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At the Origins of Neo-Liberalism: The Free Economy and the Strong State, 1930–1947*

Published online by Cambridge University Press:  29 January 2010

BEN JACKSON
BEN JACKSON*
Affiliation:
Oxford University
*
University College, Oxford, OX1 4BH[email protected]
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Abstract

It is often suggested that the earliest theorists of neo-liberalism first entered public controversy in the 1930s and 1940s to dispel the illusion that the welfare state represented a stable middle way between capitalism and socialism. This article argues that this is an anachronistic account of the origins of neo-liberalism, since the earliest exponents of neo-liberal doctrine focused on socialist central planning rather than the welfare state as their chief adversary and even sought to accommodate certain elements of the welfare state agenda within their market liberalism. In their early work, neo-liberal theorists were suspicious of nineteenth-century liberalism and capitalism; emphasized the value commitments that they shared with progressive liberals and socialists; and endorsed significant state regulation and redistribution as essential to the maintenance of a free society. Neo-liberals of the 1930s and 1940s therefore believed that the legitimation of the market, and the individual liberty best secured by the market, had to be accomplished via an expansion of state capacity and a clear admission that earlier market liberals had been wrong to advocate laissez-faire.

Type
Research Article
Information
The Historical Journal , Volume 53 , Issue 1 , March 2010 , pp. 129 - 151
Copyright
Copyright © Cambridge University Press 2010

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Footnotes

*

This article greatly benefited from presentation to the Oxford History of Political Thought seminar in November 2007; the Political Studies Association Labour Movements Group conference in June 2008; and the Cambridge Modern Economic and Social History seminar in February 2009. For invaluable comments and suggestions, I am grateful to the audiences on those occasions and to Martin Daunton, Clare Jackson, Desmond King, Melissa Lane, Gregg McClymont, Marc Stears, Zofia Stemplowska, Simon Szreter, Richard Toye, and two anonymous Historical Journal referees. The following people and institutions kindly granted permission to quote from private papers: Bruce Caldwell; Christopher Johnson; the Ludwig von Mises Archive at Grove City College; and the Karl Popper Library at the University of Klagenfurt.

References

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2 The classic account in this vein is Cockett, Thinking, pp. 35–56, 59–62, 77, 78, 86–8. This view is also implicit in political commentary on neo-liberalism from both the left and the right: e.g. N. Barry et al., Hayek's ‘serfdom’ revisited (London, 1984), pp. 5, 20–1, 89–94; N. Klein, The shock doctrine (London, 2007), pp. 49–57. For a brief criticism of Cockett in a similar vein to the one documented in this article see Alan Peacock's review in Economic Affairs, 15 (1995), p. 52. I am grateful to Peter Sloman for drawing this reference to my attention.

3 Walpen, Die offenen Feinde; Mirowski, ‘Review of Harvey’; R. Van Horn and P. Mirowski, ‘The rise of the Chicago School of Economics and the birth of neo-liberalism’, in Mirowski and Plehwe, eds., Road from Mont Pèlerin; J. Shearmur, Hayek and after (London, 1996), pp. 3–5, 53–64; J. Shearmur, The political thought of Karl Popper (London, 1996), pp. 24–36, 50–7, 109–15; Shearmur, J., ‘Hayek, Keynes and the state’, History of Economics Review, 26 (1997), pp. 68–82CrossRefGoogle Scholar; J. Shearmur, ‘Hayek's politics’, in E. Feser, ed., The Cambridge companion to Hayek (Cambridge, 2006), pp. 148–70.

4 For details of these early organizational initiatives, see Cockett, Thinking, pp. 54–6, 67–77, 100–21; Hartwell, History, especially pp. 20–99; F. Denord, ‘Aux origines du néo-libéralisme en France: Louis Rougier et le Colloque Walter Lippmann de 1938’, Le Mouvement Social, 195 (2001), pp. 20–9; Walpen, Die offenen Feinde, pp. 51–61, 84–93, 98–117.

5 F. A. Hayek, ‘Address to the Mont Pèlerin conference’, 1 Apr. 1947, typescript, F. A. Hayek papers, Hoover Institution Archives, Stanford University (hereafter Hayek), 71–7, pp. 2–3.

