Has the 2008 global financial crisis discredited the principles of Neo-liberalism?
For many, the global financial crisis was seen as an opportunity for change. This article argues that the crisis has not discredited the principles of neo-liberalism and has allowed the principles of free market capitalism to become more deeply ingrained within society.
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Jenson argues that the global financial crisis has produced a ‘Polanyian moment’ in which society has discredited the principles of neoliberalism and is undergoing a significant change in direction (Boychuk et al, 2015: 314). Yet many academics dispute this claim and view neoliberalism’s dominance as unchallenged in the wake of the 2008 collapse. The purpose of this post is to investigate whether the global financial crisis that ricocheted around the world, with devastating outcomes for many, has resulted in society abandoning the principles of neoliberalism in search of new ways to organise society. The post argues that following the crisis, the ideas of neoliberalism have remained fairly unscathed, with elites re-framing the crisis as an issue of state profligacy and prescribing austerity measures which serve to further entrench the neoliberal project. Whilst there is evidence of countermovements from both elites and the general public, there has not been a global, unified, rejection of neoliberal ideas or a large scale change in how societies are managed. Thus, we cannot assert that the financial crisis discredited the principles of neoliberalism.
Neoliberalism can often be interpreted as a resurgence of the liberal tradition; suggesting that the tradition of liberalism had declined but has returned, reinvigorated (Torbat, 2008: 191). However, liberalism, with its focus on individual self-interest and the ability of the market to produce efficient outcomes, has been the dominant feature of Western political thought since the Second World War. Between 1945 and the 1970s, this took the form of Keynesianism, which acknowledged the virtues of the market but also promoted active state intervention, such as providing countercyclical fiscal and monetary stimulus to solve problems in the short run (Jahan et al, 2014). However, as stagflation set in, Keynesianism fell out of favour and was replaced by a system that promoted more market, less state; Neoliberalism.
The term ‘Neoliberalism itself poses conceptual debates. Howard Stein (2012: 422) points to the fact that neoliberalism has been defined in multiple competing ways. These range from understanding neoliberalism as ‘an ideology supported by neoclassical economic theory’, to an assertion that the market sits at the core of capitalist society and that policy should be focused on making markets work well (Ibid). Yet, these different approaches to the term unify around a single policy paradigm, underpinned by theories of free markets, the rule of law and a strong but minimal state (McBride, 2015: 24). As such, this paper understands neoliberalism as a loose set of ideas which offer a certain way of looking at the world (Thorsen, 2010; Metcalf, 2017). These principles, namely that individual, rational actors and free markets produce optimal outcomes, and that state intervention should be minimised due to its adverse impacts on economic prosperity, prescribe numerous, constantly evolving, policies including budgetary austerity, deregulation and privatisation (Stein, 2012; McBride, 2015).
Polanyi and the Financial Crisis
The previous section defined neoliberalism as a set of ideas that promote free markets and minimal state intervention; these ideas being realised through state-led policies such as deregulation. Such extensions of the role and remits of markets vis-à-vis the state and society have been questioned by political thinkers including Karl Polanyi (Watson et al, 2014). In The Great Transformation, Polanyi argued that the pre-market ‘human economy was always embedded in society’ (Block, 2001: xxiii) whereby the economy was subordinate to political and social relations. Yet, through deliberate state action, movements were to be made towards self-regulating markets where society would be run adjunct to the market, organised around the principles of supply, demand and exchange (Block, 2001: xxiv). Consequently, the economy would be disembedded from society and the principles of the free market would reach into all aspects of social life; turning land, labour and money into ‘fictitious commodities’- commodities that were not produced to be bought and sold but were nonetheless treated like pure commodities (Block, 2001: xxv).
However, Polanyi argued that treating labour, land and money as commodities would have disastrous effects on society, leading to poverty, environmental degradation and business closures (Polanyi, 2001: 76). Faced with the ‘perils inherent in a self-regulating market system’ (Polanyi, 2001: 80) society would form a ‘countermovement’ against the market mechanism to ‘insulate the fabric of social life from the destructive impact of market pressures’ (Block, 2008: 1). Taken this way, on realising the destructive nature of the free market and the commodification of land, labour and money, society loses faith in laissez-faire movements and discredits free-market ideas, imposing measures and policies to check the influence of the market (Polanyi, 2001: 79). Disembedded financial markets were especially perilous due to their global reach and, as such, countermovements would have to develop a ‘global and long-term perspective’ in order to be successful (Altvater, 2009: 77).
