The great neoliberal misunderstanding

When Kevin Rudd published his lengthy essay on the global financial crisis, it was not only an attempt to strengthen his reputation as Australia’s philosopher prime minister but also meant to mark the day of reckoning for neoliberalism. ‘Neoliberalism,’ Mr Rudd told us, ‘has been revealed as little more than personal greed dressed up as an economic philosophy.’

Despite this stark rhetoric, Rudd’s essay only revealed one thing: Neoliberalism is one of the most sloppily used words in today’s political debates. The original philosophy of neoliberalism, of which the prime minister seems unaware, was decidedly anti-capitalist and the very opposite of a laissez faire free-for-all.

The term neoliberalism was invented at the time of the Great Depression in the 1930s. The belief in eternal prosperity had been shattered by Wall Street’s ‘Black Friday’ and the events that followed. Liberalism and capitalism were blamed for the global economic crisis. Around the world, economists like John Maynard Keynes and politicians like US President Franklin D Roosevelt were looking for alternatives to a system that they thought had failed spectacularly.

In Germany, too, the mood had turned against unfettered capitalism. However, not everybody believed that this had to mean a complete departure from a market-based economy. The young German economist and sociologist Alexander Rüstow certainly did not. In a speech he delivered in 1932, which is regarded as one of the founding documents of neoliberalism, he called for a ‘Third Way’ between socialism and capitalism.

Rüstow’s speech was titled ‘Free Economy, Strong State,’ and in these four words he summed up the core of the neoliberal project. He rejected markets left to their own devices. Such markets, he was convinced, would always degenerate. ‘We agree with Marxists and socialists in the conviction that capitalism is untenable and needs to be overcome,’ Rüstow wrote in a later essay.

If laissez faire and Adam Smith style liberalism were so bad according to Rüstow, would he then have preferred a planned economy? His answer was a resounding no. With the same rhetorical verve he used to condemn capitalism, he equally rejected the promises of socialism and communism. They were no viable economic systems, and they were also incompatible with democracy, freedom, and human dignity.

All of this led Rüstow to call for a middle way between laissez faire and socialism, a ‘Third Way.’ ‘We should be happy,’ he wrote, ‘that we do not have to make a difficult choice between capitalism and communism, but that there is a Third Way.’ Ironically, it is the very same logic that makes today’s critics of neoliberalism claim that one no longer had to choose between Hayek and Brezhnev, as Prime Minister Rudd expressed it last year.

Although contemporary supporters of a ‘Third Way’ claim to be fighting neoliberalism, to Rüstow this very same ‘Third Way’ was neoliberalism. He called it neoliberalism to differentiate it from earlier liberalism, for which Rüstow frequently used derogatory terms such as ‘vulgar liberalism.’ Rüstow wanted to break with this old liberal tradition to put a new liberalism in its place—hence the prefix ‘neo.’ It was the philosophy for the state setting and policing a regulatory framework without actually planning the economy.

A group of German economists and lawyers continued to develop this neoliberal philosophy in the 1930s and 1940s. Some of them, like Rüstow himself, left Nazi Germany to work in exile. Others like Walter Eucken, a close friend of Rüstow, remained in Germany where they were under constant threat.

The Protestant theologian Dietrich Bonhoeffer is well known to an Australian audience since Rudd had named him ‘without doubt, the man I admire most in the history of the twentieth century.’ Therefore it may be of some interest that Bonhoeffer, too, was connected to the German neoliberal movement.

It was none other than Bonhoeffer who commissioned the neoliberal economists around Walter Eucken for a concept for both domestic and foreign policies in Germany after the end of National Socialism. When the assassination of Hitler on 20 July 1944 failed, parts of this memorandum were obtained by the Gestapo, and Bonhoeffer was executed for his involvement in these post-war plans.

It may seem ironic that Rudd’s most admired man in recent history had sympathies for neoliberalism, when the same Rudd has subsequently denounced neoliberalism as an empty philosophy.

The philosophy of neoliberalism was eventually implemented in West Germany’s ‘Social Market Economy.’ There it became the foundation of the country’s rapid economic growth after the war, the so-called ‘economic miracle.’

Neoliberalism is a far richer, more thoughtful concept than it is mostly perceived today. To those criticising neoliberalism today, the answer may well be just that: We need more of this kind of neoliberalism that sets a good framework for a free economy. What we would need less of is only the rhetorical abuse of neoliberalism for political purposes.

Dr Oliver Marc Hartwich is a Research Fellow at The Centre for Independent Studies. His essay Neoliberalism: The Genesis of a Political Swearword was published by CIS in May.