Why Neo-liberalism Is Really Neo-socialism

By Richard M. Ebeling

If there is one common enemy that all opponents of individual liberty, free markets, and limited government seemingly can agree upon it is the “evil” of neo-liberalism. Everything that is hated in an open, competitive market society is summed into that word and condemned. The problem is that actual free market liberalism has nothing to do with its “neo-liberal” caricature and is being used as a rationale for abolishing what remains today of a free market society.

The idea of need for a “new,” or “neo,” ”liberalism did not arise out of the ranks of the proponents of laissez-faire as an attempted justification for unrestrained and unregulated markets. Instead, it emerged from those who wished to do away with the relatively free market system of the mid- to late 19th century as it was still widely in existence, especially in countries such as Great Britain and the United States.

The German Historical School and the Modern Welfare State

One important strand of this came from the intellectual influences of the German Historical School, which was made up of social philosophers and economic historians who held sway at many of the leading universities in Imperial Germany in the second half of the 19th century. They rejected the ideas of the classical economists of the 18th and early 19th centuries, including those of Adam Smith. They denied that there were “laws” of economics true and valid for all people, at all times, and in all places. In their view each historical period had its own economic “laws” and accompanying appropriate set of institutional relationships between markets and the state.

They said that economic policy decision-making should be based on “opportunism” and “pragmatism.” The role of the state was to oversee and balance the interests of the “social classes” to ensure a fair, equitable, and loyal nation that would not threaten political unrest and revolution that would undermine the harmony and destiny of Germany on its path to being a great power among the nations of the world.

To ensure such social balance and stability, especially beginning in the 1880s and 1890s during the time when Otto von Bismarck was German chancellor, a series of “social reforms” were introduced that included a national health care system, government-funded pension plans, government regulations in the workplace, and protectionist tariffs to foster and guide the directions of domestic industry to serve the interests of “society” rather than merely the profit pursuits of private owners of business enterprises. These interventionist policies included government support for cartels and monopolies considered essential to making Germany “great again.” (See my article “America’s Future in Germany’s Past? A Brief History of the Origin of the German National Care System,” AIER Research Reports, Vol. LXXV, No. 8, May 5, 2008.)

German Professors and American Progressivism

With few universities in the United States offering doctoral degrees at that time, a good number of American graduate students flocked to Europe to earn their PhDs. Of course, some went to Great Britain or France, but a significant number of Americans pursuing advanced degrees in philosophy, political science, economics, and sociology went to study at German institutions of higher learning.

Here they sat at the feet of many of the leading members of the German Historical School. They were taught, for instance, that the economic theories of earlier thinkers such as Adam Smith or David Ricardo were unrealistic abstractions not touching the historical facts in which actual societies existed. They were told that the path to insights on economic and social matters would only come through an inductivist focus on social and economic historical “facts” on the basis of which conclusions might be reached concerning relevant social and economic institutional relationships in the past and the present.

The lesson to be learned, they insisted, was that while in one historical period economic policies of free trade might be relevant and appropriate, at other times government interventions in both domestic and foreign trades might be both necessary and desirable for the good of society as a whole. The British doctrines of free enterprise and free trade were merely a means for capitalists in that country to exploit the people in other lands who were not yet as economically developed as Great Britain. Free trade, the German Historicists insisted, was just British “imperialism” in the disguise of freedom of trade.

When the American graduate students who had absorbed the German Historicists’ ideas returned to the United States, they became the intellectual vanguard of the emerging “Progressive” movement. The older free market liberalism of a “let-alone” policy by the government had to be set aside for a more “positive” role by the political authorities.

What was needed was a new, progressive liberalism that regulated industry, limited business “bigness” through antitrust laws, and ameliorated the hardships of the “working class” through government health care, workplace safety and wage laws, and public housing and government-guaranteed living conditions. It was under their impetus that many of the federal-level regulatory agencies came into existence before and after the First World War. Those who had studied in Germany before 1914, or their students they had taught at American universities, swelled the ranks of the growing number of federal employees in Washington, D.C., under Franklin Roosevelt’s New Deal in the 1930s. (See my article “American Progressives Are Bismarck’s Grandchildren.”)