6 In this period we can also observe the earliest use of the term ‘neo-liberal’ itself to refer to those seeking to modernize the market liberal tradition: for examples, see Denord, ‘Aux origines du néo-libéralisme’, pp. 11–13, 24.

7 Neo-liberals such as Hayek obviously accepted that this assertion of state power was necessary during wartime in order to defeat the Nazis, but they worried that the distinction between the necessities of war and the need for a more liberal regime in peacetime would not be understood by elite or public opinion. See F. A. Hayek, The road to serfdom, ed. B. Caldwell (Chicago, IL, 2007 [1944]), p. 213.

8 For a full list of the individuals involved in the ‘Colloque Walter Lippmann’ and the founding members of the Mont Pèlerin Society, see Walpen, Die offenen Feinde, pp. 60–1, 391–2; Hartwell, History, p. 51.

9 Rüstow, A., ‘Freie Wirtschaft – starker Staat – Die staatspolitischen Voraussetzungen des wirtschaftspolitischen Liberalismus’, Schriften des Vereins für Sozialpolitik, 187 (1932), pp. 62–9Google Scholar; H. C. Simons, A positive program for laissez-faire: some proposals for a liberal economic policy (Chicago, IL, 1934), pp. 1–16. See also W. Eucken, ‘Staatliche Strukturwandlungen und die Krisis des Kapitalismus’, Weltwirtschaftliches Archiv, 36 (1932), pp. 297–321; F. A. Hayek, ed., Collectivist economic planning (London, 1935); A. J. Nicholls, Freedom with responsibility: the social market economy in Germany, 1918–1963 (Oxford, 1994), pp. 32–59. The slogan ‘the free economy and the strong state’ was of course later made famous by Andrew Gamble as a crystallization of the statecraft and ideology of Thatcherism: see his The free economy and the strong state (2nd edn, Basingstoke, 1994).

10 Admiration for Gladstone was expressed in e.g. Hayek, Road, p. 194.

11 W. Lippmann, The good society (London, 1937), pp. 184–92, 239–40, 297–8, quote at p. 186.

12 J. Jewkes, Ordeal by planning (London, 1948), p. 223.

13 K. Popper, The open society and its enemies (2 vols., London, 1945), ii, pp. 158, 113–14; see also pp. 129–32, 166–7, 174–5, 181–2; i, pp. 97–8, 115. The definitive account of Popper's sympathy with certain forms of socialism in this period is M. M. Hacohen, Karl Popper: the formative years, 1902–1945 (Cambridge, 2000), especially pp. 383–520. For other examples of neo-liberal criticism of the nineteenth-century liberal preference for laissez-faire, see L. Rougier, Les mystiques économiques: comment l'on passe des démocraties libérales aux états totalitaires (Paris, 1938), pp. 34, 79–84; Compte-rendu des séances du Colloque Walter Lippmann (Paris, 1939), pp. 13–17, 32, 37–8, 62, 91–2; A. Rüstow, ‘Appendix’, in W. Röpke, International economic disintegration (London, 1942), pp. 268–74; W. Röpke, Die Gesellschaftskrisis der Gegenwart (Zurich, 1942), pp. 87–90, 300–3; M. Polanyi, The logic of liberty (London, 1951), pp. 169, 187.

14 I return to the differences between Mises and the rest of this group in section iii. The phrase ‘paleo-liberal’ was coined by Rüstow: Megay, E., ‘Anti-pluralist liberalism: the German neo-liberals’, Political Science Quarterly, 85 (1970), pp. 424–7CrossRefGoogle Scholar; Walpen, Die offenen Feinde, pp. 57, 323 n. 39.

15 Simons, Positive, p. 3.

16 Robbins to Lippmann, 8 Aug. 1937, Walter Lippmann papers, Manuscripts and Archives, Yale University Library (hereafter Lippmann), 1810. A more extended argument about the political ‘misrepresentation’ of classical economists and the industrial revolution was given by W. H. Hutt, Economists and the public (London, 1936), pp. 128–78.

17 Hayek, Road, pp. 71, 118.

18 Hayek, ‘Free enterprise and competitive order’, typescript, 1947, Hayek 81–3, p. 5; reprinted in F. A. Hayek, Individualism and economic order (London, 1948), p. 109.

