From Dominance to Decline: The Shifting Tides of Neoliberalism

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• The 2008 financial crash revealed the limitations of neoliberal economic principles, exposing deep inequalities and undermining the belief that free markets alone could ensure prosperity for all. Meanwhile, recent crises such as the COVID-19 pandemic and the Ukraine-Russia war have necessitated increased government intervention in markets.
• Economist Gary Gerstle argues that these recent developments signal a departure from the core tenets of neoliberalism in his book “The Rise and Fall of the Neoliberal Order: America and the World in the Free Market Era.”
• How did we get here, exactly? Gary breaks down the evolution of political and economic orders in the U.S. — and what’s next.

“We’re living in a really volatile period,” says Gary Gerstle, the Paul Mellon Professor of American History and Fellow of Sidney Sussex College at the University of Cambridge and author of “The Rise and Fall of the Neoliberal Order: America and the World in the Free Market Era.”

“In the United States, there’s been a clear departure from neoliberalism and a desire to recover a relationship of state to society that to me closely resembles the New Deal.”

Gary cites some of Biden’s major legislative accomplishments: The $400 billion, so-called Inflation Reduction Act, which he describes as a “massive reshoring of chips manufacturing and the biggest green energy investment in any period of American history.”

The title, by the way, “is ridiculous; it’s not inflation reduction, it’s about the promotion of green energy,” Gary notes.

The more aptly named, $1 trillion Infrastructure Investment and Jobs Act (“the biggest infrastructure bill in America since Eisenhower in the 1950s and, arguably, since the 1930s”) includes somewhere between 55,000 and 57,000 discrete projects underway, “most of which are not known to Americans or outside the United States,” he notes.

These massive investments mean that America is poised to have a significant impact on the global economic landscape, which — coupled with recent crises like COVID-19 and the war in Ukraine — suggest that neoliberalism’s days are numbered.

Gary joined host Alan Dunne on a Global Macro edition of Top Traders Unplugged to talk about his book, Biden’s economic policies, the rise of authoritarianism worldwide, the transformative tech revolution and much more. Read on for his take on the last 100 years of American political orders — and the current geopolitical cycle.

Political order: The New Deal emerges

Gary defines the concept of political order as “an effort to understand political trends that cannot be understood simply within the confines of normal electoral cycles.”

Because elections are so critical to democracies, political order is a way of understanding longer-term trends and developments that occur over decades, not four-year terms.

At its core, a political order features a set of principles about how the economy ought to be governed. In the 20th century, we saw several political orders in the United States, including what he calls the “New Deal order.” He characterizes this school of thought as the belief that “in order for capitalism to flourish, a strong state had to manage the chaotic system of capitalism in the public interest with heavy forms of regulation — often associated with Keynesianism.”

Political orders “will compel the opposition to adopt those principles as their own,” says Gary. “Even if some ideas are strongly associated with one political party rather than another.”

Although the New Deal order originated with Franklin Roosevelt and the Democratic Party in America in the 1930s, it flourished after World War II.

When Dwight D. Eisenhower became president in 1953, he was the first Republican president in 20 years.

“What does he do with what has transpired under Democratic rule the previous 20 years?” Gary asks. “Is he going to dismantle the New Deal order? Is he going to free the markets from state regulation? Or is he going to acquiesce to what Roosevelt and the Democrats had done over that 20-year period?”

Spoiler alert: He acquiesced.

“To me, that’s the sign that there’s a political order,” Gary says. “Because the opposition party has decided that its only route back to power is by acquiescing to its opponent’s core economic beliefs. So the New Deal order became dominant in the 1950s and ’60s.”

Enter Neoliberalism

The New Deal order began to break down during the economic crisis of the 1970s. 

“When a political order is breaking down, when its core economic principles are no longer delivering the goods to the economy, employment, low inflation, stability — when that is no longer happening, that’s an opportunity for ideas on the margins to flow into the mainstream,” Gary argues.

One of those marginal ideas was neoliberalism, which he describes as a variant of the classical, 18th-century liberalism espoused by Adam Smith. Neoliberalism emerged as a response against economies controlled by monarchs, aristocrats and excessive trade regulation, which were seen as barriers to achieving widespread affluence. For capitalism to thrive, it needed freedom from government intervention.

Neoliberalism emphasizes free markets, global trade and comparative advantage, advocating that economic growth and overall welfare are maximized when everyone engages freely in commerce, as Adam Smith suggested. So the turmoil of the 1970s sparked an interest in dismantling New Deal policies and Keynesian economic ideas, aiming to deregulate and free the markets from state controls.

Gary explains that the term “neoliberalism” was adopted because “liberalism” in America had come to be associated with progressive, state-regulated policies promoted by Democrats and figures like Roosevelt. Neoliberal thinkers like Milton Friedman and Friedrich Hayek needed a new term to distinguish their ideas from modern American liberalism.

Bill Clinton out-Reagans the Gipper

In the 1980s, Ronald Reagan played a significant role in establishing neoliberal policies as part of a “laissez-faire economy,” says Gary.

When Bill Clinton took office after a period of Republican rule, he faced the choice of overturning or accepting the neoliberal framework.

“He deregulates, arguably, even more so than Reagan had done,” Gary notes.

By the 1990s, neoliberalism had evolved from an ideology into a dominant political order, shaping the political landscape until the financial crisis of 2008-2009, which “rattled and upset” its dominance. 

“The Rise and Fall of the Neoliberal Order” suggests that the neoliberal order is nearing its end, with the financial crisis marking the first major blow. Economic principles are fundamental to political orders, and neoliberalism’s promise was that free markets and minimal restraints on capital would lead to overall prosperity, even if inequality increased. The financial crash, however, exposed the flaws in this belief, revealing deepening inequalities and winners and losers in the globalized order.

Fast-forward to today

Government recovery efforts, which prioritized stabilizing banks, exacerbated the divide between the haves and the have-nots. After the 2008 crash, those with assets in the stock market had recovered well, while those without faced slower, more painful recoveries in wages and job opportunities, not reaching pre-crash levels until 2018-2019.

This disparity heightened awareness of inequality and the perceived favoritism in government programs, undermining the legitimacy of neoliberalism. While neoliberal practices and institutions persisted, the ideology lost its authoritative grip, enabling political shifts like Brexit, Trump’s rise, and the emergence of ethno-nationalist movements worldwide.

The Ukraine war and COVID-19 crisis pushed governments (like the U.S. under Bidenomics) to manage the economy more directly, ensuring the availability of essential commodities like food, oil and computer chips. (The Inflation Reduction Act is one example of a government intervening in global markets.) This shift was largely driven by national security concerns rather than a move toward progressive or social democratic policies.

Although the urgency of these crises has waned — and global supply chains are slowly recovering — the trust in free markets has been shaken. The political landscape now includes a broader array of policies as people search for a new political order that incorporates elements of neoliberalism but not its pure form.

On top of that, “we are living through a technological revolution of a magnitude certainly not seen since the industrial revolution of the 18th [or] 19th century in terms of information, maybe not since the invention of the printing press in the 1400s,” Gary notes.

“So, this technological revolution … the innovation has been extraordinary. The way in which our lives have been changed by [social] media is extraordinary. It’s going to take us 100 years to work through all these changes, in terms of living patterns and adjustments we have to make in light of that.”

Change is truly the only constant — and I think Gary would agree.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.