Chapter 58: The Neoliberal Order
Core idea
A napkin, a curve, and a generation of policy
On the evening of September 14, 1974, the economist Arthur Laffer sketched a simple curve on a Washington restaurant napkin for Dick Cheney and Donald Rumsfeld. The curve showed government tax revenue rising as the tax rate climbed from zero, peaking somewhere in the middle, and falling back to zero at 100 percent (because nobody would bother to earn what they could not keep). Laffer’s claim was that the United States was past the peak — that cutting taxes would actually raise revenue.
That single argument, dressed up as “supply-side economics” by supporters and “trickle-down economics” by critics, drove the Reagan tax cuts of 1981, the Thatcher revolution in Britain, and a generation of fiscal policy worldwide. Whether or not the Laffer Curve was empirically right (the evidence has been mixed at best), it gave political cover for a wholesale shift in how Western governments thought about the economy.
Neoliberalism is not “liberalism” in the American sense
In economics, “liberal” means free-market — minimal taxation, minimal regulation, minimal state. That is the opposite of what “liberal” means in American politics. So “neoliberalism” refers to the post-1970 revival of free-market economics, advocated by people who would be called conservatives in US political vocabulary. The same person can be an economic liberal (pro-market) and a political conservative — they are the same position, just measured on different axes. Keep the two senses of “liberal” separate and the political map of the last fifty years becomes much clearer.
Why it matters
Keynesianism versus austerity: the recession debate
When a country falls into recession, should its government spend more money or less? The Keynesian answer (named for John Maynard Keynes, 1883-1946) is: spend more. Public-sector spending puts money into private hands, those hands then spend it, and the economy reflates. The 1930s New Deal in the United States is the canonical example — federal spending under Franklin Roosevelt is widely credited with pulling the US out of the Great Depression.
The neoliberal answer is the opposite: cut taxes and cut spending. The theory is that lower taxes will incentivize private investment, which will create jobs faster than government programs could, and that the lower government spending is necessary to make the tax cuts fiscally responsible. This package — “austerity” — has been tried repeatedly (the UK after 2010, Greece during the eurozone crisis, much of Latin America under IMF programs) and has not yet produced a clear success story. Investors tend to hold on to their money during recessions; corporations are not eager to expand their workforce when consumer demand is collapsing. Austerity tends to deepen recessions rather than end them.
The Washington Consensus went global
By the 1990s, the neoliberal package — privatization of state enterprises, deregulation, free trade, foreign-investment-friendly tax codes, and fiscal austerity — was the standard prescription that the IMF and World Bank attached as conditions to any loan they made to a developing country. This set of conditions became known as the Washington Consensus, and it reshaped the economies of Latin America, sub-Saharan Africa, and the post-Soviet bloc in the 1990s. The results were mixed: some economies grew, but inequality typically widened, and the political backlash against “structural adjustment” eventually contributed to the populist turn of the 2000s and 2010s.
Neoconservatism: the foreign-policy cousin
In domestic policy, neoconservatism is essentially the same as neoliberalism. Where the two terms diverge is in foreign policy. Neoconservatism, especially after 1989, came to mean an aggressive, interventionist foreign policy aimed at exporting Western-style democracy — by sanctions, by drone strike, by invasion if necessary. The wars in Iraq and Afghanistan in the 2000s were the high-water mark of this approach. As with neoliberalism, neoconservatism cut across party lines: the Bush administration in the US and the Blair government in the UK pursued essentially the same foreign-policy agenda from opposite ends of the conventional left-right spectrum.
Key takeaways
Key takeaways
- The Laffer Curve (1974) gave political cover to the supply-side argument that tax cuts could increase government revenue.
- Neoliberalism is the post-1970 free-market doctrine; 'liberal' here means pro-market, the opposite of 'liberal' in US politics.
- Reagan in the US and Thatcher in the UK enacted neoliberal programs in the 1980s — tax cuts, deregulation, privatization, weakening of unions.
- Keynesian economics (named for John Maynard Keynes) holds that government should spend more during recessions; austerity holds the opposite.
- Austerity has not yet produced a clear empirical success story; the evidence is that investors and corporations hold back during recessions rather than fill the gap.
- The Washington Consensus exported neoliberal policy globally through IMF and World Bank loan conditions in the 1990s.
- Neoliberal policies appear in both left- and right-wing parties; Bill Clinton's 'end welfare as we know it' was a neoliberal compromise from the American left.
- Neoconservatism shares neoliberalism's domestic agenda but adds an aggressively interventionist foreign policy.
Mental model
Read it as: A simplified comparison, not a verdict. Both approaches have circumstances in which they work better; the chart captures the dominant historical record of recession responses since 1945, in which Keynesian intervention has more often produced recovery than austerity has.
Key figures
Milton Friedman (1912-2006)
The University of Chicago economist whose monetarist theory and Capitalism and Freedom (1962) provided the intellectual foundation for the neoliberal turn. His students at Chicago — the “Chicago Boys” — became the architects of Pinochet’s economic policies in Chile in the 1970s, providing the first national test case for full-throated neoliberalism.
Margaret Thatcher (1925-2013) and Ronald Reagan (1911-2004)
The British prime minister (1979-1990) and US president (1981-1989) whose simultaneous embrace of supply-side economics, anti-union policy, and deregulation defined the political center of gravity in the Anglosphere for a generation. Both inherited high-inflation, low-growth economies and both pursued essentially the same package: cut top marginal tax rates, weaken organized labor, privatize state enterprises, deregulate finance.
Example
Why a privatized utility behaves differently
Suppose a city’s water supply was previously owned by a municipal authority. Its mandate was to deliver clean water at the lowest sustainable cost; profit was not in the picture. The authority charged enough to cover its costs and reinvested anything left over in infrastructure.
Now suppose the city sells the water utility to a private company. The new owner’s mandate is to return value to shareholders. To do that, it can (a) raise rates, (b) cut costs (often by deferring maintenance or laying off workers), or (c) some combination. Service quality may improve or decline depending on competition and regulation, but the incentive structure has fundamentally changed: water is now priced to generate profit, not just to cover costs.
This is the neoliberal bet in microcosm. Sometimes privatization produces real efficiency gains. Sometimes it produces rent extraction with no service improvement. Often it produces both at once, plus a transfer of wealth from public to private hands. Whether the bet pays off depends on the specific sector, the regulatory regime, and who ends up holding the new ownership stake. The historical record is genuinely mixed — which is why the neoliberal-versus-Keynesian debate is still live, decades after the Laffer Curve appeared on its napkin.
Related lessons
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