The true face of neoliberalism

In the run-up to the elections for the European Parliament left-wing parties in many member states of the European Union blamed ‘neoliberalism’ for the dismal state of the European economy.

The leading German social democrat, Martin Schulz, who currently acts as the EP’s president and is running as a candidate for the presidency of the European Commission, posted an article on his LinkedIn page in which he drew some ‘lessons’ from the economic crisis1.

The first lesson he offered is that “the invisible hand of the market does not work and needs a robust regulatory framework… For the last three decades neo-liberalism has set the agenda. Deregulation, privatisation and tax-cutting became the dogma.”

If a lot of red tape, high taxes and state-run companies could have prevented the economic crisis, one wonders why precisely Portugal, Spain and Greece ran into economic trouble. None of these countries was known as a neoliberal paradise.

But the point I want to make here is that Schulz, like so many other critics of free market economics, indiscriminately uses the word ‘neoliberalism’ without bothering to define the ‘neo’ in neoliberalism.

And if neoliberalism is a full-fledged ideology, who and where are its adherents, the neoliberals? The European Parliament, which is chaired by Schulz, has been dominated for decades by Christian-democrats and social-democrats, and so have the parliaments of most EU member states. There is a liberal group in the EP too, though rather small, but none of its members has ever used the label ‘neoliberal’ self-descriptively.

Others have argued before that neoliberalism is often used as swearword or catch-all phrase for an enormous variety of politico-economic phenomena, some of which are contradictory2. For example, the breakdown of Bretton Woods and the introduction of floating exchange rates is often touted as a neoliberal victory, engineered by Chicago economist Milton Friedman (1912-2006), who is regarded as the pontiff of neoliberalism by the European left.

At the same time, however, the introduction of the common European currency and, consequently, the austerity forced upon debtor countries, is blamed on neoliberalism too.

These conflicting claims are ironic, for Friedman warned explicitly that a common currency for a continent as diverse as Europe was bound to wreak economic havoc and would deepen instead of erase political divisions within Europe3.

Despite the fuzziness surrounding neoliberalism today, there is a historic form of neoliberalism. One of its main contributions to economics was precisely its insistence on the need of a regulatory framework.

The origins of this neoliberalism can be traced back to interwar Europe, where a group of mostly German speaking economists in Austria, Germany and Switzerland feared that the rise of left-wing and right-wing collectivism would destroy the last vestiges of the liberal political order in Europe. Socialism and fascism regarded each other as the enemy, but from a liberal perspective both represented a totalitarian attack on individual freedom and human dignity.

To preserve, or rather restore economic and political freedom, these men wanted a new, positive liberal agenda. In the popular mind liberalism had become more and more equated with laissez faire, the idea that the less a government does the better it is.

According to the neoliberals, however, laissez faire in practice led to random and distortive government intervention in the economy. One of them, Alexander Rüstow (1885-1963), who worked at the impotent German antitrust office, witnessed firsthand how a weak state falls victim to organised economic interests.

He said in 1932: “The new liberalism… calls for a strong state, a state above the economy, above interest groups.”4 Rüstow’s friend and colleague Wilhem Röpke (1899-1966) blamed the proliferation of cartels on the feudal and absolutist history of Germany, where a cartel “was next in rank to Court and Church” and speaking disrespectfully of monopolies was “as plebeian as the public use of a tooth pick.”5

It is a grave mistake, said Röpke, to assume that the market is an autonomous system that can maintain itself without a legal, ethical and institutional framework. Without that framework capitalism will degenerate into corporate capitalism.

The lines between economics and politics will blur: rather than trying to please consumers, entrepreneurs will try to win the favours of politicians and civil servants. The neoliberals often compared the required framework to speed limits and traffic signs, which regulate the behaviour of road users but leave them free to drive where it pleases them; whereas under collectivism each driver would be told which route to take.

Socialism and fascism regarded each other as the enemy, but from a liberal perspective both represented a totalitarian attack on individual freedom and human dignity

Across the Atlantic president Roosevelt had just announced his interventionist New Deal for the American people, which inspired famous journalist Walter Lippmann to write The Good Society. On the occasion of Lippmann’s visit to Europe, a group of like-minded intellectuals gathered in Paris in 1938 to discuss the revival of liberalism, the topic of Lippmann’s book.

Among the members of this group were Rüstow and Röpke, as well as Ludwig von Mises and Friedrich Hayek; the latter of the two had acquired some fame in Great Britain as a vocal opponent of John Maynard Keynes. They are often dubbed neoliberals, retrospectively, although quite a few of them were actually trying to resuscitate classical liberalism – in the tradition stretching from Adam Smith (1723-1790) to John Stuart Mill (1806-1873) – rather than seeking a new liberalism.

