Ever since the collapse of the housing bubble became a full-blown banking crisis in the fall of 2008, the Left has been reveling in Schadenfreude at this "market failure." It matters not that most of the causes of the crisis should be laid at the feet of government failure rather than market failure. The aftermath of the crisis found the defenders of free markets in disarray, as they lost control of "the narrative" to their critics.
It is hard to blame the Left for the new spring in its step. For almost 30 years liberals were in retreat before market ideas that spread far beyond the successes of the Reagan and Thatcher administrations—to the vast privatizations and market liberalizations in the former Soviet empire and in the developing world. Libertarians owned the most successful branch of conservatism during this period, with monetarism, sensible anti-trust policy, de-regulated markets, and their critique of central macroeconomic planning accepted almost everywhere in speech if not always in deed. By the 1980s, Keynesianism seemed as vanquished as Lamarckian biology. With free marketeers' near-monopoly on the Nobel Prize in economics (Milton Friedman, Friedrich Hayek, James Buchanan, and many more), the collapse of the Soviet Union, the rout of Hillarycare, and the willing embrace of market logic by the Clinton and Blair governments, the Right by the mid-1990s reveled in a triumphalism (remember the End of History?) that became complacency—the first step to hubris.
Perhaps it was so much success after so many decades of being the pessimistic opposition that lulled the Right into overestimating its position going forward. At any rate, a number of early warning signs were missed. The welfare reform of 1996 did not breed similar reforms of other welfare state programs. The disaster of California's misnamed "electricity restructuring" cast public suspicion on "de-regulation." And the passage of the onerous, counter-productive Sarbanes-Oxley law after the bursting of the internet bubble and the Enron accounting scandal should have been a warning that we were backsliding into the kind of policies that clotted our economic arteries from the 1930s to the 1970s. From there it was a straight line to the massive interventionism of Dodd-Frank after the housing-banking collapse.
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Around the time of Sarbanes-Oxley, Milton Friedman tried to warn us:
After World War II, opinion was socialist while practice was free market; currently, opinion is free market while practice is heavily socialist. We have largely won the battle of ideas (though no such battle is ever won permanently); we have succeeded in stalling the progress of socialism, but we have not succeeded in reversing its course. We are still far from bringing practice into conformity with opinion.
I'm not sure Friedman was right even a decade ago that we had won the "battle of ideas," but his admonition that practice wasn't really following our self-congratulatory narrative was correct. As long as Friedman was on the scene a certain confidence seemed reasonable; he was unquestionably the most formidable champion of the cause of free markets in our time. (Just check out any of the numerous YouTube videos of him in action back in the 1970s and 1980s and you'll get an instant sense of the overpowering confidence of resurgent free market thinking in that era.)
It may not be a coincidence that the onset of the housing crash, beginning the year following Friedman's passing in 2006, saw his heirs seemingly unable to gain public attention for their admittedly more complicated account of the real causes of the crisis. (For one thing, there is just enough truth to the Left's "market failure" narrative—such as reckless risk-taking by banks—to render a pure market-friendly counter-narrative problematic.)
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The crisis created a huge opening for liberals to do what they do best—roll out a revisionist narrative that the free-marketeers were wrong all along. We shouldn't have been surprised to see the corpse of John Maynard Keynes exhumed, and the pop culture zombie fad of the moment may explain the seeming acceptance of the zombie-like economy that revived Keynesianism has delivered. But the Left is not content with an excuse to spend more money; it wants to go in for the kill.
The previous generation of books about the revival of free market thinking, such as Daniel Yergin and Joseph Stanislaw's The Commanding Heights: The Battle for the World Economy (1998), or Richard Cockett's superior but less well known Thinking the Unthinkable: Think Tanks and the Economic Counter-Revolution, 1931-1983 (1995), generally followed the "heroic" narrative of the role and consequences of the free market counter-revolution. While respectful in significant ways, Daniel Stedman Jones's Masters of the Universe and, to a lesser extent, Angus Burgin's The Great Persuasion discard the heroism and cast subtle and not so subtle aspersions on free market thought. Stedman Jones, a barrister in London who was educated at Oxford and the University of Pennsylvania, aims to take Friedman, Hayek, and their peers down several notches, while Burgin, a history professor at Johns Hopkins University, situates them within a subtle historicist frame that downgrades their achievement more than he probably intends.
