12 Jan 2013

Philip Pilkington: The Origins of Neoliberalism

via Naked Capitalism

Part I - Hayek's Delusion

By Philip Pilkington, a writer and research assistant at Kingston University in London. You can follow him on Twitter @pilkingtonphil

It is not only by dint of lying to others, but also of lying to ourselves, that we cease to notice that we are lying.

– Marcel Proust

Friedrich Hayek was an unusual character. Although well known to be a libertarian political philosopher, he is also commonly associated with being an economist. And it’s certainly true that at one time Hayek’s focus was solely on economics. In the 1920s Hayek was still within the fold of pure economics, publishing papers and works that were taken seriously by the discipline. However, by the 1930s Hayek’s theories had started to come apart at the seams. Exchanges between Hayek and John Maynard Keynes and Piero Sraffa show Hayek as confused and even somewhat desperate. It was around this time that Hayek discontinued making any substantial contributions to economics. Not coincidentally this overlapped with the time when most economies, mired as in Great Depression, demonstrated that Hayek’s theories were at best impractical, at worst a complete perversion of facts.

So, Hayek turned instead to constructing political philosophies and honing a metaphysics rather than engaging in any substantial way with the new economics that was emerging. When pure logic and empirical reality ceased to support Hayek’s emotionally charged ideology he turned, to the more malleable sphere of meaning and metaphysics. He became concerned with watery terms like “freedom” and “liberty”, which he then set out to impregnate with a meaning that would support his dreams. The most famous result of this period of conversion, which resembled less St. Paul on the road to Damascus and more so an alcoholic who had hit rock bottom, was Hayek’s 1944 work The Road to Serfdom. In a very real way it was this book that marked the close of Hayek’s career as a serious economic thinker and set him on the path of the political propagandist, agitator and organiser.

The over-arching argument of the book is well-known and need not be repeated too extensively here. Hayek thought that all totalitarianisms had their origins in forms of economic planning. Economic planning was the cause of totalitarianism for Hayek, rather than the being just a feature of it. Underneath it all this was a rather crude argument. One may as well make the observation that totalitarianism was often accompanied by arms build-up, therefore arms build-ups “cause” totalitarianism. But Hayek pushed it and most probably believed it anyway, for reasons that we shall soon see.

The implicit argument here was that, Britain for example, which had begun to increasingly plan its economy during the war, was on a slippery slope that would end in totalitarianism. It must be understood that Hayek’s argument had no factual basis. Only a polemicist could argue that the two totalitarianisms that existed in this period – namely, Hitler’s Germany and Stalin’s Soviet Union – had formed because a naïve democratic government had engaged in some economic planning that then got out of hand and resulted in tyranny. But Hayek’s motivations probably lay somewhat deeper – probably so deep that he himself could not properly recognise them.

The Rise of the Third Reich: Hayek’s Historical Repression

To understand Hayek’s “reasoning” a bit better we should consider the political situation that he refused to return to after Austria’s annexation by Hitler in 1938. The broad reasons for Hitler’s rise to power are beyond dispute among serious historians today. The sweeping picture of Germany in this era is that she was not only humiliated after the First World War but was also subject to vicious reparations payments – payments which ultimately set off a hyperinflation in the country. The average German knew that the national humiliation and the economic turmoil were intimately connected and so they became increasingly bitter about the Treaty of Versailles which they thought, quite rightly, had subjected the country to both economic and political bondage. It was into this vacuum that Hitler and his cronies stepped and began, in the early to mid-1920s, to accumulate political support.

However, after the hyperinflation came to an end and thanks to loans from the United States, the reparations troubles eased and the German economy began to return to moderate growth. Hitler’s popularity fell enormously in this period. But the 1929 stock market crash soon came and the loans from the United States promptly dried up. Unemployment soared in Germany and the government, like so many others across the world, engaged in severe austerity in order to attempt to balance the budget. They believed that this would return the country to economic prosperity.

In retrospect it is quite obvious that Hitler’s immediate rise to power was due to the economic downturn and the government’s deflationary policy response. In 1930 the Nazis had become the second largest party, obtaining 18.3% of the votes. When compared with the 2.8% of the vote they received in 1928 during an era of high employment and an economically optimistic outlook it quickly becomes obvious what the underlying forces driving Hitler’s election actually were.

