Neoliberal economics: The road to freedom or authoritarianism?

In the early 1930s, Austrian economist Friedrich Hayek, then based at the London School of Economics, jotted off a memo to the school's director, William Beveridge. At the time, the Great Depression was wreaking havoc around the world. And the ideals of classical liberalism, like democracy and free-market capitalism, were under assault. Witnessing the rise of fascist parties around Europe, Beveridge, like many others in his day, had argued fascism was the ultimate expression of a failed capitalist system. Absolutely not, argued Hayek in his memo. Fascism, with its rejection of liberal democracy and embrace of government power, actually had its roots in socialist ideas and policies.

What began as the germ of an idea in a memo became a magazine article and then, in 1944, a book, which Hayek titled The Road To Serfdom. When Hayek shopped the publication rights of the book in the United States, three commercial publishing houses rejected it. They didn't see its potential. Hayek settled for an academic publishing house: The University of Chicago Press.

The Road To Serfdom became a smashing success. Not only did it sell hundreds of thousands of copies, it blew wind into the sails of a flagging conservative movement, which had struggled to captivate the hearts and minds of mainstream America after the Great Depression.

Hayek argued that the ballooning welfare state, characterized by policies like those of the New Deal, handed too much power and control to the central government, robbing people of autonomy over their economic lives, hurting the economy, and paving the road to tyranny. He argued that freedom and prosperity could only be achieved by embracing the free market.

80 years later, economist Joseph Stiglitz — who like Hayek, won a Nobel Prize in economics — has a new book out with a response to Hayek and his generations of followers. "A major theme of my book is that Hayek got it 180 degrees wrong," Stiglitz told Planet Money in an interview last week. In fact, the very title of Stiglitz's book is a counterpunch to The Road to Serfdom. It's called The Road To Freedom.

Like in the 1930s, when Hayek began working on his book, populism is now exploding around the world. And Stiglitz fears some countries may be careening towards "a 21st century version of fascism." But contrary to the classic argument made by Hayek, Stiglitz says, this rise in authoritarianism "comes not in the countries where the government is doing too much, but where the government is doing too little to protect individuals against unemployment, the stresses of adaptation to globalization, to technical change, to the stresses of migration."

For a long time, conservative politicians sold lower taxes, fewer regulations, and smaller government as integral to enhancing freedom. But, Stiglitz argues, this conception of freedom is all wrong and, even worse, it has paved the way to a dangerous political era that threatens our real freedom.

What Is Freedom?

For Hayek — and later Milton Friedman and a whole host of other conservatives and libertarians who were inspired by Hayek's work — freedom largely meant freedom from government.

Stiglitz opposes this narrow way of thinking about freedom. In his book, he offers a much different conception of freedom, which he writes is really about, using jargon from economics, "a person's opportunity set — the set of options she has available."

Freedom, in other words, is "really what you're free to do," Stiglitz says. "Somebody who is at the point of starvation doesn't really have much freedom. He does what he has to do to survive." By giving that person more resources, Stiglitz says, he becomes more free. He has more options in life. In this sense, Stiglitz argues, the government can step in and give citizens more freedom by, for example, levying taxes to fund programs that eliminate poverty or help people get jobs.

Even more, Stiglitz argues, policymakers should be wary that policies that expand the freedom of some people may come at the cost of the freedom for many more people. He begins his book by quoting the Oxford philosopher Isaiah Berlin: "Freedom for the wolves has often meant death to the sheep." He uses this metaphor to criticize policies like financial deregulation, which, he says, gave more freedom to banks at the expense of the freedom of ordinary Americans.

An Assault On "Neoliberalism"

Stiglitz goes well beyond an effort to reclaim the concept of freedom for progressives. Much of his book is aimed at bulldozing away any legitimacy for "neoliberalism" — an increasingly popular term for the free-market ideology that swept America and much of the world in the 1980s and 1990s.

"Neoliberalism's crimes include freeing financial markets to precipitate the largest financial crisis in three-quarters of a century; freeing trade to accelerate deindustrialization [by, for example, gutting American manufacturing]; and freeing corporations to exploit consumers, workers, and the environment alike," Stiglitz writes. "This form of capitalism does not enhance freedom in our society. Instead, it has led to the freedom of a few at the expense of the many. Freedom for the wolves; death for the sheep."

