A desire to apply certain principles of 19th century laissez-faire economic liberalism combined with a role for the modern state. Neoliberals believe the market economy is the most efficient means of distributing resources. They are against state intervention in the economy, regulation, artificial exchange rates and international tariffs on trade. But at the same time, they believe the state can play an important role in underpinning this system.
A 2016 International Monetary Fund paper by Jonathan D. Ostry, Prakash Loungani, and Davide Furceri defined neoliberal agenda as “two main planks”:
The first is increased competition—achieved through deregulation and the opening up of domestic markets, including financial markets, to foreign competition. The second is a smaller role for the state, achieved through privatization and limits on the ability of governments to run fiscal deficits and accumulate debt.
The liberal economic ideology underpinning neoliberalism can be traced back to the 18th century Scottish philosopher Adam Smith. In his seminal book The Wealth of Nations, he argued that while each individual labours for their own benefit, this together creates an “invisible hand” that drives markets and adds to the public good. In the 19th century, British imperialists embraced an extreme version of economic liberalism, known as laissez faire (French for “let go). The mantra of free trade was used to justify the Second Opium War with China, when Britain forced the legalisation of the opium trade and an end to trade tariffs.
With the Great Depression, liberal economic theory fell from grace. The term “neoliberal” is attributed to Alexander Rüstow, a German scholar, who in 1938 called for a strong state to set the economic rules and then minimise further intervention. But it was in the second half of the 20th century that “neoliberal” entered common currency. It was advocated by the US economist Milton Friedman and most closely associated with the policies of the Chilean dictator Augusto Pinochet, who introduced a wave of reforms demolishing protectionist barriers and privatising state assets.
In the UK, the most prominent advocate of neoliberalism was Margaret Thatcher. Under her watch, the financial market deregulated – an event known as the “big bang”. The New Labour government adopted some of the same principles, with the Chancellor Gordon Brown advocating “light touch” regulation of the City. This approach was widely discredited after the financial crisis of 2008.
Joseph Stiglitz (critic of neoliberalism): “Neoliberalism is a kind of mantra or religion. In my work for which I received the Nobel Prize, I stressed that markets left to themselves, particularly in developing countries, are inefficient. The state must intervene with these “incomplete” markets.”
Milton Friedman (advocate of neoliberalism): “A new faith must… give high place to a severe limitation on the power of the state to interfere in the detailed activities of individuals; at the same time, it must explicitly recognize that there are important positive functions that must be performed by the state. The doctrine sometimes called neo-liberalism which has been developing more or less simultaneously in many parts of the world and which in America is associated particularly with the name of Henry Simons is such a faith.” Neo-liberalism and its prospects essay, 1951.