19 Simons, Positive, p. 1.

20 Popper to Hayek, 15 Mar. 1944, Karl Popper papers, microfilm, LSE Library (hereafter Popper), 305.13.

21 Hutt, Economists and the public, pp. 313–47; his Plan for reconstruction (London, 1943), pp. 137–45, 310–11, quote at p. 310; Rüstow, ‘Appendix’, pp. 281–3; Polanyi, Logic, p. 144.

22 E.g. Hayek, Road, pp. 137–8, 149–56. Some contemporary critics of Hayek also took him to be attacking socialist means rather than socialist ends: Dickinson, H., ‘Review of Freedom and the economic system’, Economica, 7 (1940), p. 435CrossRefGoogle Scholar; Pigou, A. C., ‘Review of The road to serfdom’, Economic Journal, 54 (1944), pp. 217–18CrossRefGoogle Scholar; E. Durbin, ‘Professor Hayek on economic planning and political liberty’, Economic Journal, 55 (1945), pp. 357–9.

23 Popper to Hayek, 11 Jan. 1947, Popper 305.13. Popper also argued Hayek was not a ‘reactionary’ in correspondence with Rudolf Carnap: ‘[Hayek] is certainly not a protagonist of unrestricted capitalism. On the contrary, he insists on the need of a system of “Social Security”, on anti-cycle policy, etc.’ Popper to Carnap, 25 Apr. 1946, reprinted in K. Popper, After the open society: selected social and political writings, ed. J. Shearmur and P. Norris Turner (London, 2008), p. 100.

24 Hayek, ‘Prospects for freedom’, lecture at Stanford University, 1946, typescript, Hayek 107–7, p. 10.

25 Hayek, ‘Free enterprise and competitive order’, pp. 4–5 (p. 109 in published version).

26 Hayek, Road, pp. 100–11, 139–42.

27 W. Röpke, Die Lehre von der Wirtschaft (Vienna, 1937), pp. 185–7; L. Robbins, Economic planning and international order (London, 1937), pp. 4–7; Hayek, Road, p. 85.

28 Lippmann, Good society, p. 283; Röpke, Gesellschaftskrisis, pp. 299–300; Hayek, Road, pp. 113–14. Lippmann also used the analogy of a whist club that, rather than restricting itself to stipulating a binding set of rules of the game for everyone, instructs players to play certain cards: Good society, p. 317. Keynes also used a similar rule of the road metaphor in his How to pay for the war (London, 1940), p. 12.

29 Rougier, Mystiques, p. 88. He also made the same point in Colloque Walter Lippmann, p. 16.

30 Rüstow, ‘Freie Wirtschaft – starker Staat’; his ‘Appendix’, pp. 274–83; W. Röpke, German commercial policy (London, 1934), pp. 50–1; Röpke, Lehre, pp. 187–93; Röpke, Gesellschaftskrisis, pp. 258–64; Popper, Open society, i, pp. 138–48, ii, pp. 181–2, 318 n. 9. The ‘third way’ vocabulary was also used by Walter Eucken to characterize the implications of Hayek's Road to serfdom: Eucken to Hayek, 12 Mar. 1946, Hayek 18–40, p. 3.

31 Röpke to Hayek, 8 July 1942, Hayek 79–1; Hayek, Road, e.g. pp. 85–90. See also e.g. Robbins, Economic planning, pp. 225–9; Rougier, Mystiques, pp. 84–8; M. Polanyi, The contempt of freedom: the Russian experiment and after (London, 1940), pp. 35–40, 59–60. In his introduction to the 1976 edition of The road to serfdom, Hayek noted that when writing the book ‘I had not wholly freed myself from all the current interventionist superstitions, and in consequence still made various concessions which I now think unwarranted.’ Hayek, ‘Preface to the 1976 edition’, reprinted in Road, p. 55.

32 F. A. Hayek, ‘Address to the Economic Club of Detroit’, 23 Apr. 1945, typescript, Hayek 106–8, p. 6.

33 Hayek to Popper, 12 Nov. 1943, Popper 541.12. Although Hayek also indicated in the same letter that he would not personally choose to employ the term to describe his own position.