The “New” Freedoms of Political Paternalism

Here are some of the words of Frederic Howe, a leading figure in the early 20th-century Progressive movement who served in Roosevelt’s New Deal administration. This is from his book Socialized Germany (1915), and was meant to serve as a model for America:

The German state has its finger on the pulse of the worker from the cradle to the grave. His education, his health, and his working efficiency are matters of constant concern. He is carefully protected from accident by laws and regulations governing factories. He is trained in his hand and his brain to be a good workman, and is insured against accident, sickness and old age. While idle through no fault of his own, work is frequently found for him. When homeless, a lodging is offered so that he will not easily pass to the vagrant class.

Frederic Howe admitted that under this German welfare-state system, with its pervasive controls and regulations, “The individual exists for the state, not the state for the individual.” But he insisted that in this German welfare state paradise, people did not lose freedom; they, rather, gained a different kind of freedom.

This paternalism does not necessarily mean less freedom to the individual than that which prevails in America or England. It is rather a different kind of freedom.… This freedom is of an economic sort.… Social legislation directed against the exploitation of the worker and consumer insures freedom in many other ways. It protects the defenseless classes from exploitation and abuse.

Furthermore, Howe explained that the principle guiding the policies of the welfare state was expediency:

In the mind of the Germans, the functions of the state are not susceptible to abstract, a priori deductions. Each proposal must be decided by the time and the conditions. If it seems advisable for the state to own an industry it should proceed to own it; if it is wise to curb any class or interest, it should be curbed. Expediency or opportunism is the rule of statesmanship, not abstraction as to the philosophical nature of the state.

Here is part of the explanation for the change in the meaning of “liberalism” from an idea and an ideal of individual liberty, with freedom of domestic and international enterprise under constitutionally limited government, into the new American connotation starting in the 1930s that liberalism now meant a socially active government through an extensive interventionist and welfare state. This new, or “neo,” liberalism has been and is the government regulatory and redistributive state under which we currently live. (See my articles “How the World Liberalism Came to Mean Its Opposite” and “Barack Obama and the Meaning of Socialism.”)

Neo-liberalism, Pragmatism, and Critics From “the Left”

Joining this neo-liberalism of pervasive political paternalism in the post-World War II period was the idea that “ideology” as a system of abstract ideas about freedom and the role of government in society had to be set aside as being out of date, with pragmatic “compromise” determining the needed changing course of government policy. There were no philosophical Archimedean points from which to evaluate the meaning of human liberty or the institutions to sustain it. The right policy, it was argued, was a matter of the changing “democratic” consensus based on what seemed to be needed at any moment in time.

Of course, those more radical strains on the political “left,” beginning in the 1930s, labeled this is as “social fascism” — that is, an attempt to save the capitalist baby by only emptying out the laissez-faire bathwater. Hence, the notion by both supporters and leftist critics of New Deal liberalism and other policies later building on it, that it was all designed to “save” capitalism, and not to destroy it. And this was considered a black mark on the existing order of things.

The supporters spoke of having the best of both worlds: private enterprise but with a paternalist system of government regulation and redistribution to ensure “social justice.” The more left-of-center opponents charged that it was all a cover-up to keep the capitalist “exploiters” in control of the means of production with a candy coating over the retained social injustices. (See my article “Paternalistic Follies of the 1960s: Vietnam Whiz Kids and Great Society Social Engineers.”)

“Neo-liberalism” Meets Public Choice

The world we live in, in America, does reflect the ideas and policies of neo-liberalism, but it is not the classical, or free market, liberalism that the new, more radical “progressives” and democratic socialists attempt to portray it to be. It is the creation of their intellectual and ideological ancestors of just a few generations ago during the 20th century.

Rather than admit that the political-economic system in the United States is the result of the very interventionist-welfare state which they mislabel as free market capitalism, they try to protect the rationale and logic for the regulations and redistributions they want by pejoratively calling it the very thing their own intellectual predecessors created, a “neo-liberalism” that undermined and replaced the classical, free market liberalism of the past.

