Published in The Australian (Sydney), 21 May 2009
WHEN Kevin Rudd published his lengthy essay on the global financial crisis, it was not only an attempt to strengthen his reputation as Australia’s philosopher Prime Minister but also to mark the day of reckoning for neo-liberalism. “Neo-liberalism has been revealed as little more than personal greed dressed up as an economic philosophy,” he wrote. Despite this stark rhetoric, Rudd’s essay revealed only one thing: neo-liberalism is one of the most sloppily used words in today’s political debates. The original philosophy of neo-liberalism, of which Rudd seems unaware, was anti-capitalist and the opposite of a laissez-faire free-for-all.
The term neo-liberalism was invented at the time of the Depression in the 1930s. The belief in eternal prosperity had been shattered by Wall Street’s Black Friday and the events that followed. Liberalism and capitalism were blamed for the global economic crisis. Across the world, economists such as John Maynard Keynes and politicians such as US president Franklin D. Roosevelt were looking for alternatives to a system that they thought had failed spectacularly.
In Germany, too, the mood had turned against unfettered capitalism. However, not everybody believed this had to mean a complete departure from a market-based economy. Young German economist and sociologist Alexander Rustow certainly did not. In a speech he delivered in 1932, regarded as one of the founding documents of neo-liberalism, he called for a “third way” between socialism and capitalism. Rustow’s speech was titled Free Economy, Strong State and in these four words he summed up the core of the neo-liberal project.
He rejected markets left to their own devices. Such markets, he was convinced, would always degenerate. “We agree with Marxists and socialists in the conviction that capitalism is untenable and needs to be overcome,” Rustow wrote in a later essay.
If laissez faire and Adam Smith-style liberalism were so bad, according to Rustow, would he then have preferred a planned economy? His answer was a resounding no. With the same rhetorical verve he used to condemn capitalism, he equally rejected the promises of socialism and communism. They were not viable economic systems and were incompatible with democracy, freedom and human dignity.
This led Rustow to call for a middle way: between laissez faire and socialism, his third way. “We should be happy that we do not have to make a difficult choice between capitalism and communism, but that there is a third way,” he wrote. Ironically, it is the same logic that makes today’s critics of neo-liberalism claim that one no longer has to choose between Friedrich Hayek and Leonid Brezhnev, as Rudd expressed it last year.
Although contemporary supporters of a third way claim to be fighting neo-liberalism, to Rustow this same third way was neo-liberalism. He called it neo-liberalism to differentiate it from earlier liberalism, for which Rustow frequently used derogatory terms such as “vulgar liberalism”. Rustow wanted to break with this old liberal tradition to put a new liberalism in its place, hence the prefix neo. It was the philosophy for the state setting and policing a regulatory framework without actually planning the economy.
A group of German economists and lawyers continued to develop this neo-liberal philosophy in the ’30s and ’40s. Some of them, such as Rustow himself, left Nazi Germany to work in exile. Others such as Walter Eucken, a close friend of Rustow, remained in Germany, under constant threat.
Protestant theologian Dietrich Bonhoeffer is well known to an Australian audience since Rudd named him “without doubt, the man I admire most in the history of the 20th century”. It may be of some interest that Bonhoeffer, too, was connected to the German neo-liberal movement.
None other than Bonhoeffer commissioned the neo-liberal economists around Eucken to develop a concept for domestic and foreign policies in Germany after the end of National Socialism. When the assassination attempt on Hitler on July 20, 1944, failed, parts of this memorandum were obtained by the Gestapo, and Bonhoeffer was executed for his involvement.
It may seem ironic that Rudd’s most admired man in recent history had sympathies for neo-liberalism, when the same Rudd has subsequently denounced neo-liberalism as an empty philosophy. The philosophy of neo-liberalism was eventually implemented in West Germany’s “social market economy”. There it became the foundation of the country’s rapid economic growth after the war, the so-called economic miracle.
Neo-liberalism is a far richer, more thoughtful concept than it is mostly perceived today. To those criticising neo-liberalism today, the answer may well be just that: we need more of this kind of neo-liberalism that sets a good framework for a free economy. What we would need less of is only the rhetorical abuse of neo-liberalism for political purposes.
Oliver Marc Hartwich is a research fellow at the Centre for Independent Studies. His essay Neoliberalism: The Genesis of a Political Swearword is published today.