Series: A Glance in the Rear View Mirror to Understand the Present (Part 4)

The 1970s: Liberal ideology returned with a vengeance

25 June 2009 by Eric Toussaint

The 1970s: Liberal ideology [1] returned with a vengeance
(Part 4) [2]

Liberal ideology returned with a vengeance in the 1970s, in response to the economic crisis in the main industrialised capitalist countries. The crisis marked the beginning of a long wave of slow growth, or rather a long downturn. The liberal counter-offensive picked up steam with the Third World debt crisis in the early 1980s and the implosion of the bureaucratic regimes of Eastern Europe at the end of the 1980s, followed by the restoration of capitalism in the former soviet bloc and China.

This liberal (or neo-liberal) resurgence has underlain and justified the massive world-wide offensive waged by Capital against Labour. This offensive began in the second half of the 1970s [3] in the industrialised capitalist countries. It continued with the progressive restoration of capitalism resulting from the collapse of the bureaucratic regimes of the East at the end of the 1980s. It included the crisis of the ’developmentalist’ models in the countries of the South, aggravated by the foreign-debt crisis - leading to a new cycle of heightened dependence for countries that had experienced partially autonomous industrialisation (such as Mexico, Argentina, Brazil, India and Algeria). South Korea may soon join the ranks of these latter countries. As for the most dependent and least industrialised countries (Central America; the Caribbean – except for Cuba; Sub-Saharan Africa; and South Asia – except for India), they never really escaped dependence on the North’s capitalist powers. They are now fully under the thumb of the international financial institutions (including Nicaragua and Vietnam, which had indeed experienced authentic revolutions). Institutions such as the Economic Commission for Latin America (CEPAL) and the United Nations Conference on Trade and Development UNCTAD
United Nations Conference on Trade and Development
This was established in 1964, after pressure from the developing countries, to offset the GATT effects.

(UNCTAD) have slowly but surely joined the neo-liberal chorus - though it is true that this process has not always been a smooth one: witness, for example, the 1995 UNCTAD report quoted in this book). As for the Non-Aligned Movement (NAM), it has not survived the Yugoslav crisis, the Third World debt crisis and the overall neo-liberal offensive.

Neo-liberal ideology is not a product of the crisis

Liberal (or neo-liberal) ideology is not a product of the crisis. It existed long before the crisis broke. A variety of economists and political leaders continued to identify with liberal ideas in spite of the pre-eminence of Keynesian and proto-socialist policies. A number of them had long been sharpening their theoretical wits. They had been engaged in a wide-reaching ideological battle with the Keynesian ideas favoured in the North, the ’developmentalist’ ideas in the South (personified by such people as CEPAL head Raul Prebisch for several decades), and with socialist and Marxist ideas in general in various parts of the world.

The theoretical foundation of the different neo-liberal currents

Methodologically speaking, it is not easy to define the main tenets of neo-liberal thought. The same goes for Keynesian and Marxist thought. Each one of these schools of thought has many different currents. There are profound differences between the different currents of liberalism, just as there are within Keynesianism and Marxism. There have also been attempts to synthesise liberal and post-Keynesian ideas, on the one hand, and liberal and post-Marxist ideas, on the other.

In general, the liberal (and neo-liberal) school of thought is grounded in a vast and eclectic body of works - including neo-classical notions such as the quantitative theory of money, Say’s law, the theory of prices based on the interaction of supply and demand, and the theory of comparative advantages …

The neoliberal ideology drew inspiration from economic, political and philosophical theories which date back to David Hume (1711-1776), Adam Smith (1723-1790), Jean-Baptiste Say (1767-1832), David Ricardo (1772-1823), even Emmanuel Kant (1724-1804).

Friedrich von Hayek (1899-1992) and Paul Samuelson are good examples of why it is so difficult to clearly define the parameters of neo-liberalism. Hayek currently enjoys enormous popularity as an ultra-liberal, yet he rejects many key hypotheses of neo-classical thought. Samuelson does not belong to the liberal school, yet in the 1950s pushed for a synthesis of neo-classical thought.