That the economic policies the Weimar government had engaged in had led to the election of Hitler was and is obvious to any unbiased observer. But there were many who actively repressed this fact. The liberals that had supported the government’s austerity measures no doubt felt some burden, whether unconscious or otherwise, of guilt. This is best illustrated by an anecdote that the American economist John Kenneth Galbraith relates regarding the Chancellor who presided over the austerity, Heinrich Brüning, which he published in his book Money: Whence It Came, Where It Went:

In the 30s, Brüning joined the Harvard faculty as Professor of Government. At a welcoming seminar one evening I asked him if his Draconian measures at a time of general deflation had not advanced the cause of Adolf Hitler. He said that they had not. When, unwisely, I pressed the point, he asked me if I disputed the word of the former Chancellor of the German Reich.

This was then, rather unsurprisingly, a touchy subject for Brüning which he preferred to evade. After all, the facts were simply not on his side and there was no way he could rationally argue to the contrary. Likewise too for those liberals like Hayek who firmly believed that the austerity measures were the only road to salvation. Mark Ames at the eXiledonline sums up rather nicely the reaction this provoked in Hayek and the other Austrian school libertarians:

Von Hayek and his fellow Austrian aristocrats who were forced to flee from the fruits of their economic programs, did a complete revision of history and retold that same story as if the very opposite of reality had happened. Once they were safely in England and America, sponsored and funded by oligarch grants, hacks like von Mises and von Hayek started pushing a revisionist history of the collapse of Weimar Germany blaming not their austerity measures, but rather big-spending liberals who were allegedly in charge of Germany’s last government. Somehow, von Hayek looked at Chancellor Bruning’s policies of massive budget cuts combined with pegging the currency to the gold standard, the policies that led to Weimar Germany’s collapse, policies that became the cornerstone of Hayek’s cult—and decided that Bruning hadn’t existed.


An Existential Choice

It is not hard to discern whether Hayek was lying or simply deluded. He was not lying – at least not consciously. For the rest of his life he was driven by a genuine belief in the idea, put forward in The Road to Serfdom, that economic planning was what had led to totalitarianism in Europe. It was not hard to discern if Hayek was lying simply by looking at the zeal with which he pursued the crusade against planning. This was not the cynical enthusiasm of a charlatan, but instead the forward impetus of a man who, as if riding a bicycle, would come crashing down emotionally if lost his momentum.

Hayek’s entire ideology and career had begun to come apart in the 1930s. His theories were shown to be inconsistent in the academic journals of the time and the practical implications of those theories had shown themselves to be both discredited and dangerous. A man in such a position only has two choices: he can either completely re-evaluate his ideas which, if they were held with unshakeable conviction and constituted a core component of his emotional make-up, as seems to have been the case with Hayek, would have likely resulted in a mental collapse; or, alternatively, he can engage in a massive repression, shut out reality and construct around himself a fantasy world.

Hayek opted for the latter. So too did all of what was to become the neo-Austrian school which soon developed into a sealed hermetic cult of True Believers who reinforced each other’s unsubstantiated ideas and defended each other from the threatening world outside the circle. But this cult was largely fringe. Although it did command some respect among neoliberals in the Thatcher and Reagan administrations, it was the respect accorded to the eccentric rather than that accorded to the practical man. Lip service was paid to the doctrines of Hayek and the Austrians, but their extremist and impractical economic policy implications were sterilised and kept out of immediate contact with the levers of power. Milton Friedman’s more pragmatic doctrines of monetarism were preferred so far as economic policies went.

But we should not fool ourselves. Hayek’s delusion did indeed have profound effects on history. Indeed, as we shall see, it was even directly responsible for Friedman’s rise. For Hayek, in his crusade against what he thought the germ from which totalitarianism spread, became a tireless worker and organiser. With the ingenuity of a Leninist, Hayek formed around him a host of like-minded thinkers and politicians. Backed by the funding of right-wing millionaires, Hayek constructed a network of people who he initiated into his delusion and convinced that every manifestation of collective intervention into the free market was just one more stepping stone on the road to serfdom.