The 2008 financial crisis can be analysed through a Polanyian lens and helps us to understand neoliberalism as the cause of the crash. Following a period of ‘embedded liberalism’ under the Bretton Woods system, neoliberalism came to the forefront with widespread liberalisation, deregulation and privatisation taking place under the Thatcher and Reagan governments (Kohl & Warner, 2004: 855). Through this state-led process, finance became disembedded, increasing the power of capital relative to labour and providing more scope for private actors to make decisions, as well as to create financial innovations, including the securitization of mortgage loans (Altvater, 2009). In turn, financial innovations allowed the market to reach further into social life, transforming the home from a dwelling linked to the institution of the family, to a major asset that could be traded in financial markets (Gemici, 2016: 21). Resultantly, American families were integrated into a market system whereby their mortgages stayed afloat only when financial markets were healthy (Gemici, 2016: 34). Thus, when the subprime mortgage crisis hit, the linkages between capital markets and housing finance meant that there was a huge increase in foreclosures as increasing numbers of households defaulted on their mortgages, quickly leading to the demise of key financial institutions (Gemici, 2016: 28). Understood in this way, the financial crisis was caused by neoliberalism and its principles of ‘more market, less state’.
The financial crisis caused by the expansion of the market under neoliberalism produced the widespread social problems that Polanyi feared. By early 2009, the crisis had wiped out 14.3 trillion dollars (Steger & Roy, 2010: 130), caused catastrophic output and job losses (Hall, 2014: 71) and had led to surges in poverty (Doemeland, 2016) and suicide rates (Chang et al, 2015). Such a damaging crisis could be expected, as Jenson (2015) posits, to act as a catalyst for a Polanyian moment in which society loses faith in free market ideas, creating a countermovement against neoliberalism in search of new ways to organise society. The following sections investigate whether there has been a societal backlash against the principles of neoliberalism to understand whether the financial crisis discredited neoliberalism.
A Polanyian Moment?
In light of such a devastating crisis, it could be expected that a Polanyian moment had been reached whereby dominant elites would concede that running society according to the principles of neoliberalism had failed and that change was required (Jenson 2015; Massey & Rustin, 2015). Indeed, the policy responses from governments to bail out failing financial institutions and nationalise some banks can be viewed as a movement away from neoliberal principles by the policymaking elite, towards a model of economic management that brings the state back in, representing a return to Keynesian principles (Patomäki, 2009: 437). We may therefore join Wallerstein (2008) and Stiglitz (2008) in understanding the financial crisis as the event which killed the dominance of neoliberal ideas in modern governance.
Yet, in the events that followed the 2008 crisis, it would be premature to argue that elites no longer believe in the principles of neoliberalism. In fact, elites have ‘shown remarkable capacity to shape the post-crisis recovery process’ (McBride, 2015: 24), using their discursive power to shape how the crisis is understood and how it should be reacted to. This includes not only powerful states and organisations, such as the U.S. and the IMF (Deacon, 2007: 16) but also entire disciplines, such as the field of economics, where academics, some of who have close ties to the financial industry, have been successful in framing the causes of the crisis as well as setting out the best policy responses (Carrick-Hagenbath & Epstein, 2012). As a result, the cause of the 2008 financial crisis has come to be understood not as a result of neoliberal policies and the principles that underpin them, but rather as the outcome of ‘governmental profligacy and excessive social protection’ (Massey & Rustin, 2015: 192).
Understood as a result of state overspending, the financial crisis provided neoliberalism with the chance to further consolidate its position as the dominant set of principles governing society (Boychuk et al, 2015: 313). For many nations, the ‘common sense’ response to the crisis was to impose austerity measures; cutting public services and raising taxation levels. The imposition of austerity following the crisis demonstrates how the principles of neoliberalism remain ‘locked in’ to political and economic structures, dictating the ways in which actors think (McBride, 2015: 33). In responding to the crisis, political elites remained dedicated to the principles of neoliberalism; this was certainly the case in Britain where Chancellor George Osborne stated that he would not be ‘blown off course’ by considering alternatives to austerity (Whiteside, 2015: 265). At the same time, such measures could not be imposed without the backing of society, where many individuals, especially on the right, still subscribe to the idea that ‘you cannot solve a problem just by throwing money at it' (Hall & O’Shea, 2015: 55). The result of framing the financial crisis as a problem of state intervention has, therefore, allowed governments around the world to reconfigure the welfare state ‘to its current economically elite-driven, capital-centric, shrunken form’ (Farnsworth & Irving, 2018: 465). Hence, the financial crisis, far from creating a social backlash against the principles of neoliberalism, has provided more fuel for neoliberalism to push its ideas further.
