Neoliberals wanted to limit government, but the upshot of their policies has been a huge expansion in the power of the state. Deregulating the financial system left banks free to speculate, and they did so with reckless enthusiasm. The result was a build-up of toxic assets that threatened the entire banking system. The government was forced to step in to save the system from self-destruction, but only at the cost of becoming itself hugely indebted. As a result, the state has a greater stake in the financial system than it did in the time of Clement Attlee. Yet the government is reluctant to use its power, even to curb the gross bonuses that bankers are awarding themselves from public funds. The neoliberal financial regime may have collapsed, but politicians continue to defer to the authority of the market.
Hardcore Thatcherites, and their fellow-travellers in New Labour, sometimes question whether there was ever a time when neoliberal ideas shaped policy. Has public spending not continued to rise over recent decades? Is the state not bigger than it has ever been? In practice, however, neoliberalism has created a market state rather than a small state. Shrinking the state has proved politically impossible, so neoliberals have turned instead to using the state to reshape social institutions on the model of the market - a task that cannot be carried out by a small state.
An increase in state power has always been the inner logic of neoliberalism, because, in order to inject markets into every corner of social life, a government needs to be highly invasive. Health, education and the arts are now more controlled by the state than they were in the era of Labour collectivism. Once-autonomous institutions are entangled in an apparatus of government targets and incentives. The consequence of reshaping society on a market model has been to make the state omnipresent.
Raymond Plant is a rarity among academic political theorists, in that he has deep experience of political life (before becoming a Labour peer he was a long-time adviser to Neil Kinnock). But he remains a philosopher, and the central focus of The Neoliberal State is not on the ways in which neoliberalism has self-destructed in practice. Instead, using a method of immanent criticism, Plant aims to uncover contradictions in neoliberal ideology itself. Examining a wide variety of thinkers - Michael Oakeshott, Friedrich Hayek, Robert Nozick, James Buchanan and others - he develops a rigorous and compelling argument that neoliberal ideas are inherently unstable.
Neoliberals are not anarchists, who object to any kind of government, or libertarians, who want to limit the state to the provision of law and order and national defence. A neoliberal state can include a welfare state, but only of the most limited kind. Using the welfare state to realise an ideal of social justice is, for neoliberals, an abuse of power: social justice is a vague and contested idea, and when governments try to realise it they compromise the rule of law and undermine individual freedom. The role of the state should be limited to safeguarding the free market and providing a minimum level of security against poverty.
This is a reasonable summary of the neoliberal view of the state. Whether this view is underpinned by any coherent theory is another matter. The thinkers who helped shape neoliberal ideas are a very mixed bag, differing widely among themselves on many fundamental issues. Oakeshott's scepticism has very little in common with Hayek's view of the market as the engine of human progress, for example, or with Nozick's cult of individual rights.
It is a mistake to look for a systematic body of neoliberal theory, for none has ever existed. In order to criticise neoliberal ideology, one must first reconstruct it, and this is exactly what Plant does. The result is the most authoritative and comprehensive critique of neoliberal thinking to date.
Plant's central charge against neoliberalism is that, when stated clearly, it falls apart and is finally indistinguishable from a mild form of social democracy. Plant is a distinguished scholar of Hegel, and his critique of neoliberalism has a strongly Hegelian flavour. The ethical basis of the neoliberal state is a concern for negative freedom and the rule of law; but when these ideals are examined closely, they prove either to be compatible with social democracy or actually to require it. Neoliberalism and social democracy are not entirely separate political projects; they are dialectically related, the latter being a kind of synthesis of the contradictions of the former. Himself a social democrat, Plant believes that the neoliberal state is bound as a matter of morality and logic to develop in a social-democratic direction.
But it is one thing to argue that the neoliberal state is conceptually unstable, another to suggest that social democracy is the only viable alternative. Neoconservatives have been among the sharpest critics of neoliberalism, arguing that the unfettered market is amoral and destroys social cohesion. A similar view has recently surfaced in British politics in Phillip Blond's "Red Toryism".
Immanent criticism can show that the neoliberal theory of the state is internally contradictory. It cannot tell us how these contradictions are to be resolved - and in fact neoliberals who have become convinced that the minimal welfare state they favour is politically impossible do not usually become social democrats. Most opt for a conservative welfare state, which aims to prepare people for the labour market rather than promoting any idea of social justice.
If there is no reason in theory why the neoliberal state must develop in a social-democratic direction, neither is there any reason in practice. A more likely course of events is that social democracy will be eroded even further. The banking crisis rules out any prospect of a return to neoliberal business-as-usual. As Plant writes towards the end of the book: "It has been argued that the central cause of the banking crisis is a failure of regulation in relation to toxic assets . . . This, however, completely neglects the systemic nature of the problems - a systemic structure that has itself been developed as a result of liberalisation, that is, the creation of new assets without normal market prices and their diffusion throughout the banking system." The crisis is deep-rooted, and neoliberalism has no remedy for its own failure.
The upshot of the crisis is unlikely, however, to be a revival of social democracy. Although the deregulated banking system may have imploded, capital remains highly mobile. Bailing out the banks has shifted the burden of toxic debt to the state, and there is a mounting risk of a sovereign debt crisis as a result. In these conditions, maintaining the high levels of public spending that social democracy requires will be next to impossible. Neoliberalism and social democracy may be dialectically related, but only in the sense that when the neoliberal state collapses it takes down much of what remains of social democracy as well.
The Neoliberal State
Oxford University Press, 304pp, £50
John Gray is the New Statesman's lead book reviewer. His book "False Dawn: the Delusions of Global Capitalism", first published in 1998, has been reissued by Granta Books with a new introduction (£8.99)