Likewise in the popular mind – for Hayek did effectively become a political propagandist rather than a respected intellectual in the 1940s – Hayek’s delusion, with all its emotional overtones, spread quite effectively. Today whenever we encounter an anxiety-ridden Tea Partier or a fearful and paranoid internet Austrian, it is Hayek’s delusion that we are hearing echoed through the chambers of history, albeit in slightly vulgarised form. It is the fear, distrust and paranoia which Hayek’s portrait of a free society descending into barbarism evokes that captures the minds of those it touches. That it is completely deluded and ignorant of history only makes it more effective, like all propaganda, in its role as propaganda. The bigger the lie, the more emotional investment it requires to believe in and so the more it captures the uncritical and the emotionally weak.

The inner sanctum from which Hayek’s delusion emanated was called the Mont Pelerin Society. In the next piece in this series we will turn to how Hayek’s delusion was diluted by those in the Mont Pelerin Society to fit with the American political system; this is what we might call the American version of neoliberalism. While in the final piece we will consider how Hayek’s delusion was gradually converted into the European form of neoliberalism when it was confronted with the problem of trade unions. As we shall see there is much overlap between these two forms of neoliberalism and each borrows from the other – this, of course, being the reason why they are not generally distinguished between – but most importantly, they share a common root in the wall that Hayek erected in his mind in the 1930s and 1940s to block out a world that he himself had played a part in creating.


Part II - The Americanisation of Hayek's Delusion

Shared psychotic disorder, or folie à deux, is a rare delusional disorder shared by two or, occasionally, more people with close emotional ties. An extensive review of the literature reveals cases of folie à trois, folie à quatre, folie à famille (all family members), and even a case involving a dog.
– Medscape Reference

In the previous part of our series on the origins of neoliberalism, we saw that the vigour mustered to start the movement on its way was generated by an enormous repression undertaken by the Austrian political philosopher Friedrich Hayek. When Hayek saw his intellectual position, a position in which he had invested most of his emotional energy, falling to pieces due to contemporary economic events, political happenings and theoretical debates, he opted to seal himself into his own mind and reject reality. Instead he began pushing a political philosophy and a metaphysics that he set to work constructing and disseminating. In this part of the series we explore in more detail the fruits of his labour in America.

In the following two parts of the series we draw extensively on the excellent work which a number of historians of science have undertaken and published collectively in the volume The Road from Mont Pelerin: The Making of the Neoliberal Thought Collective. We cannot recommend enough that the interested reader searches out this volume for more details of this extremely important institution which, in a very real way, has come to shape our political discourse today.

The Road to Serfdom: American Edition

A major concern of the American members of the Mont Pelerin Society, most of whom were based out of the now infamous Chicago School of Economics and Law, was to make Hayek’s delusion more palatable to the American public. During the Second World War many New Deal institutions had solidified and become popular with the public and after the war the majority of Americans did indeed think that their country, while definitively capitalist, was nevertheless one in which the government played a rather large and constructive role.

The political right found themselves completely flummoxed by such a situation. More practical men, like President Ike Eisenhower, jumped on board, while fringe elements, like Joe McCarthy, fled into paranoia, attacking many prominent liberals as Communist agents. Already in the wartime planning era of the 1940s, when Keynesianism loomed large in America, those economists at the Chicago School and elsewhere in the US who had read and absorbed Hayek’s delusion knew that they needed to change the terms of the debate. But how they were to do this proved a daunting question.

In 1945 Hayek conceived that there should be a sister book of The Road to Serfdom written for an American mass audience. Hayek and the Chicago School economists knew that the original was too refined for American tastes. After all Europeans like their propaganda filled with lofty philosophical notions, while Americans are more content with sound bites that chime with certain trigger words that have been circulating since the revolution of 1776. It is the evolution of what effectively became the American edition of The Road to Serfdom that Philip Mirowski and Rob Van Horn explore in their paper “The Rise of the Chicago School of Economics and the Birth of Neoliberalism,” included in the volume mentioned at the beginning of this piece. The evolution of this book was particularly important because it gave rise to a specifically American strain of neoliberalism.