34 D. Ritschel, The politics of planning (Oxford, 1997); R. Toye, The Labour Party and the planned economy, 1931–1951 (Woodbridge, 2003); Tomlinson, J., ‘Planning: debate and policy in the 1940s’, Twentieth Century British History, 3 (1992), pp. 154–74CrossRefGoogle Scholar; P. D. Reagan, Designing a new America: the origins of New Deal planning, 1890–1943 (Amherst, MA, 1999).

35 Hayek, Road, p. 85. For similar definitions, see Robbins, Economic planning, p. 7; Polanyi, Contempt, pp. 27–40; Röpke, Gesellschaftskrisis, pp. 38–40; Jewkes, Ordeal, pp. x–xi, 1–3. On this point, see also Shearmur, ‘Hayek, Keynes and the state’, pp. 71–3.

36 For the earlier phase of the neo-liberal critique, see Hayek, ed., Collectivist economic planning.

37 Cockett, Thinking, p. 114; M. Friedman and R. Friedman, Two lucky people: memoirs (Chicago, IL, 1998), p. 161.

38 Mises to Hayek, 31 Dec. 1946; L. von Mises, ‘Observations on Professor Hayek's plan’, 31 Dec. 1946, typescript, both Hayek 38–24.

39 Mises to Hayek, 18 July 1943, Hayek 38–24.

40 Colloque Walter Lippmann, pp. 41–2, 60–1, 74, 88–90; notes from session on ‘Free enterprise and competitive order’, 1 Apr. 1947, first meeting of Mont Pèlerin Society, Hayek 81–3.

41 See e.g. Machlup to Hayek, 14 Mar. 1941, 21 Oct. 1943, 2 Aug. 1944, 24 Aug. 1944, all Hayek 36–17. For an example of public criticism of Mises from within neo-liberal ranks, see Simons, H., ‘Review of von Mises, Omnipotent government’, Annals of the American Academy of Political and Social Science, 236 (1944), pp. 192–3CrossRefGoogle Scholar.

42 Hayek to Fisher, 18 Nov. 1948, Hayek 73–32. In correspondence with Machlup, Hayek defended Mises but also acknowledged his shortcomings. In one letter, Hayek noted that although Mises's work had ‘very brilliant patches’, he ‘has not the gift to persuade’, Hayek to Machlup, 30 July 1944; see too Hayek to Machlup, 2 Jan. 1941, both in Fritz Machlup papers, Hoover Institution Archives, Stanford University (hereafter Machlup), 43–15. For similar thoughts about the complexities of the Hayek–Mises relationship, with a focus on the methodological differences between them, see Caldwell, Hayek's challenge, pp. 143–9, 220–3.

43 F. Graham, in notes from session on ‘Free enterprise and competitive order’, evening session, 1 Apr. 1947, Mont Pèlerin Society meeting, Hayek 81–3, p. 5.

44 Lippmann, Good society, pp. xli–xlii, 212–32, quotes at pp. xli–xlii, 227. Lippmann knew Keynes fairly well: see the warm correspondence between them in the Lippmann papers, folder 1217; and R. Steel, Walter Lippmann and the American century (Boston, MA, 1980), pp. 304–9.

45 Simons, Positive, p. 4, emphasis in original.

46 Ibid., pp. 17, 19–21. For helpful discussion of Simons in this context, see Van Horn and Mirowski, ‘Rise of the Chicago School’, pp. 142–3; De Long, J. B., ‘In defence of Henry Simons’ standing as a classical liberal', Cato Journal, 9 (1990), pp. 601–18Google Scholar.

47 Lippmann, Good society, pp. 216–18, 222–4, 277–81; F. Graham, Social goals and economic institutions (Princeton, NJ, 1942), pp. 203–22; Röpke, Gesellschaftskrisis, pp. 366–74, 251; Hutt, Plan, pp. 287–92; Hayek to Lippmann, 11 Aug. 1937, Lippmann 1011; Hayek to Machlup, 8 Aug. 1942, Machlup 43–15; Hayek, ‘Address’, pp. 12–13; Hayek, ‘Free enterprise and competitive order’, pp. 16–18 (p. 116 in published version); R. Van Horn, ‘Reinventing monopoly and the role of corporations: the roots of Chicago Law and Economics’, in Mirowski and Plehwe, eds., Road from Mont Pèlerin, pp. 209–13. Lippmann and Hutt did not explicitly refer to Simons as the source of their ideas on the reform of corporate law.