The Great Persuasion is the more thorough and readable of the two, and goes a long way toward explaining why Hayek is the more important figure in the long run than Friedman, despite Friedman's greater fame and policy influence. Like other accounts of the postwar rise of "neoliberalism" (as it came to be called) Burgin's centers on the founding and crucial role of the Mont Pelerin Society (MPS), which Hayek was instrumental in founding in 1947.
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The strength of Burgin's recounting is how it brings back into view two aspects of the story not well recalled in most of the heroic narratives. First, what became the Mont Pelerin Society in 1947 had its origins, and a dress rehearsal, back in the late 1930s, meaning that the critique of the defects of Keynesianism and central planning was beginning to percolate earlier than usually supposed. Burgin is especially thorough in reclaiming the importance of earlier figures such as Frank Knight, Henry Simons, Karl Popper, Wilhelm Röpke, Albert Hunold, and several other now-obscure Europeans. As the scattered remnant of free market thinkers in the U.S. and Europe struggled to mount a more vigorous and popular defense against the rising tide of collectivism, an unexpected ally came into view: Walter Lippmann. His 1937 book, Inquiry Into the Principles of the Good Society, marked a significant departure from his earlier support of Progressivism in the pages of the New Republic. In this book, Lippmann aligned himself with the critics of the New Deal and sketched an outline for a revival or reform of capitalism. Much of his argument presaged the one Hayek would offer a few years later in The Road to Serfdom.
The nascent Chicago School and its European allies saw Lippmann's fame as the ideal vehicle around which to organize a larger effort, which would involve founding a new journal as well as an organization to carry out a public education effort. Hayek and others struck up an extensive correspondence with Lippmann, proposing a meeting of minds to develop the idea. The dry run for what would become the Mont Pelerin Society occurred in Paris in 1938 and was entitled Le Colloque Walter Lippmann. The first meeting produced some papers but no clear plan for moving forward. The coming of war in Europe the following year interrupted any sequel to Colloque Lippmann, and by the time of the crucial Mont Pelerin gathering in 1947 Lippmann disdained the effort and declined to participate. The absence of Lippmann or other political thinkers (Karl Popper, for example, dropped out after the initial MPS meeting) meant, second, that the effort to create neo-liberalism, and the Mont Pelerin Society itself, would come to be dominated by economists rather than represent a broader, interdisciplinary effort to recover classical liberalism. Here emerges a major irony: the original inspiration behind the Mont Pelerin Society aimed at a "third way" between the old purebred laissez faire capitalism and collectivist socialism. Wilhelm Röpke in particular can be seen as an early advocate of what would come to be known as fusionism (Frank Meyer's great cause); but the idea immediately ran into a buzz saw of resistance from the economists who regarded such talk as an untenable halfway house.
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The final nail in the coffin of a broader interdisciplinary effort came in 1956 when Hayek lobbied successfully to block Russell Kirk's proposed membership in the Mont Pelerin Society. After being initially enthusiastic about Kirk's The Conservative Mind (and even offering a dust jacket blurb at the time of its publication in 1953), Hayek had a change of heart, and his famous essay "Why I Am Not a Conservative" was in part a response to Kirk. Hayek also had little appreciation for William F. Buckley, Jr., or the National Review circle, even though NR offered consistent editorial support and coverage for the MPS. Röpke resigned from the MPS shortly after the Society completed its turn to a libertarian, economics-dominated body. As Burgin puts it, "The foundational tension of postwar American conservatism had begun to emerge."