The problem for the Mont Pelerin members was basically as follows: classical members of the Chicago School, like the economist Henry Simons, were, like Hayek, fairly tied to certain ideas that existed in the older liberal school of political economy. Among these ideas was the notion that monopoly and oligopoly were twin evils that conspired against the public and caused inefficiencies in the market. Simons was arguably more tied to this idea than Hayek mostly because Hayek had developed, as we have seen in the previous part of this series, a pathological obsession with planning as it related to forms of government. For this reason Hayek thought that most forms of monopoly were the result of government planning. But whatever his views were, the implications were clear: this sort of ideology was not going to fly in an America that was now dominated by large corporations with substantial ties to the state.

Mirowski and Van Horn make this case apropos of the Volker Fund, a charitable foundation set up in 1932 by home furnishings mogul William Volker, which was then converted into a bankroller of libertarian propaganda by Volker’s nephew Harold Lunhow upon the former’s death in 1947. They write:

The politics of postwar America presumed not only a powerful state, but also a configuration of powerful corporations whose international competitors had mostly been reduced to shadows of their former selves. In promoting “freedom,” they were primarily intent on guaranteeing the freedom of corporations to conduct their affairs as they wished. Thus, the Volker Fund was not interested in bankrolling a classical liberal economic position resembling that of Henry Simons, for it did not adequately correspond to their objectives. American corporations did not fear concentrations of power and generally favored the existence of a powerful Cold War state. It is our contention that the Volker Fund pushed for a reformulation of classic liberalism in the American context to conform to its Cold War antisocialist agenda. The participants in the Free Market Study [an offshoot of the Mont Pelerin Society], and even eventually Hayek, would just have to learn to adjust to the emergent characteristic doctrines of neoliberalism.

The money men loved Hayek’s message that government interference and economic planning would lead to tyranny, but they were not so keen on his purist free market ideas. Fortunately for them, however, Hayek himself was less concerned with constructing a pure free market system than he was with fighting the ghost of what he called “socialism”. Thus a union was accommodated and the child of this marriage was to be Milton Friedman, who would pen the American edition of The Road to Serfdom, which came to be called Capitalism and Freedom.

Before turning to this, however, we should briefly highlight this emergent anti-socialist trend – or, more accurately, this ideological trend constructed against what a fringe group of people thought to be “socialism”. It is this we hear when we stick our ears into the right-wing echo chamber in America today. Many are perplexed with how right-wingers and vulgar libertarians completely change the meaning of the English language and denounce centrist and centre-left politicians and commentators as “socialist” when these people have no interest in having the state seize control over the means of production – which is the definition of the term “socialism”. Now perhaps we can more clearly see that the roots lay buried in the dominant aspect of Hayek’s delusion; which was the aspect taken up and bankrolled by certain right-wing corporate interests in the 1940s and 1950s.

Consolidation of the American Neoliberal Doctrine

As the American Mont Pelerin Society began to accommodate their corporate bankrollers, the discourse of American neoliberalism proper began to crystallise out from Hayek’s original delusion. The state and big corporations were no longer to be feared, as they may have been by classical liberals. Rather they were to seen as guardians of the neoliberal order. Every society needed its networks of power and the goal now became to ensure that these networks of power were populated by people who were initiated into Hayek’s delusion.

This made neoliberalism a far more potent political ideology than the purely negative anti-government sentiment implicit in Hayek’s The Road to Serfdom were it left standing alone. Here was an ideology that politicians could buy into because it secured them a place in the schema. They were to become the handmaidens of corporate interests and were absolved from any need to institute proper government reforms – after all reforms were evil. Thus the neoliberal doctrine gave the politicians a very easy job and, most importantly, one from which they could largely absolve themselves from blame should the situation go awry. After all, they were not in charge – the free market was. Again, Mirowski and Van Horn summarise this situation well:

The starting point of neoliberalism is the admission, contrary to classical liberalism, that its political program will triumph only if it acknowledges that the conditions for its success must be constructed, and will not come about “naturally” in the absence of concerted effort. This notion had direct implications for the neoliberal attitude toward the state, the outlines of what they deemed a correct economic theory, as well as the stance adopted toward political parties and other corporate entities that were the result of conscious organization, and not simply unexplained “organic” growths. In a phrase, “The Market” would not naturally conjure the conditions for its own continued flourishing, so neoliberalism is first and foremost a theory of how to reengineer the state in order to guarantee the success of the market and its most important participants, modern corporations. Neoliberals accept the (Leninist?) precept that they must organize politically to take over a strong government, and not simply predict it will “wither away.”

