The term “neoliberalism” has come to be a general term of abuse in many circles. Out of the mouths of Latin American populists like Argentina’s Cristina Fernández or Mexico’s Andrès Manuel López Obrador, it is simply a synonym for capitalism which they denounce as the root of inequality and exploitation. A more sensible definition is the more restricted one that I used in chapters 2 and 3 of my last book Liberalism and Its Discontents, where it refers to a specific interpretation of market economics associated with economists like Milton Friedman and the Chicago School that articulated a broad critique of state intervention in markets on economic efficiency. This led to a policy agenda, carried out by politicians like Ronald Reagan and Margaret Thatcher, that pushed for a series of reforms including reduction of trade barriers and subsidies, stability of money supply, fiscal balance, deregulation, privatization, and the like—the famous “Washington Consensus” associated with economist John Williamson of the Peterson Institute.
Neoliberalism in the latter sense has been criticized extensively not just by the progressive left, but by mainstream economists like Joseph Stiglitz and Dani Rodrik, and at this point is a spent force politically. In the 2010s, it gave way to new ideas like modern monetary theory (MMT), which argued that neoliberalism’s concern for monetary stability and balanced budgets was wrong, and that governments had much more leeway to run fiscal deficits and print money than they formerly believed. The Biden administration, and in many respects the Trump administration, bought into this rejection of neoliberalism by running enormous deficits, which up until two years ago did not seem to engender any inflationary consequences.___STEADY_PAYWALL___
The laws of economics had not been repealed, however. In retrospect, the period from the mid-1980s when post-Volcker America tackled its inflation problem up until the financial crisis of 2008—what was at the time called the “great moderation”—was the product of unique circumstances that will not return anytime soon. This situation reflected the addition of several hundred million new workers from China and a handful of other developing countries to the global labor market. This held down wages and prices across the board, and led to massive shifts of low-skill labor from rich countries to emerging ones. In addition, the world saw the shift to a digital economy whose innovations were finally showing up in productivity numbers.
The transformation of China from an impoverished developing country to an upper-middle-income one with a significantly lower growth rate changed the global economy once again and has reverted the world back to the more normal one that prevailed a generation earlier. Budget deficits on levels prompted first by responses to the 2008 crisis and then by the Covid pandemic have contributed to this new inflationary normal. Central banks around the world, beginning with the U.S. Federal Reserve, are now racing to raise interest rates and constrain the growth of money supplies to fend off levels of inflation not seen since the 1980s.
This new reality is a good occasion to look back at the neoliberal agenda and consider which parts of it were actually valid and were too readily discarded, and which aspects of its critique remain on target. This was triggered for me in listening to a recent dinner talk by Bob Zoellick, who had served in a host of senior roles at Treasury, the office of the United States Trade Representative, State Department, and the World Bank, as well as by an article by my Stanford colleague Peter Henry that sought to re-assess the impact of the Washington Consensus. Bob suggested looking again at the list of policy recommendations enumerated in the Washington Consensus and asking which ones were really wrong.
Take for example monetary stability and fiscal prudence. Many aspects of neoliberalism were themselves responses to the economic crises of the 1970s and 80s, when suddenly rising oil prices triggered not just inflation but in several cases hyperinflation. This then led to balance-of-payments crises, massive devaluations, recessions, and ultimately a series of sovereign defaults across Latin America and sub-Saharan Africa. Many developing countries lost more than a decade’s worth of growth.
I remember visiting Brazil and Argentina in the early 1990s. Inflation in Brazil was then running at around 20 percent per month, which I thought was extraordinary until I got to Buenos Aires. There I was told that Brazil had not yet experienced hyperinflation, which had reached some 20,000 percent on an annual basis a bit before my visit. If you were paid your salary on a Friday, you would immediately go out and spend it because it would be worth much less by Monday. Such was the nature of life before neoliberalism.
The moderation of inflation in subsequent years was not just the product of China’s entry into the global system, but of acceptance of the monetary component of the Washington Consensus. Newly independent central banks made inflation targeting and monetary stability their top priority, and the world benefited. Countries that haven’t accepted this part of the consensus like Turkey and Argentina continue to suffer from debilitating rates of inflation.
Now that we are living in an inflationary world, the logic of that part of the Washington Consensus may start to make more sense to younger people who didn't experience the 1970s-80s version. In the next post, I want to take up the issue of industrial policy, which has made a return as part of the post-neoliberal agenda.
Francis Fukuyama is chairman of the editorial board of American Purpose and Olivier Nomellini Senior Fellow and director of the Ford Dorsey Master’s in International Policy program at Stanford University’s Freeman Spogli Institute for International Studies.
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