As a member and then president of the Council of Economic Advisors in the Clinton White House, Stiglitz had a prominent seat at the table when neoliberal ideas spread beyond their traditional stronghold in the Republican Party and began being pushed by Democrats. President Bill Clinton promoted a range of free-market policies, including signing the North American Free Trade Act (NAFTA), supporting China in its bid to join the World Trade Organization, and deregulating the telecommunications and financial industries.

Stiglitz says that, behind closed doors, he fought tooth and nail against many of these policies. He notes, for example, he was successful at staving off financial deregulation — that is, until he left office in 1997. Clinton didn't sign financial deregulation into law until 1999.

"I strongly opposed deregulation of finance, in part because I understood that 'freeing' the financial sector would make us all less free in the end," Stiglitz writes in his book. He blames financial deregulation for contributing to the 2008 financial crisis.

After serving in the Clinton Administration, Stiglitz again battled creeping neoliberalism, this time on a global scale as the chief economist of The World Bank. There he fought against policies like the liberalization of capital markets, which allowed global investors to more freely move money to and from poor countries. He blamed this policy for creating financial volatility and contributing to economic crises around the world.

Of course, there are many who disagree with Stiglitz's take on neoliberalism and the need for strong government involvement in the economy. They may believe the government is too dumb or corrupt to do a good job regulating the market and engineering a more prosperous and freer society. Countries like Argentina and Venezuela, where generations of left-wing leaders have pursued interventionist policies, have seen a host of economic problems, including runaway inflation and dismal economic growth.

Many economists still believe in the virtues of free-market capitalism. For example, in a new book titled The Capitalist Manifesto: Why The Global Free Market Will Save The World, Swedish author Johan Norberg argues that free-market capitalism has lifted millions and millions of people out of poverty, fostered incredible technological innovations, and brought down prices on all sorts of goods and services. Turning against it, Norberg warns, will only hurt growth, lower our living standards, and devastate many, especially the world's poor.

Stiglitz's Fears and Hopes For the Future

Now is the time, Stiglitz argues, for the United States and other nations to abandon neoliberalism and embrace a new form of "progressive capitalism," where the government plays a bigger role in managing the economy, fighting climate change, breaking up monopolies, and eradicating poverty, inequality, and joblessness.

"If we continue down this path — you might say the road to serfdom — we will lose some freedom because it's leading to more populism," Stiglitz says. "This populism is an authoritarian kind of populism and is a real threat to the sustaining of democracy and even, really, a market economy that actually functions."

While Stiglitz spends much of his book criticizing Republicans, many Republicans these days are more receptive to the idea that the free market is failing America and that we need greater government intervention. Senator Josh Hawley (R-Missouri), for example, has been vocal against monopolies and has sponsored various bills to break them up. Last year, Senator Marco Rubio (R-Florida) published a book, Decades of Decadence, which explicitly blasts neoliberalism, especially free-trade deals, for hurting American workers. Rubio now supports "industrial policy" — handing the federal government more power to shape and grow strategic American industries (For more on industrial policy, listen to this Indicator episode). In a recent op-ed in The Washington Post, Rubio says "industrial policy" used to be dirty words in his political circle, but now he believes the federal government must play an active role in revitalizing American manufacturing.

We asked Stiglitz whether the growing bipartisan consensus that the government needs to play a bigger role in the economy gives him any hope that his vision may actually come into being. Stiglitz, a staunch Democrat, began by criticizing Republicans, including for pushing the unsubstantiated claim that the 2020 presidential election was stolen.

"But," Stiglitz continued, "when I read, say, Marco Rubio's views about industrial policy, I sometimes think he may have cribbed it from some of the things that I've written," he says with a laugh. "And so there is hope that on a lot of these issues, there is an understanding that neoliberalism failed — it's so obvious to me — and that we have to have new policies, like industrial policies, like more competition to stop Big Tech. I do think we're moving in that direction in a bipartisan way."

By the way, Joseph Stiglitz and I had a wide-ranging conversation about freedom, economics, neoliberalism, and his views on the world's problems. We covered a whole lot more than what I could fit in this newsletter. We will be releasing an audio version of this interview to Planet Money+ subscribers soon. You can subscribe here.

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