Again, it is worth stepping out of our narrative here for a moment and pointing out that this makes sense of where we are today regarding the US political scene. On the one hand, we have the Democrats who largely support the neoliberal agenda both in public and behind the scenes, although they still defend the remnants of a welfare state which largely promote dependency on elites. On the other hand, we have the Republicans who support the neoliberal agenda behind the scenes but sell it in public by peddling Hayek’s original delusion to attack the now crumbling remnants of a welfare state which was originally designed for a full employment economy, and which has now in the era of neoliberalism degenerated into a minor tyranny thus providing a false microcosmic confirmation of Hayek’s delusion.

The American edition of The Road to Serfdom took some time to appear. This was because, as we have said, there was a large amount of consolidation going on in the American segment of the neoliberal movement. It took a while for various political realities to be integrated into the doctrine to make it more palatable for elites. Finally, however, in 1962 Milton Friedman published Capitalism and Freedom.

Capitalism and Freedom is a vulgar work. No more nor less propagandistic than The Road to Serfdom, but certainly sanitised and written for a distinctly different audience. Friedman was soon to go on and create monetarism, which would give policymakers a positive program for how to run the economy, but for now he was content with consolidating neoliberalism as a doctrine and ensuring that American elites were not put off by the more radical musings of Hayek. Friedman, in sterile prose, writes of every societal institution as if it were either a natural market or an institution that might encroach on otherwise efficient markets – a highly simplistic “good versus evil” narrative couched in pseudo-scientific terminology. More importantly still, he chalks up monopoly and corporate power as being due to nefarious government interference and even then he dismisses this by evoking his infamous “as if” approach to methodology, thus neutralising the problem altogether:

I have become increasingly impressed with how wide is the range of problems and industries for which it is appropriate to treat the economy as if it were competitive.

And so the road was paved for the American version of neoliberalism which many live under today. Hayek’s delusion had begun to spread in the US by the 1960s. First among a few emotionally and ideologically close individuals (for ideological proximity is the next best thing to emotional closeness), but soon it was to be spread to the population at large by a charming actor named Ronald Reagan who would prove a master at emotional manipulation. Folie à deux, folie à trois, folie à quatre and so on.

In the next part of the series we will explore the emergence of the European version of neoliberalism, also born from Hayek’s delusion, but more accommodative to the trade unions that wielded, and continue to wield, significant power in Europe. This can be read as a spreading of Hayek’s delusion among the institutions of the centre-left, which would then become a steadfast pillar of neoliberalism and a bulwark against a phantom socialism.


Part III - Europe and the Centre-Left Fall under Hayek's Spell

  In the practical art of war, the best thing of all is to take the enemy’s country whole and intact; to shatter and destroy it is not so good.
– Sun Tzu

In part one and two of this series we explored how Hayek waged war on what he thought was the cause of all the political ills of the 20th century: namely, economic planning in all its forms. We also saw that Hayek’s doctrine of classical liberalism and anti-statism proved too radical for American political and business establishment and that it required diluting by Milton Friedman.

We turn now to Europe, which would come to adopt its own form of neoliberalism. Once again, while the end result was a somewhat different creature from that conceived of by Hayek, it was nevertheless his strained, absolutist thinking that lies at the heart of the system that developed.

Motivations for a European Repression of History

As we have already seen some in the American right-wing loathed the economic planning that had grown up in the US in World War II and which, due to producing good outcomes for the overwhelming majority of citizens, gained consensus in the post-war years. This gave rise to a new propagandistic discourse aimed at what Hayek and others called “socialism” but which had little to do with the collective ownership of the means of production and was in reality a mixture of pragmatism and centre-left sentiment. The reason that Hayek’s extremism found fertile soil in Europe was that the underlying conditions were altogether different from those in America but ironically, that meant the model was bent into an even more palatable-looking form.

Europeans were, quite frankly, not as gullible as their American neighbours. They were less inclined to have the words that make up their language twisted and distorted in order to become meaningless propaganda of the sort that Orwell imagined. Unlike in America there was a strong socialist tradition in Europe and people knew what socialism was – and what it was not. The reason neoliberalism ultimately developed in Europe was altogether different.