Their dream of the socially just system of political paternalism has become the reality of almost everything that Public Choice theory has warned us about. Public Choice theory is the application of the logic of economics to the political process. The “false consciousness” of all the talk about the “public good” and the “general welfare” is stripped away, and what we discover that we are left with is real flesh-and-blood human beings who run for political office and do so by offering interest group voting blocs “other people’s money” through regulatory restraints on the competition of rivals or by direct government contracts, or numerous “transfers” of wealth and income through the institutions of the welfare state.

Then there are the bureaucrats who have vested interests in defending their bureaus, agencies, and departments to ensure budgetary allocations that fund their salaries and enable them to spend ever-more money to justify their existence. A system of political privilege, plunder, and power generates a host of interest groups guided by material or ideological motives and purposes to acquire incomes and revenues through the government they are not able to obtain through the peaceful and voluntary interactions of the marketplace and the institutions of civil society. (See my article “Out-of-Control Government: How, Why, and What to Do.”)

Joseph Stiglitz’s “Progressive Capitalism” Equals Socialist Planning

One of the recent voices making these types of accusations against the market economy is Columbia University economist and Nobel laureate Joseph Stiglitz, who offers an agenda for “After Neoliberalism.” He says that there are three competing economic policy agendas for America: “far-right nationalism, center-left reformism and the progressive left.” Donald Trump represents far-right nationalism; center-left reformism is the neo-liberalism of the likes of Bill Clinton, and the progressive left is reflective of the vision in the Green New Deal.

Notice the sleight-of-hand. The free market system that leaves capitalists free to destroy the planet and plunder their fellow man is the Clinton administration’s policies of the 1990s (along with those of the former British Labor Party leader Tony Blair). Unbridled capitalism is now the “middle of the road” interventionist welfare state of the Democratic Party during the last decade of the 20th century.

So what does Joseph Stiglitz want? Well, to begin with, he labels his agenda “progressive capitalism.” He conveniently avoids the word “socialism.” Yet, he makes plain that the central planning of the U.S. and indeed the global economy that is called for in the proposed Green New Deal legislation captures his economic vision of America’s future. How Orwellian: democratic socialism is now progressive capitalism. I love Big Brother, I love Big Brother, I love… as long as we don’t use the “S” word. It is good to know that Professor Stiglitz is following in Frederic Howe’s footsteps, considering that the use of words should be guided by “expediency” and “opportunism.” (See my articles “The Green New Dealers and the New Socialism” and “The Nightmare Fairyland of the Green New Dealers.”)

Stiglitz’s Fantasy Fear That Government Is Getting Smaller

Professor Stiglitz is deeply bothered that for 40 years, he says, America has been following a neo-liberal agenda of lower taxes, deregulation, and reduced government spending. He must live in an alternative universe with a substitute Planet Earth containing a different country called the United States, because what he says is not the America the rest of us live in.

You just need to read through the Congressional Budget Office’s “Overview of the Budget and Economic Outlook: 2019-2029” (January 28, 2019) to discover the reality rather than Joseph Stiglitz’s fantasyland. For the period 1969 to 2018, federal government taxing and spending were, respectively, on average, 17.4 percent and 20.3 percent of gross domestic product. The difference between what Uncle Sam has taxed and what he has spent reflects the annual budget deficits for most of the last 50 years that have now created a national debt of nearly $22.5 trillion.

By the end of the coming 10 years, the CBO projects that the federal government will be taxing 18.3 percent of GDP and spending 23 percent of GDP, or a 5 percent increase in taxation and a 13.3 percent increase in government spending. The gap between these two numbers explains why the CBO is also projecting the return to annual $1 trillion deficits as far as the fiscal eye can see, with the national debt increasing by close to an additional $10 trillion during the next 10 years.