Their efforts were aborted by the outbreak of World War II, but they met again in 1947 to form the Mont Pelerin Society. Friedrich Hayek (1899-1992), who had taken the initiative for the society, spoke in his opening speech of “a great intellectual task” that was required to revive shared ideals for which “there is still no better name than liberal.”6

During the war Hayek had done his bit with the publication of The Road to Serfdom. The reputation of this book lives on as a plea for minimal government, but when reading the book one is struck by the firm rejection of laissez faire. “Probably nothing has done so much harm to the liberal cause as the wooden insistence of some liberals on certain rough rules of thumb, above all the principle of laissez faire,” Hayek argued7.

The key difference between liberals and others was that the first are committed to “planning for competition” and the second to “planning against competition”, as Hayek called it. Key elements of the positive neoliberal programme were a social safety net, free trade, monetary stability, a free price system and antitrust politics. Half a century on, these are tested and proven conditions for prosperity and, at least in theory, cornerstones of the single European market.

Were the likes of Martin Schulz pushed to clarify what they mean when talking about neoliberalism, they would probably refer to Margaret Thatcher, Ronald Reagan, Milton Friedman and – perhaps – Friedrich Hayek, but certainly not to a bunch of interwar German economists. It is easy, therefore, to dismiss historical neoliberalism as an intellectual tour de force without consequences for the real world.

Yet this would be a mistake. First, Wilhelm Röpke acted as economic advisor to Ludwig Erhard, Germany’s post-war minister of Economics and later Chancellor. Erhard, himself a member of the Mont Pelerin Society, is regarded as the architect of the Wirtschaftwunder, the ‘economic miracle’ in West Germany.

He did away with the price and wage controls, broke cartels and monopolies, reformed the currency and popularised the concept of the ‘social market economy’. According to Erhard, the adjective ‘social’ meant that “the market as such is social not that it needs to be made social”8.

A free market is social because it serves customers best and because it is the only economic system compatible with democracy. This meaning was lost on social democrats who later appropriated the term, but it was well understood by Margaret Thatcher, who co-founded the Centre for Policy Studies in 1974. One of its first publications was a pamphlet titled Why Britain needs a social market economy9.

A second example of neoliberalism’s lasting influence is European competition policy. Contrary to popular belief, the neoliberals did not think that the market should be left to itself. The essence of a free market is competition, and competition law is required to protect the market – ie. ordinary citizens – from monopolistic tendencies and cozy cartels.

It is because of the insistence of the Germans that these ideas found their way to European competition law10. It is no coincidence that a close ally of Erhard, Hans von der Groeben, became the first European Commissioner for Competition Policy in the late 1950s.

A final example of how German neoliberalism – the real existing neoliberalism, not the bogus version that social democrats made of it – continues to shape the European economy is that price stability is the primary objective of the European Central Bank. Since the outbreak of the economic crisis this objective is frequently attacked. According to critics, the ECB should, for example, aim for full employment or kick-start the economy by creating inflation.

This may sound social, but the neoliberals argued convincingly that it is the ordinary man who suffers most from inflation. The new money that is being pumped into the economy does not reach each and every citizen at the same time, but it ripples gradually through the economy.

Civil servants might benefit if they are the first to get a wage increase and spend the extra money buying products for ‘old’ prices. But people further down the line will be confronted with higher prices, while their wages or pensions are not (yet) adjusted for inflation.

Inflation, particularly politically engineered inflation, is a perverse process of income redistribution. If those calling upon the ECB to push up inflation really care about social justice, they will take that neoliberal lesson to heart.


1. Martin Schulz, Did We Really Learn the Lessons of the Crisis?

2. Taylor C Boas and Jordan Gans-Morse, ‘Neoliberalism: From New Liberal Philosophy to Anti-Liberal Slogan’, Studies in Comparative International Development 44 (2), 2009, pp. 137-161.

3. Milton Friedman, The Euro: Monetary Unity To Political Disunity?

4. Quoted in: Nils Goldsmidt and Michael Wohlgemut, ‘Die Freiburger Tradition der Ordnungsökonomik’, in: idem (eds.), Grundtexte zur Freiburger Tradition der Ordnungsökonomik, Tübingen, 2008, pp. 1-16, p. 3 [my translation].

5. Wilhelm Röpke, The Social Crisis of Our Time, Chicago, 1950, p. 145 (originally published in German in 1942). Many of Röpke’s works have been translated into English and are available at no cost at

6. Quoted in: Milton Friedman, ‘FA Hayek. RIP’, National Review, 27 April 1992.

7. Bruce Caldwell (ed.), The Road to Serfdom: Text and Documents – The Definitive Edition (The collected works of FA Hayek, volume II), Chicago, 2007, p. 71.

8. Alfred C Mierzejewski, Ludwig Erhard: A Biography, Chapel Hill/London, 2004, p. 31.

9. Centre for Policy Studies, Why Britain Needs a Social Market Economy, 1975.

10. David J Gerber, ‘Constitutionalizing the Economy. German Neo-liberalism, Competition Law and the “New” Europe’, American Journal of Comparative Law 42 (1), 1994, pp. 25-84, p. 73.