Economists and the rise of neo-liberalism.

Author:Backhouse, Roger E.

From the mixed economy to neo-liberalism

At the end of the Second World War, there was, outside the Soviet bloc, broad acceptance of the need for a mixed economy. There were differences over where to draw the line between the private and public sectors (for example, should basic industries be nationalised?), over the best form of economic planning, and over the appropriate level of redistribution, but the principle of a state presence in economic activity was widely accepted.

By the end of the twentieth century, the climate of opinion had changed dramatically in two inter-related ways. The most obvious change is that those who denounced any form of government action as 'socialism' had become much more prominent (1). The other was the emergence of a pervasive scepticism about whether direct state action, either by directing industry or redistributing income and wealth, could ever raise social welfare, a scepticism that has affected even those who profess social-democratic ideals.

What was the role of economists, in particular academic economists, in this process? (2) It is probably true to say that only a small minority of academic economists could legitimately be described as neo-liberal. And yet over the past three or four decades, economists have developed theories that have supported this move from government action towards market solutions to economic problems. To explore the connections between academic economics and neo-liberalism, it is useful to start with Friedrich Hayek, a central figure in neo-liberalism, but after the 1930s an outsider to academic economics.

Hayek's programme

Alarmed by the spread of socialist ideas, Hayek sought, in 'The intellectuals and socialism' (1949), to explain why they had become so influential. He argued that the key group was a class of people he called intellectuals, whom he later called the 'dealers in second hand ideas'. They included 'journalists, teachers, ministers, lecturers, publicists, radio commentators, writers of fiction, cartoonists and artists' (Hayek, 1949, 418)--professional communicators but amateurs as regards the substance of their ideas. Their authority derived from getting hold of ideas before their audience. Not being professionals, they judged ideas according to whether they fitted with fashionable general assumptions that might be called the climate of opinion. But intellectuals helped shape the climate of opinion, choosing to support certain ideas and be critical of others.

Because people interested in abstract ideas were more likely to be socialist, and because critics of the status quo would have fewer career opportunities (propositions for which he produced no evidence), Hayek argued that intellectuals would be predominantly socialist in their outlook. To counter socialism, the right strategy was to focus on converting these 'dealers in second hand ideas'.

Hayek organised, in September 1947, a meeting of people interested in developing a 'philosophy of freedom'. Its outcome was the Mont Pelerin Society, named after the location of this first meeting. The Society's aim was not to exert an immediate influence on policy but to have a long-term influence on the climate of opinion. Hayek compared its task explicitly with that facing the socialist and New Liberal intellectuals who had formed the Fabian Society. Though he had wanted to include more historians and philosophers, the Society contained a high proportion of economists.

Though many, such as Milton Friedman, later became highly influential, Hayek was the dominant figure. The main reason was his book, The Road to Serfdom (1944). As John Maynard Keynes symbolised the philosophy against which they were fighting, Hayek's book provided the manifesto of the new movement. In Britain, according to one commentator, it 'succeeded in redefining the political debate ... in a way that no single book or statement of belief has done since' (Cockett, 1994, 97). In the United States, the book achieved a wide readership through a condensed version in the Reader's Digest.

The Mont Pelerin Society became the centre of a network that included individuals and organisations concerned to sponsor free-market ideas, think tanks and academic economists, including many who were either members of the Chicago School of economics or had been trained there. Amongst such organisations, the Mont Pelerin Society was unique in the range of its contacts (including libertarians, Austrians and mainstream economists) and in the period over which it operated.

Patronage and the landscape of economics

Whilst Hayek was preparing for the initial meeting of the Mont Pelerin Society, he was approached by a businessman, Anthony Fisher, who had recently read The Road to Serfdom and wanted advice about influencing public policy for the better (3). Hayek's response was:

I would join with others in forming a scholarly research organisation to supply intellectuals in universities, schools, journalism and broadcasting with authoritative studies of the economic theory of markets and its application to practical affairs. (quoted in Cockett, 1994, 124) This eventually materialised, in 1955, as the Institute of Economic Affairs (IEA).

The IEA was, as a registered charity, strictly non-political, its aims referring not to free markets (which might have sounded political) but to 'the study of markets and pricing systems as technical devices for registering preferences and apportioning resources' (Cockett, 1994, 132). However, it published a series of pamphlets and books, by academic economists as well as by journalists and political figures, exploring market solutions to economic problems, advancing many ideas (such as privatisation, deregulation, and methods for creating markets) that eventually became government policy.

Despite its non-partisan position, it exerted a particularly strong influence on the Conservative Party under Margaret Thatcher. Beyond this, it arguably helped to change the climate of opinion through advocating policies that had previously not been taken seriously (the 'Thinking the Unthinkable' of Cockett 1994) and through providing a stream of material that, in addition to being accessible to policymakers, was attractive to students as applications of microeconomic theory.

In setting up the IEA, Fisher was influenced by the Foundation for Economic Education (FEE) in New York, representatives from which had been present at the initial Mont Pelerin Society meeting, and which he visited in 1952. This had been founded in 1946 by Leonard E. Read, supported by the Austrian economist Ludwig von Mises and the journalist Henry Hazlitt, to 'educate the world on the principles of free-market economics: individual freedom, private property, limited government and free trade' (4). Like the IEA, the FEE focused on retailing free market ideas not on academic research. The same was true of the American Enterprise Institute (AEI), founded in 1943. Education in the...

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