In fiscal year 2019, federal spending on entitlement programs will make up $2.7 trillion out of a total budget of $4.41 trillion. In 10 years’ time, if the CBO estimates are correct, entitlement spending will come to $4.6 trillion out of a 2029 total federal budget of $7.04 trillion. While total government spending will be 60 percent higher in 10 years than today, entitlement spending will have increased by 70 percent by 2029. This hardly suggests that government has been or will be suffering from a severe austerity diet, or that entitlement spending is to be axed to death over the next decade, under current legislation and the prevailing politics of the country. Earth calling Professor Stiglitz in his alternate universe! (See my article “Abolish the Welfare State to Solve the National Debt Crisis.”)

As for government regulation of the private sector, the Competitive Enterprise Institute estimates in its latest “Ten Thousand Commandments” report (May 2019) that the cost of regulatory compliance is around $1.9 trillion a year. And the Federal Register comes to almost 70,000 pages of rules and regulations that private business must meet. This $1.9 trillion in compliance costs is equal to about 10 percent of the country’s GDP, and is about 43 percent of what the federal government will spend in 2019.

Stiglitz’s Agenda for the Planning of His Choice

So what does Professor Stiglitz want? It is the same old grab bag of bigger, more intrusive and controlling, and more costly government intervention and redistribution. Let him speak for himself:

Governments have a duty to limit and shape markets through environmental, health, occupational-safety, and other types of regulation. It is also the government’s job to do what the market cannot or will not do, like actively investing in basic research, technology, education, and the health of its constituents.

A comprehensive agenda must focus on education, research, and the other true sources of wealth. It must protect the environment and fight climate change with the same vigilance as the Green New Dealers in the US and Extinction Rebellion in the United Kingdom. And it must provide public programs to ensure that no citizen is denied the basic requisites of a decent life. These include economic security, access to work and a living wage, health care and adequate housing, a secure retirement, and a quality education for one’s children.

Here is the same arrogance, the same hubris, the same “pretense of knowledge” that the interventionist-welfare-statist “neo-liberals” have been advocating and implementing for more than 100 years with increasing presence within the American economy and society. But let us call this all for what it really is: this is Professor Stiglitz’s “neo-socialism.” That’s what the Green New Dealers are all about, which he is clearly endorsing as the road (to serfdom) that he wants America to continue going down.

The battle between what he calls “neo-liberalism” and his “progressive capitalist” neo-socialism is not an ideological conflict between friends of economic liberty and the champions of the command-and-control society. It is a contest between those who want the government to continue doing all the same interventionist and welfare statist policies it has been doing and those who want what Joseph Stiglitz — social engineer, central planner, and social coercer — wants that government to do.

He wants to pick the industries and jobs in America rather than Donald Trump or Bill Clinton; he wants to decide the fair and just distribution of income instead of traditional Democrats and Republicans; he wants to implement that grand central plan to “save the planet,” instead of the more restrained responses to what he considers to be the climate crisis facing the globe. In other words, he wants to be advisor-in-chief to the right occupant of the White House who will listen to Prophet Stiglitz instead of all those false prophets representing “right-wing” nationalist statism and “left-of-center” neo-liberal interventionist “establishment” statism of the current Washington consensus powers-that-be.

When Professor Stiglitz says at the end of his article that his neo-socialism (oh, excuse me, his “progressive capitalism”) is the only alternative to the failed neo-liberalism of our time, he is merely saying: let me impose upon you the economic planning schemes that I consider the good, fair, and just ones for you, in place of those other command-economy coercers who want to take you down “wrong” collectivist paths compared to mine.

What is lost in all the “neo” this and the “neo” that? It is that what society needs is what true free market liberalism calls for: the end to all planning schemes, whether comprehensive “democratic” socialism or in the form of piecemeal interventions and redistributions. Real free market liberalism is what would solve or avoid most if not all of Professor Stiglitz’s social concerns, if he would just learn to leave people and their market and social interactions alone from the grasping and meddling hands of those in politics who constantly presume to know how to plan our lives better than we ourselves.

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Richard M. Ebeling

 Richard M. Ebeling, an AIER Senior Fellow, is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel, in Charleston, South Carolina. Ebeling lived on AIER's campus from 2008 to 2009.