48 Simons, Positive, pp. 11–12, 18, 22–3; Graham, Social goals, pp. 223–4; Röpke, Gesellschaftskrisis, pp. 306–7.

49 Hutt, W. H., ‘Economic institutions and the new socialism’, Economica, 7 (1940), p. 431CrossRefGoogle Scholar; Hutt, Plan, pp. 232–47; Röpke, Gesellschaftskrisis, pp. 306–7. Lippmann also favoured a mixture of public and private ownership: Good society, pp. 305–7.

50 Van Horn and Mirowski, ‘Rise of the Chicago School’, p. 142; Hayek, Road, pp. 206–7; notes from session on ‘Free enterprise and competitive order’, 1 Apr. 1947, Mont Pèlerin Society meeting, Hayek 81–3.

51 Röpke, W., ‘Socialism, planning and the business cycle’, Journal of Political Economy, 44 (1936), p. 323CrossRefGoogle Scholar.

52 Röpke, Gesellschaftskrisis, pp. 318–57; W. Röpke, ‘The proletarianized society’, Parts i and ii, Time and Tide, 1 and 8 Oct. 1949, pp. 973–4, 998–9; Rüstow, ‘Appendix’, pp. 279–83; Rüstow, in Colloque Walter Lippmann, pp. 77–83.

53 W. H. Hutt, The theory of collective bargaining (London, 1930); his Plan, pp. 83–4, 273; Simons, Positive, pp. 9–10, 21–2; H. Simons, ‘Some reflections on syndicalism’, Journal of Political Economy, 52 (1944), pp. 1–25; Graham, Social goals, pp. 178–9; Robbins to Lippmann, 8 Aug. 1937, Lippmann 1810; Simons to Lippmann, 5 Oct. 1937, Lippmann 1949; Hayek, ‘Free enterprise and competitive order’, pp. 19–20 (p. 117 in published version); notes from session on ‘Wages and wage policy’, 8 Apr. 1947, Mont Pèlerin Society meeting, Hayek 81–3.

54 Hayek, Road, p. 204.

55 M. Friedman, in notes from session on ‘Taxation, poverty and income distribution’, 8 Apr. 1947, Mont Pèlerin Society meeting, Hayek 81–3, p. 1.

56 Hayek, Road, pp. 118, 134, 147–9, 156, 215. In the course of a radio debate in the US on The road to serfdom (on 22 Apr. 1945), Hayek indicated that limits on maximum working hours and social insurance schemes were, from his point of view, legitimate functions for the state: see the transcript reprinted in S. Kresge and L. Wenar, eds., Hayek on Hayek (London, 1994), pp. 112–14. See also Shearmur, ‘Hayek, Keynes and the state’, pp. 71–2.

57 Simons, Positive, pp. 26–30; Simons, ‘Reflections’, p. 19. Röpke also endorsed the use of redistributive fiscal policy: Gesellschaftskrisis, pp. 305–6.

58 Graham, Social goals, pp. 177–81, 231–40; Graham, F. D., ‘Keynes vs. Hayek on a commodity reserve currency’, Economic Journal, 54 (1944), p. 428CrossRefGoogle Scholar.

59 Popper, Open society, ii, pp. 116–18, 122–3, 129–30, 169–70.

60 Hutt, Plan, pp. 5–19, 60–2, 165–85. Hayek commended Hutt's ‘very interesting suggestions’ and said that his plan ‘will repay careful study’: Road, p. 150 n. 5.

61 M. Friedman, in notes from session on ‘Taxation, poverty and income distribution’, 8 Apr. 1947, Mont Pèlerin Society meeting, Hayek 81–3, pp. 1–3 and subsequent discussion. Friedman later made this proposal famous in his Capitalism and freedom (Chicago, IL, 2002 [1962]), pp. 190–4.

62 Hayek, ‘Free enterprise and competitive order’, pp. 21–2 (p. 118 in printed version); F. A. Hayek, ‘The case against progressive income taxes’, The Freeman, 28 Dec. 1953, pp. 229–32. Hayek did not discuss taxation in any detail in Road to serfdom.

