How the Market Liberal Paradigm Rose to Dominance — And Why It Crumbles

The shift to neoliberalism that began in the United States and Great Britain in the late 1970s has fundamentally changed the world. For three decades, economic policy was dominated by the belief in a reduction of state influence and market-driven globalization. While this has brought some benefits, it has also created fundamental socioeconomic problems that have become increasingly evident since the Great Financial Crisis of 2008. These include dangerously rising levels of inequality, recurrent financial crises fueled by high levels of instability in financial markets, underfunding of public infrastructure, environmental crises, and the loss of credibility of the narrative that globalization benefits all. The failure of the decades-old paradigm of market-oriented globalization and economic policy has led to a general sense of loss of control – an individual and political vacuum that populists were quick to fill.

But while the diagnosis on the negative consequences of neoliberalism seems relatively clear, debates around neoliberal policies often fall short in explaining just what exactly neoliberalism is and why it has been able to exert a persuasive and long-lasting influence on the entire political spectrum for more than three decades.

In his latest book, “The Rise and Fall of the Neoliberal Order: America and the World in the Free Market Era”, historian Gary Gerstle from Cambridge University reconstructs the factors behind neoliberalism’s spectacular rise in the 1970s, and its increasing decay since the Great Financial Crisis 2008. Gerstle does so by placing the neoliberal political order in a 100-year historical context, knitting together economic, political, and social developments – from the fall of the Soviet Union to the Iraq war and the Great Recession all the way to the election of Donald Trump and a reinvigorated American left led by Bernie Sanders. In doing so, he develops a notion of how America and the world have changed under neoliberalism’s grip, and what its decline means for the politics of the moment.

When neoliberalism slowly started to turn from an idea at the margins to the dominant political order, its core tenet – that markets had to be liberated from government control to enable growth, innovation, and freedom – was a complete reverse image of the New Deal order that came before it. But how was neoliberalism able to replace the New Deal – and advance from a political movement to a political order?

A political order, according to Gerstle, requires long-term invested donors, think tanks and an establishment that turn political ideas into an actual program in ways that endure beyond the typical two-, four-, and six-year election cycles. It also requires decisive influence on public opinion and media all the way to the highest institutions.

The New Deal met that definition from the 1930s to the 1970s, and neoliberalism, according to Gerstle, did so from the 1970s to the 2010s, when it started to crumble after the war in Iraq and the Great Financial Crisis of 2008. A decisive event, that facilitated neoliberalism’s ability to advance from political movement to political order, according to Gerstle, was the fall of the Soviet Union.

Although neoliberalism is a paradigm that originated in Republican circles and was launched under Ronald Reagan, it was fully consolidated under the Democratic presidency of Bill Clinton in the 1990s, illuminating how it had managed to transcend political categories. Deregulation became the mantra of the decade, its most visible expression being the attack on collective bargaining and the further weakening of already battered unions. Progressive taxation was ideologically challenged and politically eroded. To facilitate these changes and make them unassailable, key institutions were drastically reconfigured, analyzes Gertle.

FT columnist Rana Forohaar credits Gary Gerstle’s central achievement as his book’s ability to highlight precisely this: that the historical rise of neoliberalism is anchored neither exclusively in the liberal nor the conservative context, but has shaped the framework of what is possible and desirable across party lines.

But three decades after its ascent and triumph, the neoliberal order has lost its power to generate ideological hegemony. When such a thing happens, argues Gerstle, it signifies the decline of a political order. New political orders do not arise often, or easily. Usually, they appear at times of crises that precipitate the fall of the old and rise of the new order. In times of crisis ideas formerly criticized as radical or heterodox are able to move from the margins into the mainstream. For neoliberalism, the crisis moments that were decisive in its descent, according to Gerstle, were the inept foreign policy choices by leaders like George W. Bush, not least the disastrous Iraq war, that collided with reckless financial deregulation, techno-utopianism, the speculative frenzy feeding the stock market bubble and the intensification of income inequality. Already fragile, the eroding ideological foundations of neoliberalism fully shattered alongside the Great Financial crisis in 2008, when millions of voters remained disillusioned after banks were saved but not homeowners.

Gary Gerstle’s account of Economic History is a worthwhile read to learn how the reckoning with capitalism came about. While some have criticized the book for the great emphasis it places on the fall of communism – disregarding the impacts of the larger transformation of the world economy towards industrial outsourcing, cheap imports, and a largely deregulated hyperglobalization – it provides a comprehensive account of a century of very complicated economic, political, and social trends, probing what is left of the former dominant ideological paradigm, thereby helping us understand the politics of the moment.