Burgin brings out the ways in which Hayek regarded The Road to Serfdom, his most famous book, as defective, but he fails to discuss how Hayek's thought developed in The Constitution of Liberty, published in 1960, and later works (this is covered well in Bruce Caldwell's excellent 2005 biography of Hayek). Even after his turn against Kirk, Hayek still retained some sympathy for an interdisciplinary approach to reclaiming the liberal tradition, but the MPS solidified its economics focus with the ascension of Milton Friedman as its dominant figure in the 1960s, who differed from Hayek in several important ways (especially about central banking). Even John Kenneth Galbraith, Burgin reminds us, would admit in 1987 that in "the history of economics the age of John Maynard Keynes gave way to the age of Milton Friedman." Burgin makes clear that without Hayek the MPS would never have been established. But by the end of the 1960s, he had been eclipsed and had begun to experience periods of deep depression.
Burgin's concluding chapter provides a brief tour of the critics like economist Jeffrey Sachs who used the housing bubble and crash of 2008 to discredit the entire free market enterprise and proclaim once again the end of laissez faire. He thinks the critics on the left are too hasty, that free market thought is more solidly established than it was at the time of the Great Depression and therefore poised for a comeback. But Burgin displays the typical historian's weakness for historicism, by rendering neoliberal ideas as mere epiphenomena of the "spirit of an age" (the subtitle of his conclusion, in fact). This is unfortunate and detracts from the respect that he obviously has for the MPS circle.
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That respect is missing from Stedman Jones's Masters of the Universe, as can be seen in the very inaptness of its title. The core of Hayek's thought was the rejection that anyone can master any large-scale social or economic activity, let alone "the universe." Stedman Jones follows the lefty line that the financial crisis of 2008 discredits free market principles: "The crisis was the direct result of a culture that had endowed the free market with a divine status it has never merited.... [T]he financial crisis was the direct result of neoliberal policies.... These were the terrible effects of uncritical deregulation and market liberalization, bred by the Chicago faith in untrammeled markets."
His narrative begins at the conventional starting point of the immediate postwar years and the founding of the MPS, and includes brief glances at ancillary organizations such as the Heritage Foundation, the American Enterprise Institute, and the Liberty Fund, which "runs reputable workshops," he notes in his clunky prose.
The author rightly notes that "neoliberalism" began infiltrating both major parties in Britain and the United States in the 1970s, though its half-hearted versions under Democrats and the Labour Party in the U.K. were ultimately supplanted by the real thing with the arrival of Margaret Thatcher and Ronald Reagan. He offers several strong accounts of the clash of monetarism and Keynesianism and other economic debates of the era, but the essential strangeness of his book is revealed in the one application of neoliberalism that he singles out in a chapter for major attention: housing policy. This chapter has the feel of a wholly different book, or a journal article that never found a home. Housing policy? Thatcher's privatization of public housing in Britain—a substantial achievement—was never matched in the United States, and in any case housing policy, aside from scattered attention to rent control, was hardly an important preoccupation of American neoliberals.
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Neoliberalism in Stedman Jones's hands is always "radical" if not extreme. If Hayek were alive, he'd note that today's would-be "masters of the universe" are the same types they've always been—that the true radicals are the Obamanauts who think they can fix American health care with tens of thousands of pages of regulations from the Department of Health and Human Services, solve the eternal problem of bank risk with the ministrations of Dodd-Frank, and generate a "green energy revolution" with a combination of subsidies, mandates, and regulations.
This is why Hayek is enjoying more of a revival than Friedman in the Age of Obama. Friedman's successors are divided over whether Ben Bernanke's Federal Reserve is following a Friedmanite path or is sowing a future of disastrous monetary instability. But Hayek's epistemological critique of economic planning and regulation is suddenly salient again in the face of contemporary liberal hubris. The "neoliberals" of the MPS era may never succeed in reclaiming the rightful understanding of liberalism, but their critique of government power remains more urgent than ever and does not depend on the spirit of any age.
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Daniel Stedman Jones, Steven Hayward, and Nigel Ashford discuss Hayward's review in our online feature, Upon Further Review.