63 Nicholls, Freedom, pp. 101–2; Hayek, ‘Free enterprise and competitive order’, p. 22 (p. 118 in printed version).

64 W. Röpke, Civitas humana (London, 1948), pp. 146–7; all in italics in original. See also Röpke, Gesellschaftskrisis, pp. 357–61.

65 Röpke, Gesellschaftskrisis, pp. 266–7, 360.

66 Popper, Open society, ii, pp. 169–70, 318 n. 10; M. Polanyi, Full employment and free trade (Cambridge, 1945), pp. 142–5.

67 Jewkes, Ordeal, pp. 63–6, 73; L. Robbins, The economic problem in peace and war (London, 1947), pp. 67–73.

68 Employment policy, Cmd 6527 (London, 1944), p. 3; P. Addison, The road to 1945 (London, 1975), pp. 242–6; J. Jewkes, A return to free market economics? (London, 1978), pp. 39–52; J. Tomlinson, Employment policy: the crucial years, 1939–1955 (Oxford, 1987), pp. 45–79.

69 L. Robbins, Autobiography of an economist (London, 1971), pp. 186–9, 224.

70 Simons, Positive, pp. 34–5; Röpke, Gesellschaftskrisis, pp. 279–80; Röpke, Civitas humana, pp. 207–8.

71 Hayek, Road, p. 149.

72 Hayek, ‘Postscript to The road to serfdom’, typescript, 1948, Hayek 106–10, p. 12. For a similar interpretation of this evidence, see Shearmur, ‘Hayek, Keynes and the state’, pp. 71–2. Note that Hayek, based in Cambridge during the Second World War, also enjoyed an increasingly friendly personal relationship with Keynes at this time: A. Ebenstein, Friedrich Hayek: a biography (Chicago, IL, 2003), p. 106. All of this provides some context for understanding the famously amicable letter that Keynes sent to Hayek after reading The road to serfdom: Keynes to Hayek, 28 June 1944, in D. Moggridge and E. S. Johnson, eds., The collected writings of John Maynard Keynes volume 27: activities 1940–1946: shaping the post-war world: employment and commodities (London, 1980), pp. 385–8.

73 W. Beveridge, Full employment in a free society (London, 1944); A. Hansen, Economic policy and full employment (New York, NY, 1947).

74 Beveridge, Full employment, p. 21; Keynes to Beveridge, 16 Dec. 1944, in Moggridge and Johnson, eds., Collected writings volume 27, p. 381; R. Skidelsky, John Maynard Keynes: the economist as saviour, 1920–1937 (London, 1992), p. 605.

75 H. Simons, ‘The Beveridge program: an unsympathetic interpretation’, Journal of Political Economy, 53 (1945), pp. 212, 220–2, 229, 233; Nicholls, Freedom, p. 52; Röpke, Gesellschaftskrisis, pp. 275–9; Eucken to Hayek, 12 Mar. 1946, Hayek 18–40, pp. 1–2; Hayek, ‘Postscript’, p. 13; notes from session on ‘Contra-cyclical measures, full employment and monetary reform’, 7 Apr. 1947, Mont Pèlerin Society meeting, Hayek 81–3. A further concern for neo-liberals was the possibility that this form of Keynesianism would influence the design of post-war international institutions and hence promote a system of co-ordinated international economic planning: for this debate, see J. Toye and R. Toye, The UN and global political economy (Bloomington, IN, 2004), pp. 87–109.

76 I am grateful to a Historical Journal referee for this formulation.

77 Nicholls, Freedom, p. 87; Tomlinson, ‘Planning’, pp. 157–8, 166–9. This convergence over the role of the price mechanism was noted at the time by Hutt, ‘Economic institutions’, pp. 419–20, but he did not stress the degree to which the ground between the two sides had narrowed on distributive issues as well.

78 In reaching this conclusion I therefore dissent from Foucault's verdict that such a wholesale neo-liberal critique of the state ‘is effectively, completely, and already very clearly formulated in the years 1930–45’: Birth of biopolitics, pp. 187–91, quote at p. 189.

79 E.g. D. Jay, The socialist case (London, 1937); J. Meade, Planning and the price-mechanism (London, 1948).

80 Kresge and Wenar, eds., Hayek on Hayek, p. 108; Hayek, ‘The road to serfdom after twelve years’ [1956], in his Studies in philosophy, politics and economics (London, 1967), pp. 220–1.