Forerunners of the neo-liberals

Adam Smith. Smith (An inquiry in to the Nature and the Causes of the Wealth of Nations, 1776) carried out a synthesis of the contributions of a number of schools of economic thought, including that of the French physiocrats. He opposed mercantilism, which had been responsible for two centuries of protectionism and state intervention. The main expressions of mercantilism were Colbertism in France, Bullionism in Spain and the policies of Cromwell and Petty in England. Adam Smith is best remembered for his allegory of the ’invisible hand’. According to Smith, every individual “intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” [4]

Here is the passage in which one can find Adam Smith’s quote on the invisible hand: “As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. , nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it." [5]

In Smith’s discourse, the invisible hand contrasts with the visible hand of the government which tries to regulate trade, industry etc. Smith seeks to show how the intervention of the tangible hand of the State generally has negative results. For Smith, public spending should be limited to defence, justice and public works when and where private entrepreneurs were not willing to take charge themselves, “and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain [6]
Adam Smith’s ideas correspond to the strong development of English capitalism in the eighteenth century and laid part of the foundation for ’economic liberalism’.

We should recall that Smith has not only been a source of inspiration for liberals (and neo-liberals). Some parts of his analysis (and that of the mercantilists he fought) were taken on by Karl Marx in his critique of political economy. Indeed, for Smith, “Labour, therefore, is the real measure of the exchangeable value of all commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. .” [7] David Ricardo expanded on this notion, and Marx further developed it while acknowledging his debt to Smith and Ricardo. Unlike Smith, Marx also used a number of the mercantilists’ contributions [8]

2) Jean-Baptiste Say. In 1803, Say described a law whereby the role of money is neutral in the economy and ’supply creates its own demand’. Therefore, no crisis of overproduction is possible in a free market economy.

Say’s law is a key reference for liberal (and neo-liberal) economists. Yet it was proved wrong by events in Say’s time, a point that has been raised by a wide range of economists from Malthus, (1820, Principles of Political Economy: Considered with a view to their practical application, French trans. Principes d’économie politique considérés sous le rapport de leur application pratique, Paris, pub. Calman-Lévy, 1969 ) to Sismondi (1819, Nouveaux principes d’économie politique ou de la richesse dans ses rapports avec la population pub. Calman-Lévy 1971) and Marx.

3) David Ricardo. In Ricardo’s theory of competitive advantages (Ricardo, 1817, chapter VII on Foreign Trade), he critically takes and enhances Smith’s stance in favour of free trade and an international division of labour. For Ricardo, a country does well to specialise in those areas of production whose relative costs are lowest - in other words, those areas where it has the greatest comparative advantage. Unlike Smith, he goes on to say that countries that have competitive advantages in all areas of production should nonetheless specialise.

In a well-known example, Ricardo shows that if Portugal is more efficient than England in the production of both wine and fabric, it should still abandon the latter if its price advantage in wine production is greater. Inversely, England should specialise in the production of fabric, where its handicap is the least great.’ [9] The example referred to is to be found in Chapter VII cited above.

4) Today’s neo-liberals draw inspiration not only from Smith, Say and Ricardo, but also from other economists such as Jevons (The Theory of political Economy, 1871), Menger (Grundsätze des Volkwirtschaftlehre, 1871) and Walras (Eléments d’économie politique pure ou théorie de la richesse sociale, 1874-1877).

These economists criticise both Ricardo’s (and Marx’s) analysis of value and his analysis of distribution. They developed a theory of prices based on the principle of decreasing marginal utility. Dominant economic thought refers to this theory as signalling the ’marginalist revolution.’

Within this framework, Walras also developed a theory postulating a system of general equilibrium. This theory is very much in vogue among today’s neo-liberals. In such a system, society is defined as a natural mechanism (akin to a biological organism and the solar system) within which individuals freely ensure the most effective allocation of resources, thereby guaranteeing optimum economic performance.

5) Finally, to complete the list of references for today’s neo-liberals, we must add the quantitative theory of money. This theory can be found in Smith and Ricardo’s work and has been around since at least the sixteenth century. It explains price movements as being a result of the quantity of money in circulation.

Taken together, all these references are described by some economists as forming a ’neo-classical’ synthesis. As Michel Beaud and Gilles Dostaler have pointed out, ’Through it all, real life has persistently contradicted the analysis of many classical and neo-classical economists whereby the free functioning of the markets is enough to guarantee the full use of resources and their optimum allocation.’ [10]

Marxist scholars, beginning with Marx and Engels themselves, refuted the different component parts of this rather eclectic body of theoretical work - at a time when Marxism influenced a large part of the international working-class movement.