Also key to the preservation and extension of neoliberalism following the financial crisis has been the influence of financial elites. Here, capital has been able to use its power over governments and labour, the power which sits at the heart of neoliberalism (McBride, 2015: 33), to secure bailouts that would restore the bank’s health at the expense of the taxpayer (Johnson & Kwak, 2011: 4). Further still, the vast wealth of the financial sector and the revolving door between politics and finance has been important in ‘locking in’ neoliberal ideas, allowing financial elites to exercise vast amounts of power over policymaking in the years following the crisis. This allowed the world of finance to fight off the threat of regulation (Johnson & Kwak, 2011: 8) and continue to secure further ‘bank-friendly’ regulatory changes (McLannahan & Jopson, 2018).
Yet, this is not to suggest that there has been no response from elites in the aftermath of the financial crisis. Prominent economists, including Paul Krugman, have been promoting ‘new Keynesian thinking’, arguing against austerity measures and in favour of fiscal stimulus packages (Whiteside, 2015: 258). Further, key international organisations such as The International Labour Organization have been putting forward new policy agendas which focus on social protection, job creation and anti-austerity policies (Deacon, 2015: 117). Therefore, while the elite response to the financial crisis was to impose neoliberal principles further, there is evidence that new policy alternatives are being considered and that an elitist countermovement may be developing.
Turning to the rest of society, there have been protests in many countries, including the Occupy movements, which have ‘sought to promote alternative ideas to resolve the crisis on terms more favourable to labour’ (McBride, 2015: 26). Such protest movements can be viewed as a stark rejection of neoliberal principles and policies by wide swathes of society in the aftermath of the financial crisis. However, Ishkanian & Glasius (2018) argue that relatively few of the protestors used the term ‘neoliberalism’ or framed their protest as ‘anti-neoliberal’. While it was clear that protestors in cities such as London and Cairo knew that things were wrong and had mobilized themselves in response to the destructive outcomes of the financial crisis and the austerity measures that followed, it was not clear that they understood the underlying problem; the systematic exploitation of society that accompanies the process of implementing neoliberal principles (Ishkanian & Glasius, 2018: 534). Similarly, there have been upsurges in nationalist and xenophobic movements, including the Golden Dawn in Greece and the Front National in France, which misunderstand the issues of impoverishment and inequality that followed the financial crisis as ‘an issue of national and ethnic identity’ (Massey & Rustin, 2015: 193). These examples show that while general publics have formed a backlash against the effects of the financial crisis and the subsequent austerity measures, they have been unable to identify the dominance of neoliberal principles as the underlying cause and have failed to form a unified opposition against neoliberalism.
While protests have signaled a societal backlash against the principles of neoliberalism, the most significant shift away from neoliberal ideas has been the rise of social movements, many of which engage in actions of solidarity (Schmidt & Thatcher, 2013: 427). These solidarity movements represent a loss of faith in the neoliberal logic, disregarding the idea that people should deal with their problems as individuals and realizing that ‘positive change will only come through community actions and struggles’ (Ishkanian & Glasius, 2018: 539). Therefore, the creation of systems such as food distribution networks and lending libraries can be understood as political interventions which resemble a staunch rejection of the neoliberal logic and aim to bring social principles of reciprocity and trust back into people’s lives (Ishkanian & Glasius, 2018: 539). However, while such movements may indicate a rejection of neoliberal principles and the creation of new ways to organise society, they remain localised and ‘can be extraordinarily difficult to move to other places’ (Peck et al, 2012: 27). Therefore, while social movements and actions of solidarity show that the principles of neoliberalism have been discredited by some people in the wake of the financial crisis, we cannot say that there has been a widescale, unified countermovement against neoliberalism.
This post has argued that the global financial crisis has not discredited the principles of neoliberalism. In response to the events of 2008, elites have remained dedicated to the principles of individualism, free markets and minimal state intervention, framing the cause of the crisis as one of state profligacy. As a result, policies such as austerity have been understood by both elites and wide swathes of the general public as the ‘common sense’ response. In turn, neoliberalism has emerged in a stronger position following the crisis, as the state has continued to be rolled back. This is not to say, however, that there has been no backlash against neoliberal ideas. There is evidence of ‘Polanyian countermovement’s’ against neoliberalism following the financial crisis, with elites promoting alternative policy regimes that bring the state back in, and members of the public taking part in protests and solidarity movements. Yet, these backlashes have not culminated in a global, unified movement which has identified neoliberalism as the cause of social ills and made significant progress towards implementing a new set of ideas. Therefore, neoliberalism has come out of the financial crisis remarkably unscathed, preserving its place as the dominant set of ideas by which modern societies are run.
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