Did Neoliberalism Empower Socialism? No.

Introduction Connor O'Keefe recently published an article and a video talk on the Mises Institute on how 'Neoliberals Fueled the Rise of Socialism'. In it, he argues that neoliberal globalists preserved economic intervention and cronyism while simultaneously being rhetorically free-market. Essentially he's accusing neoliberals of being larpers while desecrating the efficacy of free-market Capitalism. The issue O'Keefe observes is that when the system eventually tumbles, Capitalism receives the blame instead of Milton Friedman, central banking or the financial sector that helped bankroll the pain. Thus, the disenfranchised masses default to democratic socialism, the seemingly only shining beacon in all the political fog. Now the disgruntled masses won't even give the glorious Mises Institute a chance! There's a sane insight in O'Keefe's observations, that is, Capitalism loses credibility when people associate it with favoritism and economic instability, further, 'Capitalist failings' can easily become tied with the fruits borne from socialist policies, since individual policy evaluation is virtually non-existent in the median voter's epistemology. However, acknowledging this doesn't quite get us to the claim that 'neoliberalism empowered socialism'. We all acknowledge that Ronald Reagan was not an anarcho-capitalist free market absolutist, but we also don't need to leap to the conclusion that anything short of anarcho-capitalism is merely a socialist power generator in a Capitalist garb. From my experience, a lot of this confusion stems from a sort of Nirvana fallacy. The Neoliberal Washington Consensus is viewed under the harsh light of reality: the political constraints, the competing factions, the pragmatic concessions, the populist temptations, and the whole 9 yards. Meanwhile, anarcho-capitalism in all its non-existent glory is observed (and compared) as this sort of tempered system with perfect resource allocation and no public choice constraints, because there just is no government and we got there by somehow convincing everyone to become a libertarian! The point is, it seems like an obviously unfair, and unequal comparison, that ironically is emulated by none other than utopian socialists. The main thesis of this blog is not to defend every privatization, bailout or decision made by the guy with a bronze Friedman statue at his desk. The scope of this essay is to explore whether identifiable market reforms, consistent with the neoliberal consensus, improved economic conditions, and whether those improvements generated political support in favor of Socialism or Capitalism. In other words, evidence in favor of my thesis would be neoliberal reforms increasing Capitalism's political longevity while cutting against Socialist sentiments. O'Keefe spends a lot of time focusing on Western neoliberalism, e.g., Thatcher, Reagan, etc, but omits some of the most notable and successful neoliberal regimes of South America. Neoliberalism and Politics The original tenants of theNeoliberal Washington Consensusbroadly included fiscal discipline, trade liberalization, unleashing the private sector, openness to foreign investment and private property rights. The few carve outs for this were basic education, public expenditures, and healthcare; after all,John Williamsonwas also not an anarcho-Capitalist. This particularly matters because 'neoliberalism' cannot be used as a catch all phrase foreverythinggovernments did after 1980. A tariff reduction is a government action qualitatively different from a bank bailout and thus should be counted in different directions as to how neoliberal a country is.Tibor Rutar's blogon the efficacy of the Washington Consensus further highlights this by citing work fromKevin and Robert Grierwho identify 49 significant instances of neoliberal reforms (shorthand for increases in the Economic Freedom of the World Index). Rather than comparing rich economies with poor interventionist countries, they match reforming countries with comparable characteristics. The estimated effects here are a 16% higher income after ten years relative to the non-reform counterfactual. So this is evidence that favors the hypothesis that neoliberalism makes people better off, and granted that voters are able to identify the neoliberal reforms with higher living standards, this should be evidence that favors the hypothesis that neoliberalismdoesn'tempower socialism in virtue of making people crave the growth they experienced under neoliberalism. Another paper fromAnusha Chari, Peter Blair Henry and Hector Reyesidentify similar neoliberal reform episodes and find that average annual real GDP growth was 2.6% higher in the decade after stabilization of high inflation than in the preceding decade. This coupled with a 2.66% increase following trade liberalizations serve as weak (non-causal) evidence that support the thesis that neoliberalism accomplished much more than nothing, and thus, likely satiated socialist cravings. It also seems from other case studies, that