By his own admission Keynes himself had originally championed the liberal cause. Yet 75 years after Marx and Engels, he developed a radical critique of a number of the central tenets in the classical (liberal) economic creed. In response to Smith and Say, [11] for example (and like Marx), he highlights the important contributions of the mercantilists (Keynes, 1936, Chapter 23). However, he stood by the liberal creed on a number of other matters - on such key questions, for example, as the definition of real salaries as being equal to the marginal productivity of labour. [12]

Bibliography :

Adda, Jacques. 1996. La Mondialisation de l’économie, 1 et 2, La Découverte, « Repères », Paris, 2000, 125 p. et 126 p.

Beaud, Michel et Dostaler, Gilles. 1993. La Pensée économique depuis Keynes, Seuil, Paris, 1996, 444 p.

Dewey, John. 1935. « The Future of Liberalism », The Journal of Philosophy, XXII, N°9, p. 225-230.

Hayek von, Friedrich August. 1944. The Road to Serfdom, Routledge Press, UK

Keynes, John. M. 1936. The General Theory of Employment Interest and Money, MacMillan, London, 1964, 403 p.

Malthus, Thomas-Robert. 1798. An essay on the principle of population , J Johnson, Paris.

Marx, Karl. 1867. Capital, Volume I, Penguin Classics, 1993.

Marx, Karl. 1869-1879. Capital, Volume II, Penguin Classics, 1993. Capital Volume III, Penguin Classics, 1993.

Prebisch, Raúl. 1981. Capitalismo periférico, Crisis y transformación, Fondo de Cultura Económica, Mexico, 1984, 344 p.

Ricardo, David. 1817. On the Principles of Political Economy and Taxation, 1950, Cambridge University Press, London

Smith, Adam. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations.

Translated by Vicki Briault, Francesca Denley and Raghu Krishnan in collaboration with Christine Pagnoulle.


[1This is referring to the liberal ideological trends experienced in the European continent and which clearly places itself on the right hand side of the political spectrum. In the United States the use of the term liberal has an entirely different meaning. The liberals of the United States belong to the centre left or moderate right. One such liberal and progressive figure in the United States is John Dewey (1859-1952). In particular, see John Dewey, “The future of Liberalism” The Journal of Philosophy, XXII, N°9, p. 225-230 in Zinn, Howard. 1966. New Deal Thought, Hackett Publishing Company, 2003, 431 p

[2The first part of this series ‘A Glance in the Rear View Mirror to Understand the Present’ was posted on the CADTM website on 12 June 2009 under the title ‘Adam Smith is closer to Karl Marx than to those who sing his praise’; was posted on June 13th under the title: “Neo-liberal ideology is a hard nut to crack”; the third part was posted on the 19 June 2009 : ˝The 1930s to the 1970s: liberalism eclipsed”

[3Throughout the 1970s, the global economy entered a long phase of slow expansion which broke with the previous almost thirty years of unprecedented rapid economic growth, famously known as the ˝ glorious thirty˝.

[4Adam Smith. 1776. An Inquiry into the Nature And Causes of the Wealth of Nations. Book IV, Chapter 2.

[5Adam Smith. 1776. An Inquiry into the Nature And Causes of the Wealth of Nations. Book IV, Chapter 2.

[6Adam Smith. 1776. An Inquiry into the Nature And Causes of the Wealth of Nations. Book V, Chapter 1, Part 3.

[7Adam Smith. An Inquiry into the Nature And Causes of the Wealth of Nations. Book I, Chapter 5. (p. 31, édition en espagnol). Adam Smith further writes: “Labour measures the value not only of that part of price which resolves itself into labour (salary, editor’s note), but of that which resolves itself into rent, and of that which resolves itself into profit.” (Adam Smith. 1776. An Inquiry into the Nature And Causes of the Wealth of Nations. Book I, Chapter 6. ). Alan Greenspan, who claims to adhere to Adam Smith’s thought gives a particularly stupid definition of value ˝Value is what people believe it to be˝ What an idiot this Greenspan is! Poor Adam Smith. (A. Greenspan, 2007, p. 617).

[8For Marx and the mercanitilists, see Labica - Bensussan, 1982, p. 740.

[9Adda, 1996, T.1, p.35

[10Beaud and Dostaler, 1995, p.32

[11See J.M Keynes, 1936, chapter 23 entitled “Notes on Mercantilism...” where, like Marx, he emphasizes the mercantilists’ contribution.

[12See Beaud and Dostaler, 1995, p.54

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc.
See his bibliography:
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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