In the post-war years many right-wing liberal politicians and intellectuals were tarrying with the same problem that Hayek faced in the 1930s. Any honest look at history – and indeed for many of these people this history was lived – would lead one to conclude that totalitarianism and war had developed in Europe, as Keynes hinted that it might in his 1919 book The Economic Consequences of the Peace, due to punitive reparation policies that were deflationary in nature. The neutral observer would also conclude that these circumstances had been exacerbated in Germany by a government which dogmatically pursued austerity policies and that this ultimately led to Hitler’s election. This presented right-wing liberals with a conundrum: how could they continue to support so-called laissez faire, small government policies if these policies resulted in forces that were so destabilising that they had led in the past to the most monstrous of tyrannies?

The answer for some was to convert to Keynesianism and to acknowledge that some degree of economic planning was not inconsistent with the principles of conservatism. The answer for others was to embrace Hayek’s delusion wholeheartedly and pretend as if it were economic planning and not laissez faire policies that had led to Hitler. So, they picked up a copy of The Road to Serfdom, joined Hayek’s network which was centred on the Mont Pelerin Society and threw history down the memory-hole.

Their problems were, however, much greater than their American compatriots. While the labour unions were indeed extremely important in the American political structure, they were never integrated in the same way that they were in many European countries. Europe, after all, had a strong tradition of social democratic parties that literally grew out of the labour movement. For this reason the unions had become more institutionalised in Europe than they had in the US, which lacked a labour party proper.

While in private many of the Mont Pelerin ideologues might have called these unions “socialist” – and indeed Hayek had some very unpleasant things to say about them as we shall see – this was not a tactic that would readily win political and institutional power. A public face was needed that would accommodate the unions in a way that they would not become vehicles for the economic planning that these “thinkers” had convinced themselves would result in totalitarianism.

Folie à syndicat

Throughout his life Hayek was extremely hostile to unions – a hostility that would later be taken up directly by the Thatcher government in Britain – but many of the Europeans around him thought this ideology counterproductive to the spread of neoliberal ideas. Some of these politicians and intellectuals genuinely did seem to believe that unions had a place in a neoliberal society, while others were likely being pragmatic.

Hayek and his Austrian compatriots saw the unions as a dangerous force – a potential harbinger of their fantasy totalitarianism – and sought to have governments squash them using the legal apparatus. Somewhat ironically Hayek’s stance on unions can only really be properly compared in Europe to the positions taken by the fascist and Nazi movements in the early 20th century insofar as brute legal force was sought to crush organised labour in the most authoritarian manner imaginable. Perhaps then, it should not surprise us that many members of Hayek’s inner circle would later rally to the support of savage dictatorships in Latin America.

However, other emergent European neoliberals took a completely different view and one would probably not be far wrong in saying that this was because the Hayek position brought up some rather unsavoury memories of the fascist era and the abuse of the legal apparatus that took place in those times. The main faction who supported the thesis that unions should be integrated – unsurprisingly, mostly Germans – were the ordoliberals. They, like the neo-Austrians, had formed largely as a collective of intellectuals opposed to the emergence of totalitarianism in Europe, but they had a slightly different view of what sort of society they thought would defend against it.

The ordoliberals and their allies – who dominated the discussion in the Mont Pelerin Society on this issue – believed that unions had already been integrated into the structures of power sufficiently that their more radical elements had been neutralised. They believed, rightly it turned out, that the union leaders could be “educated” in the ways of neoliberalism and help to keep their own workers in check. Thus the unions were seen by the ordoliberals and their allies as an integral part of their ideal of a neoliberal system of governance.

This ideology would later become known in Europe as “social partnership” and would prove, in Germany especially, as a remarkably effective way to keep wages low by indoctrinating union leaders into believing that doing otherwise would necessarily result in their workers being laid off. (The perceptive reader who is aware that many of Europe’s current problems actually stem from this will see yet another important link between today’s events and our little history). Within the left and the union movement those opposed to social partnership in its neoliberal form would also be painted as “Reds” and “communists” and be criticised in line with Hayek’s totalitarian delusion in much the same perverse way as the charge of “socialism” is used in the US. Those who go against the neoliberal orthodoxy in the European labour movement, while tolerated, are generally seen as socialists of a rather old fashioned sort whose silliness stems from the fact that they failed to learn the lessons of Europe’s totalitarian past. Need we amend this to correctly read: “Hayek’s construction of Europe’s totalitarian past”?

