Ronald Reagan Presidential Library

The Lesson of Neo-liberalism that we have Never Learned

The triumphant march of neo-liberalism that has dominated the world over the last 40 years is rapidly fading after the costly defeat in the 2016 elections. It leaves behind a history of several major economic disasters, a dubious legacy of globalism, the erosion of the middle class, the widening gap between the rich and the poor, the growing political instability, and the general social malaise. Even those who created and were part of the neo-liberal order recognize that it does not work.

The demise of neo-liberalism leaves a gaping hole in our political landscape. Several political forces are now scrambling to step in its shoes. Which of them will fill in the political vacuum? Will the change resolve the current political conundrum?

In his recent piece “After Neoliberalism” that has appeared in Project Syndicate, Joseph Stiglitz tries to answer these questions. He identifies three major candidates that compete for an opportunity to shape our future. There is center-left reformism, the resurgent nationalism, and what Stiglitz calls “progressive capitalism.” He dismisses center-left reformism that he dubs–quite appropriately–“neo-liberalism with a human face.” This refurbished version of neo-liberalism bears, in Stiglitz’s view, too much resemblance to its progenitor. The spectacular failure of neo-liberalism makes any attempt to revive its ghost dead on arrival. He also dismisses the resurgent nationalism that holds, for Stiglitz, no hope. Its policies that disrupt the global economy and political order promise increased tensions and strife in the world. Its American version persists in the failed policies of tax cuts, deregulation, and reduction of social programs.

The boon can only come from what Stiglitz calls progressive capitalism whose agenda Stiglitz tries to formulate and promote in his piece. The core of this agenda includes, first of all, the undoing of neo-liberalism by restoring the balance between markets, the state, and civil society. In contrast to neo-liberalism that merged the business and political elites, progressive capitalism should seek to free the state from corporate influence. The government should put an end to the power of money in politics. In Stieglitz’s view, the problem of neo-liberalism was born of the market and, therefore, cannot be resolved by the market. The solution that Stieglitz envisions lies in an increased role of the state. The government should enforce laws that curb unrestrained capitalism, thus forcing corporations to create wealth rather than pursue rent-seeking opportunities. The duty of the government is to limit and shape markets by enforcing a variety of regulations related to health, occupational safety, the environment, and others. The state will also be responsible for advancing science through funding scientific research, promoting education, protecting the environment, and much else.

How realistic is this agenda? Does it offer new policies and approaches to meet the needs of the modern world?

On close analysis, the agenda of progressive capitalism looks very much like a refurbished New Deal. The government will expand its regulatory role but will rely on market forces in facilitating social cooperation. The success of the New Deal is in the past. Replicating the past is an impossible task. The fact that the New Deal was abandoned for neo-liberalism was no accident. The New Deal outlived itself. It could not solve the problem of growth. The introduction of neo-liberalism was a response to this failure.

Neo-liberalism argued that government hierarchies by their very nature—that is, by being hierarchical–were incapable of generating innovations that the solution of the problem of growth so obviously required. Its intuition was sound. Indeed, hierarchical interactions are good for conserving and optimizing innovations, but they are not capable of generating them. Neo-liberalism saw the market with its creative capacity as the main source of innovation. However, while emphasizing the market, neo-liberalism did not reject the state. It understood the essential role of government hierarchies in conserving and optimizing innovations. This understanding of the close interrelationship between hierarchical and non-hierarchical interactions constituted the basis of the main idea of neo-liberalism—the merger of the economic and political elites.

Indeed, neo-liberalism has dismally failed. However, one should not rush to blame this failure on the new approach to governance advanced by neo-liberalism. There is nothing wrong with the idea of combining hierarchical and non-hierarchical interactions. In fact, all systems in nature maintain a balance between these two types of interactions; and given the success of the evolution, one can say with confidence that nature has solved the problem of growth. The failure of neo-liberalism is more likely a result of a limited application of its main idea. The new practice remained, by and large, elitist. Even though neo-liberalism sought to benefit from balancing hierarchical and non-hierarchical interactions, its overall elitist approach privileged hierarchies, which stifled innovation and growth. In the absence of true innovation, economic growth, contrary to the expectations of many neo-liberals, remained tepid as social and political problems continued to mount.

Progressive capitalism completely abandons the idea of balancing the power of government hierarchies and society. It makes a decisive shift toward restoring the domination of the state over the market and society in general. In the economy that relies increasingly on creativity, the impact of this shift can only be negative. What is one to make, for example, of the idea to force corporations to be creative and generate new wealth? The idea that force can encourage creativity is outlandish and has no basis in reality.

Stiglitz’s progressive capitalism does not offer anything new. It is a knee-jerk reaction to the failure of neo-liberalism. There is no question that neo-liberalism has failed. However, it did offer something new. If the old elitist approach wrecked this novelty, the fault is with elitism, not with the novelty. Stiglitz is right in rejecting neo-liberalism, but his progressive capitalism throws out the baby and keeps the water. It abandons the new idea of balancing hierarchies and society and tries to prop up the failing elitism.

The political turmoil we witness today reflects strong anti-elitists attitudes. The evidence is abundant. The gains of nationalists in Europe in the recent elections, the election of Donald Trump, the election of Volodymyr Zelensky in Ukraine, the Maidan movement, the Arab Spring, and much else—all these have the same root: people demand and expect empowerment. Rather than pay attention to this cry for empowerment, progressive capitalism offers the same shabby elitism dressed in a progressive mantle. What will it take to assert the power of the state over society now? We live in a very different time. Many changes have taken place. People feel empowered by these changes. Bringing back the domination of hierarchies and forcing society under their control will take an enormous toll and, most importantly, it will not solve any of the problems. If history teaches us anything, it is this: that civilization can survive only by creating new possibilities, not replaying the past.