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“The Neoliberal Theory of Society”: Simon Clarke

The ideological foundations of neo-liberalism

Neoliberalism presents itself as a doctrine based on the inexorable truths of modern economics. However, despite its scientific trappings, modern economics is not a scientific discipline but the rigorous elaboration of a very specific social theory, which has become so deeply embedded in western thought as to have established itself as no more than common sense, despite the fact that its fundamental assumptions are patently absurd. The foundations of modern economics, and of the ideology of neoliberalism, go back to Adam Smith and his great work, The Wealth of Nations. Over the past two centuries Smith’s arguments have been formalised and developed with greater analytical rigour, but the fundamental assumptions underpinning neoliberalism remain those proposed by Adam Smith.

Adam Smith wrote The Wealth of Nations as a critique of the corrupt and self-aggrandising mercantilist state, which drew its revenues from taxing trade and licensing monopolies, which it sought to protect by maintaining an expensive military apparatus and waging costly wars. The theories which supported the state conceived of exchange as a ‘zero-sum game’, in which one party’s gain was the other party’s loss, so the maximum benefit from exchange was to be extracted by force and fraud. The fundamental idea of Smith’s critique was that the ‘wealth of the nation’ derived not from the accumulation of wealth by the state, at the expense of its citizens and foreign powers, but from the development of the division of labour. The division of labour developed as a result of the initiative and enterprise of private individuals and would develop the more rapidly the more such individuals were free to apply their enterprise and initiative and to reap the corresponding rewards.

Smith laid the foundations of neo-liberalism with his argument that free exchange was a transaction from which both parties necessarily benefited, since nobody would voluntarily engage in an exchange from which they would emerge worse off. As Milton Friedman put it, neoliberalism rests on the ‘elementary proposition that both parties to an economic transaction benefit from it, provided the transaction is bilaterally voluntary and informed’ (Friedman, 1962, p. 55). Consequently, any restriction on the freedom of trade will reduce well-being by denying individuals the opportunity to improve their situation. Moreover, Smith argued, the expansion of the market permitted increasing specialisation and so the development of the division of labour. The advantages gained through exchange were not advantages gained by one party at the expense of another. Exchange was the means by which the advantages gained through the increased division of labour were shared between the two parties to the exchange. The immediate implication of Smith’s argument is that any barriers to the freedom of exchange limit the development of the division of labour and so the growth of the wealth of the nation and the prosperity of each and every one of its citizens.

Adam Smith did not expect his scientific arguments to have much impact because of the political weight of the vested interests associated with the mercantilist state and the colonial system. Ironically, however, Smith’s book was published in the very year, 1776, that the cornerstone of that system collapsed, with the declaration of independence of the American colonies. Smith’s arguments appeared to be vindicated when American independence was followed not by the pauperisation of British merchants and the British state, but by a dynamic growth of the Atlantic trade, the new wave of prosperity being disrupted only by the long and costly French Wars. By the beginning of the nineteenth century Smith’s doctrines had been transformed from a subversive attack on a parasitic state to become the ideological orthodoxy of a liberalising state (Clarke 1988, Chapter One). The role of the state was no longer to restrict and to tax trade, but to use all its powers to extend the freedom of trade within and beyond its national boundaries.

The romantic and socialist critiques of liberalism

The liberal doctrines propounded by Adam Smith came under attack from two directions. On the one hand, Smith’s ideal society was one of isolated individuals, each pursuing his own self-interest. (Men pursued their self-interest, while women and children remained their dependents within the family – as Margaret Thatcher notoriously proclaimed: ‘there is no such thing as society. There are individual men and women, and there are families’ (Margaret Thatcher, Woman’s Own, October 3 1987)). Smith’s ‘romantic’ critics argued that this model ignores the most distinctive characteristics of human society – morality, religion, art and culture – that provide higher values than the individual and elevate humanity above the animal condition of seeking immediate gratification. On the other hand, experience soon showed that the benefits of free trade flowed overwhelmingly to the more economically advanced and/or politically powerful party. While free trade brought prosperity to the most advanced producers, it imposed destitution on those who were unable to compete, provoking periodic crises in which less advanced producers were bankrupted, masses of people were thrown out of work and the trade of whole nations came to a standstill. This experience gave rise to demands for state protection for small producers and for the national industry of the productively less advanced countries. Small producers saw the source of their difficulties in the power of the bankers, who denied them access to the credit they needed to sustain themselves, while capitalists of less advanced countries sought tariff protection for their national industries. For the liberal political economists, of course, periodic crises and bankruptcy were part of the healthy operation of the market, the stick that accompanied the carrots offered to the more enterprising producers. The market was not just an economic, but also a moral force, penalising the idle and incompetent and rewarding the enterprising and hard-working, for the greater good of society as a whole.

The conservative critics of liberalism sought to negate the evils of capitalism by turning the clock back to an idealised form of medieval society in which individualism was subordinated to the values and institutions of community, nation and religion. However, the dramatic increases in prosperity that capitalism offered to those who were able to benefit from its dynamism meant that such a reactionary response was politically quite unrealistic. The dominant critiques of liberalism have, therefore, been not reactionary but reformist, seeking to retain the benefits of capitalism while introducing reforms that would eliminate its negative consequences. In the nineteenth century, reformism focused on the regulation of the monetary system, since distress always appeared as a shortage of money imposed by bankers seeking to exploit their control of credit to their own advantage. In the twentieth century reformism came to focus more on the direct intervention of the state in the regulation of markets, protecting the vulnerable from the full force of competition. The central thrust of reformism, however, is always the same: to keep the ‘good’ parts of capitalism while eliminating the ‘bad’. The liberal response to reformism has also always been the same: the good and the bad are two sides of the same coin; penalties for failure are inseparable from rewards for success. The ‘evils’ associated with capitalism cannot be ascribed to capitalism, but represent the failures of those who are unwilling or unable to live up to its standards. Liberalism is, therefore, not so much the science of capitalism as its theology. God cannot be blamed if sinners find themselves in hell; the way to avoid hell is to live a virtuous life.

Socialist critics of capitalism, since the early nineteenth century, have developed a more radical critique of capitalism and its legitimising ideologies, based on the critique of its silent presupposition, private property. Adam Smith’s economic agents are not just isolated individuals, they are property owners, and it is because they are the owners of property that some have the power, embodied in legal right, to profit from the labour of others. Socialist critiques saw the inequalities which capitalism creates not as the result of the failure of markets, but as an expression of the unequal distribution of property, and called for the equalisation and/or the socialisation of private property and the organisation of production on the basis of common ownership, sustained by the free availability of credit.

The Neoliberal Theory of Society

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