Not only were the ordoliberals concerned with keeping unions in check in terms of their bargaining powers, but they also saw in Europe a very real threat that workers were gaining political ground within the workplace. While they did not generally agree with Hayek’s stance on unions, they certainly did see this as an obstruction of “the market” and thus, in the language of Hayek’s delusion, a possible source of totalitarianism. Once again, however, the ordoliberals saw social partnership as a means by which they could back labour leaders who were not antagonistic to managers at the expense of their more radical colleagues. As in the case of wage bargaining, the ordoliberal project was to essentially gain control over the union movement and turn it into a means by which to further the neoliberal agenda.

Hayek and the Austrians reacted to all this in a rather extreme manner, even, rather surprisingly, invoking the spectre of class war. Indeed, one might easily mistake their stance for a sort of right-wing Leninism. Fritz Machlup, for example, at a meeting of the Mont Pelerin Society in 1947 said that:

Industrial peace is something that we should be afraid of, as it can only be brought at the cost of further distortion of the wage structure. I am most afraid of Professor Iversen’s proposal for wage determination by State, and consider it the end of democratic government.

According to such a view, of course, any countries with minimum wage laws do not, by Machlup’s idiosyncratic standards, have democratic government; and labour markets should, in a functioning Machlupian society, be in a state of constant war.

But rhetoric aside the Austrians largely lost the debate on the unions in Europe, while the ordoliberals won the day. Unlike in the case of monopolies, however, there was substantial opposition from Hayek and his allies. Whereas large corporations were to be accepted as normal by all those of neoliberal persuasion in both America and Europe, the tension over unions within the movement would continue; reaching fever pitch in the administrations of Reagan and Thatcher. These politicians and their allies, in a very real and direct sense, can be seen as purist Hayekians in the context of labour policy where they were not in terms of macroeconomic policy for which they favoured the doctrines of Friedman and the monetarists.

Conclusion: Neoliberalism Today

Many of us today live under neoliberal structures of governance. Each country may have its own peculiarities, but on broad principles they follow a pattern that invokes laissez faire, balanced government budgets, control over wages, privatisation, an abstention from economic planning beyond that strictly required and deregulation. What is more, Hayek’s delusion has become widespread to the point of all discourse being completely saturated. In polite company and in public you can certainly be left-wing or right-wing, but you will always be, in some shape or form, neoliberal; otherwise you will simply not be allowed entry.

Any policy or notion that offends the neoliberal mind-set and threatens to shatter Hayek’s delusion is said to only put us on the road to serfdom. It is not difficult to win a rational argument by pushing the point home that this is utter fantasy and nonsense, is completely ignorant of history and is founded on pre-school notions of economics; but that matters little. When you leave the room people will whisper to one another that you are an odd sort with silly ideas and probably should not be trusted.

Such is characteristic of all systems of crude propaganda. Propaganda, by construction, appeals to a series of images inside peoples’ heads – snapshots of a history either half-forgotten or fabricated entirely. These images, in turn, are design to affect peoples’ emotional centres and control them through manipulating that which causes their anxieties and their fears. That the founder of this propaganda himself believed in it entirely makes no difference, for it is the foolish man who thinks that effective propaganda is based on pure and cynical lies.

The oddness of the world in which we live today is that neoliberalism as a system of governance has become entirely dysfunctional. Those ambitious souls in the present ruling generation that received the torch from the inventors of the discourse believed it to be a pragmatic doctrine. This is not surprising given that we have seen that this is precisely how it was constructed. But as we have also seen neoliberalism was built on a fundamental fantasy – a sort of primal repression. Any serious student of history in general and economic history in particular knows that such policies are bound to be deflationary in the medium to long-run and that they will likely generate economic meltdowns and result in social and political turmoil.

And so our leaders, both intellectual and political, try to get a grasp of the situation we face today. But they consistently fumble and fall over; tripped up by their own ideologies. Hayek’s delusion is potent – very potent – and just as he all those years ago preferred to retreat into a fantasy world rather than face what was going on all around him, so too today our leaders do the same. Against all odds and in an act of what can only be considered heroic ignorance Hayek went to the grave with his delusion intact, we can only wonder how long others will uphold it before they buckle under its weight.