to become more pronounced as he grew older. In the 1970s this former supporter of the gold standard advocated the abolition of all national currencies and central banks, the complete deregulation of one of the state's main functions.

The paradox of Hayek's work however is that he stopped short of advocating either the kind of anarcho capitalism sought by some libertarians, or even the strict minimal state proposed by Robert Nozick. On the contrary he thought that the state needed to retain very strong powers to police the market order and prevent powerful interest groups such as trade unions from subverting it.

But he fretted constantly about how this might be achieved, and how democratic governments could be persuaded to cease interfering with markets. His case would have been stronger had he not, in his most important book The Constitution of Liberty, proposed a raft of measures where government spending and intervention were desirable.

Keynes had already spotted this inconsistency in Hayek, as Kevin Rudd has pointed out, and as many libertarian critics of Hayek have also done. Hayek was reluctant to propose an absolute limit for state action, which makes his policy prescriptions curiously imprecise. He even agreed that a welfare safety net was desirable, in order to limit the disaffection of those who gained least from the market order.

The market fundamentalism which he often rhetorically proclaimed was not always reflected in the specific policies he advocated.

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