What comes after neoliberalism? A new social contract.

Is neoliberalism dying of COVID-19? Neoliberalism was a political and intellectual project whose origins lay in the 1930s and 1940s, originally championed by a group of economists and philosophers, including Friedrich Hayek, Milton Friedman and Ludwig von Mises. It aimed to revise and revitalise (hence the prefix ‘neo-’) classical liberal ideas about how the economy and society should be structured.

Few economists self-identify as neoliberals today. Indeed, the term ‘neoliberalism’ is highly contested and is more often used as a pejorative. Nevertheless, the cultural theorist Stuart Hall reasonably suggested there may be “enough common features to warrant giving it a provisional conceptual identity”.

Firstly, then, neoliberalism argues that the role of states in the economy should be reduced as much as possible to one of fostering the proper functioning of competitive markets. To that end, publicly-owned industries should be sold off (‘privatised’) and replaced with private enterprises.

Secondly, government financial expenditure should be reduced as much as possible, so that a declining share of GDP is spent by the state and a growing share by private companies and individuals.

Thirdly, neoliberalism argues that markets are most competitive in a low-regulation environment because regulation acts as a barrier to entry into markets, which results in less competition between firms.

Neoliberalism is not libertarianism or anarchism. There is still an important role for the state to play in neoliberalism, but it should ideally be reduced as much as possible to the role of ensuring that markets are functioning in a competitive manner. In reality, economies are complex and always mixed, borrowing from elements of social democracy and neoliberalism, and involving state intervention, public-private partnerships, and so on.

Nevertheless, support for neoliberalism is clearly at a low ebb. Even in Britain and the United States, the Anglo-Saxon champions of free markets and privatisation in the 1980s, politicians have turned their backs on neoliberalism’s core tenets. In 2017, then-British prime minister Theresa May famously renounced “selfish individualism” and “untrammelled free markets”, while Donald Trump was embracing protectionism by launching tariff wars with Europe and walking away from international free trade deals such as the Transatlantic Trade and Investment Partnership (TTIP).

Historian Adam Tooze asks whether COVID may have “ended the neoliberal era”. He points out that “loud calls” are coming from “unlikely places” for a new social contract to replace neoliberalism, one that “would properly value essential workers and take account of the risks generated by the globalised lifestyles enjoyed by the most fortunate”. Indeed, bastions of economic orthodoxy such as the Financial Times, The Economist, the IMF and the European Central Bank are now championing a new social contract to replace neoliberalism. The latest issue of the Oxford Review of Economic Policy is a symposium asking what has gone wrong with capitalism and how it can be fixed.

Something has changed since the pandemic began. The shutdown of our economies necessitated massive and sustained state interventions in the economy, while there is now a growing sense that free markets are maybe not as competitive as promised (instead giving rise to clear monopolies and firms that are “too-big-to-fail”), that inequality of wealth and opportunity is growing (threatening democracy itself), and that markets are not taking into account the costs of negative externalities such as climate change, nor are they even investing resources productively or efficiently. See Friends of Europe’s recent event on the global balance sheet for evidence of this.

What comes after neoliberalism? How can we set a “social floor” and an “environmental ceiling” for capitalism, as economist Kate Raworth puts it? Markets can assign monetary prices for goods and services, but we need to be measuring much more than that. The European Union is working on this right now, through instruments such as the EU taxonomy for sustainable activities or the Corporate Sustainability Reporting Directive (CSRD).

Should we not expect, in our new social contract, a different role for private enterprise? One that aims to improve social wellbeing and environmental sustainability rather than purely focusing on the economic bottom line? Could the state be more involved in the economy, working in partnership with private industry and being more active in breaking up monopolies and tackling inequality of wealth and opportunity? As Martin Wolf put it in an article in the Financial Times on the new social contract, if not markets, then “around what idea might politics, society and the economy now revolve”? This is the discussion we should be promoting as we start to exit the pandemic.

You may also like…

• Friends of Europe: A look at the global balance sheet: how can growing wealth contribute to thriving societies?
• Friends of Europe: State of Europe – the festival of politics and ideas: a new Renaissance
• #CriticalThinking: If Europe is the stage, a new social contract is the next act, by Augusta Ramaccioni
• Debating Europe: What will 2022 bring?