higher GDP, or raising other economic indicators, does somewhat translate into political loyalty. In the 1990s, Alberto Fujimori's government inherited a country under rapid hyperinflation and implemented a stabilization program that included ending central-bank financing of the government, liberalizing prices, interest rates, and so on. So beyond what some Austrians have suggested, Neoliberal reforms were far more than just rhetorical drivel, they actually materialized. Secondly, and more importantly, the economic prosperity brought about by such reforms bore massive political traction for Capitalism, rather than Socialism.Kenneth Robert's and Moises Arce's paper 'Neoliberalism and Lower-Class Voting Behavior in Peru'notes that Fujimori's initial stabilization / market reforms were viewed negatively by poorer voters, however, by the time economic growth, crime reduction and increased poverty relief spending kicked in, political support for him increased just in time for the 1995 election. So it seems like in the long run, Neoliberalism in fact empowers Capitalism, and it also seems like initial negative sentiments against Capitalism during the early phases of austerity programs perhaps, is inescapable, and not something Austrian policy proposals are free of; yet it seems unfair and unintuitive to say that either Austrian Econ or Neoliberal Econ empowers Socialism in virtue of this. To see how long these political points last, you just need to look at any modern Peruvian election. Political scientistCaitlin Andrews-Leefor example has written about how Keiko Fujimori, the now president of Peru and daughter of Alberto Fujimori, essentially rode the wave of her father's economic and political accomplishments to appeal to the masses. This should be considered strong evidence in favor of the thesis that Neoliberalism empowers Capitalism and cuts against socialism consideringKeiko ran against a leftist coalition, or in other words, its an incredibly strong counter-example to the purely negative Austrian account of Neoliberalism. Suffice to say, Neoliberalism, especially that of LATAM should discredit the broader presumption that the political consequences of Friedman, and neoliberalism run only in the downward direction. If bad outcomes can discredit a system, then it seems equally true that good outcomes give the populace reasons to preserve it. Socialism is NOT When Central Banking A smaller point I wanted to touch on here is that Socialism is hardly ever described as the mere presence of government activity. Even Mises split intervention, i.e., restrictions of private ownership with socialism, i.e., authoritative commands on production decisions. Unfortunately, it seems like half the neoliberal-Austrian feud often gets swallowed up by Capitalism-Socialism semantics, in which a monetary authority exercising control over the money supply which helps bankroll cronyist policies is socialist enough. Although Friedman was in favor of central banking, he was also in favor of rule based money supply growth (k-percent rule). There often is a large leap between central banking and Friedmanite licensing of discretionary bailouts. This is further complicated when you try to argue that merely being in support of a central bank allows for snowballing spending since money supply growth can silently erode people's purchasing power for bureaucrat spending sprees. But this also seems to be an unfair litigation since under a mostly Austrian regime, quiet spending would get substituted for demagoguery (see arguably Argentina) for higher taxation and spending, yet this is hardly a good criticism of Austrian economics, or evidence that Austrian economics empowers socialism. Ironically, O'Keefe is largely spot on when he talks about about cronyist policies seeping its way into neoliberal regimes, but that is just to say that neoliberalism is being pitted against the harsh reality of politics where politicians are less principled and less efficient versions of the economists they're trying to emulate. As I mentioned earlier, this seems to be similar to the Nirvana fallacy where Austrian economics is tested in a purely non-empirical landscape while Neoliberalism is tested against reality. I also strongly sympathize with the view that intervention and cronyism can be presented as Capitalism only to later damage Capitalism's reputation, but this is an issue we can defer to rational ignorance. Interventionist and Cronyist political concessions championed by progressives like Sanders can have catastrophic consequences, but we know any semblance of causal inference doesn't exactly fit into the median voter's epistemics. It's quite unreasonable to blame neoliberalism for the cronyist cesspool borne out of the highly volatile political attitudes of 1990s LATAM, or anywhere else. Criticize the bailouts, the cronyist privatizations, and the monetary policy. But to claim that Neoliberalism empowered socialism requires examining the people who found something worth defending, not just the people who turned against it.