What is neoliberalism? How the 'Washington consensus' was imposed on the world

Throughout history, the dominant form of government has evolved from feudal systems to nation states as we know them today.

The rise of capitalism was marked by the transition from feudalism to a class society, where workers sold their labor to capitalists. Throughout history, there has been a close relationship between capitalist firms and governments, even during the colonial era. World War I and the Great Depression were significant events that shaped capitalism's development.

The Great Depression led to the rise of Keynesian economics, which advocated for government intervention and deficit spending to stimulate the economy during times of recession. This marked a shift away from laissez-faire ideology and ushered in an era of increased state intervention in capitalist economies. However, this consensus began to change in the 1970s with the emergence of neoliberalism as a dominant ruling class ideology.

Margaret Thatcher, the conservative party leader and prime minister of the United Kingdom in 1979, solidified the emergence of neoliberal ideology. She famously stated that there is no such thing as society, emphasizing individual responsibility over government assistance for children, poor people, and homeless individuals.

Classical liberalism, which advocates for limited government and individual freedoms, gained mainstream popularity in the late 70s and 80s with the rise of neoliberalism. Neoliberalism emerged as a dominant economic ideology, championed by figures like Ronald Reagan and Margaret Thatcher, promoting free market fundamentalism globally.

The Bretton Woods conference in 1944 established the IMF and World Bank as international financial institutions, with the US having veto power. In the 1980s, these institutions were used to impose neoliberalism on Russia, resulting in millions of excess deaths and widespread poverty and health crises.

The Washington Consensus refers to the neoliberal policies imposed in the global South, characterized by reducing government budget deficits, redirecting spending from popular areas to high economic returns, cutting taxes on the rich and corporations, and liberalizing the financial sector. These policies collapsed due to their negative impact on average working people and lack of state control over finance.

The adoption of a competitive single exchange rate allows foreign investors to determine the strength or weakness of a country's currency, undermining import substitution industrialization and leading to devaluation in the global South. This policy is part of the neoliberal ideology imposed on countries worldwide since the late 1970s.

Francis Fukuyama, a neoliberal philosopher and political scientist in the United States, believed that neoliberalism was the final stage of human development and predicted that every government would eventually become a liberal democracy with a capitalist economy implementing neoliberal policies.

Milton Friedman, a prominent neoliberal economist and advocate of free market fundamentalism, had a significant influence on Western governments as well as fascist dictatorships like Pinochet's regime in Chile. The implementation of neoliberal ideology in Chile was accompanied by fascism, with the government engaging in human rights abuses such as rounding up leftists and supporting Nazi war criminals.

Robert Lucas, a Nobel Prize-winning economist, was influential for his idea of the rational expectations hypothesis. Despite being debunked, it was mainstream economics orthodoxy and showcased how neoliberalism had become mainstream in 2003 when he declared that macroeconomics had solved its central problem of depression prevention.

Neoliberal economists claimed to have solved the problem of depressions, but this was proven false after the dot-com crash, Asian financial crisis, and Great Recession. The 2008 financial crash discredited many neoliberal economists and sparked a renewed interest in Keynesianism.

The New Keynesian school emerged as a combination of Keynesian and neoclassical economics, with economists like Paul Krugman leading the way. While they have brought back elements of Keynesianism, they still operate within the neoliberal framework. Despite some differences in monetary and fiscal policy from old-school neoliberals, there are still many similarities between them. This has led to a crisis of neoliberalism that persists in Europe, where austerity measures imposed by authorities like the Troika have actually worsened economic crises rather than resolving them.

The IMF, a key proponent of neoliberal policies, published a report in 2016 acknowledging that these policies have not delivered the expected growth and instead increased inequality. They also noted that overall growth has been smaller during the neoliberal era compared to the Keynesian era.

The imposition of neoliberal policies, such as financialization and de-industrialization, leads to increased inequality. This hurts economic growth in the long run because wealthy individuals tend to invest their income instead of spending it, resulting in a lack of aggregate demand. Neoliberalism may initially show short-term economic growth due to privatizations and foreign investments but fails to consider the negative consequences in the long term.

Global GDP growth per capita has decreased over time, particularly after the emergence of neoliberalism in the 1980s. The Keynesian era saw higher economic growth compared to the current neoliberal era, even when considering China's exceptional economic growth.

The quality of economic growth has decreased and trended toward stagnation, with a shift from manufacturing to financialization and the service sector in the neoliberal era. This contrasts with the Golden Era of keynesianism when there was significant development in local industries producing tangible goods.

The failure of neoliberalism and the Washington consensus has been acknowledged by top U.S government officials, including National Security advisor Jake Sullivan. He suggests that the U.S should shift towards a Keynesian approach with increased state investment in strategic industries and social programs, moving away from free market policies.

The dominant ideology in America for decades has been that markets always allocate capital productively. However, this belief has led to the hollowing out of America's industrial base and a neglect of public investment. The assumption that all growth is good and trade liberalization would benefit America was proven wrong as essential sectors like semiconductors and infrastructure suffered while other industries moved overseas. Additionally, economic dependencies on China have posed considerable challenges, with subsidies given to key industries of the future. The gains from trade failed to reach working people, leading to economic inequality driven by policies favoring the wealthy over public investment and labor rights.

The rise of Chinese socialism is forcing the US to implement socialistic policies, contradicting its previous neoliberal stance. The hypocrisy of the Reagan administration's protectionist trade policies and the consistent budget deficits in the US government further highlight this double standard.

The rise of deficits in the US government began in the 1970s and 80s during the era of neoliberalism, with President Ronald Reagan doubling the nation's deficit. The trend continued under subsequent presidents, both Democrat and Republican, reaching record-breaking levels. Despite being touted as proponents of small government, Republicans often oversaw some of the largest deficits.

The author discusses the irony of neoliberal leaders in the US advocating for austerity measures while overseeing massive government deficits and increases in debt. They argue that this deficit spending primarily benefits the wealthy, leading to increased inequality. The author also highlights how military and police budgets have skyrocketed during the neoliberal era, despite calls for smaller government. Finally, they note that some figures in Washington are now acknowledging the failure of neoliberalism and turning towards elements of Keynesianism due to China's success with socialism.