What is neoliberalism, and why has it had such a devastating impact on Britain's economy, public services and democracy?

Neoliberalism has dominated economic and political thinking for more than 45 years. But what does it actually mean, who benefits from it, and why have successive governments accepted its ideas?

In this episode of Understanding Economics, I explain how neoliberalism emerged, why economists such as Friedrich Hayek and Milton Friedman promoted it, and how it became the dominant economic ideology of our time.

I explore how neoliberalism has encouraged privatisation, deregulation, austerity and lower taxes on wealth, while transferring economic power away from democratically elected governments towards corporations, financial markets and the wealthy.

I also explain why neoliberalism's claims about government money are fundamentally misleading. Governments that issue their own currencies are not financially constrained in the way households are. Understanding that changes how we think about taxation, public spending and the possibilities for economic reform.

The consequences of neoliberalism are everywhere, from NHS waiting lists and privatised water companies to growing inequality and weakened democratic accountability.

But there is an alternative.

I argue that we need a caring state that puts people, public services, democracy and the environment before financial wealth.

The economy should serve people, not the other way around.

This is part of my Understanding Economics series, which explains how the economy really works and how we could make it work better.

This is the audio version:

This infographic supports this video:

This is the transcript:

Hello, I'm Richard Murphy, and this is Understanding Economics. That is the series of videos that I'm making that explains economics in the way that I see it, and I stress that point. This is economics in the way that I see it, and I do not see it as most economists do, because I am what is called a heterodox economist.

There are about 8% of all economists in the world who stand outside the mainstream and who criticise mainstream economics because of its failure to supply answers which solve the problems that we face in the world, and I am pleased to be one of that 8%. So this is not standard economics. It is economics that answers the questions that you might have about our economy and why it isn't working.

One of the terms that I use quite often in my videos is neoliberalism, and yet I've never made a video which says what neoliberalism is, and it seems time to make one in this Understanding Economics series.

So, what is neoliberalism? Neoliberalism is a political and economic philosophy, and I stress the point. It is both, and it has transformed the way our economy and our societies work. It has shifted power away from government and towards markets and business. It has changed how we think about public services, taxation and responsibility. And it has also changed who benefits in our society from the economic activity that is undertaken in it.

But what exactly does it do, and why does it matter so much to all of us?

The point is, neoliberalism is this unusual combination of both being an economic theory and a political ideology. Now, it's not alone in being that. Marxism clearly does the same thing. And there are other forms of thinking that do have this overlap. But not every type of description of economics is deeply political at the same time. Neoliberalism is.

It assumes that markets usually make better decisions than governments. It argues as a result that governments should do less inside our economy and businesses should do more. It treats competition as the best way to organise almost everything in our society. And the result is an economic system that gives increasing power to those with wealth and to the businesses that they own.

But where did this ideology come from? Neoliberalism did not become influential by accident. Its ideas were deliberately developed and promoted over many decades. They began after World War II with Friedrich Hayek and Milton Friedman, and they created a society to promote this idea in 1947 called the Mont Pèlerin Society, named after the mountain in Switzerland, below which they held their first meeting.

After that, think tanks, wealthy individuals and financial institutions helped spread the word about neoliberalism. They argued that markets should replace many decisions made by governments, and they did so because that was in their own self-interest. Their aim was to change who exercised power over the economy. They resented the rise of social democracy in the aftermath of World War II and the Keynesian economics that went with it. They wanted to replace democratic decision-making wherever that was possible.

But what are the central beliefs of neoliberalism? Neoliberalism argues that government should be smaller and less influential inside our society. It favours privatisation of business, which transfers public services into private ownership, and that, of course, is done by direct sale of those businesses, but it is also achieved by outsourcing. We should never forget that the idea of outsourcing is a key component within the neoliberal framework.

Neoliberalism also supports deregulation, which reduces government controls over business, and it argues for lower taxes on business and wealth because they say that those taxes undermine entrepreneurial activity even though there is no evidence that they do. It also makes individuals responsible for solving problems that society creates.

So we, individually, become responsible for solving climate change. And we, individually, are deemed to be self-sufficient and therefore capable of looking after ourselves even though no evidence is necessarily available that everyone is capable of doing so. But as a consequence, we find the idea that neoliberalism promotes that we should, for example, be responsible for our own healthcare. And the idea that we might need to pay for education is also one implicit in neoliberalism. Millions of students now have neoliberal thinking to blame for the fact that they now have student debt.

But what does neoliberalism change within society apart from student debt?

Neoliberalism transfers economic power away from elected governments. It gives financial markets, corporations, and wealthy investors greater influence. That is what it is promoted to achieve.

People are increasingly treated as consumers within a neoliberal market rather than as citizens, and public services become opportunities for private businesses to make profits.

We have seen that, of course. Water is the worst example, but the railways were privatised for a long time. So has the post office been. So have electricity and gas and so many other businesses. Decisions about society's needs become increasingly dependent upon commercial interests.

So what happens to public services in a neoliberal state? Neoliberalism encourages governments to reduce their direct provision of services. We see the consequences. It is not by chance that we see long NHS waiting lists, whilst at the same time, if you can produce the necessary cash, someone will see you very quickly in the private sector. That stress is a deliberately created one within a neoliberal environment where money is able to talk louder than need.

Neoliberalism assumes that private businesses can provide services more efficiently than government. And as a result of the way in which the bias is created within the supply of government services, this often appears to be the case, whether true or not, and this puts financial returns and commercial priorities ahead of public need. Services that should provide security and care can consequently be weakened. The result is that access to essential services can depend increasingly on having access to money. Nowhere is that seen more obviously than in the provision of social care for the elderly.

What happens to inequality in that case? Neoliberalism gives greater economic power to those who already own wealth. Lower taxes and reduced regulation can increase the rewards available to them. Wealth and economic influence consequently become more concentrated because they can use their economic power to influence government. Meanwhile, many people experience growing insecurity in their daily lives. A neoliberal economy can grow while leaving large numbers of people feeling ignored.

So what is neoliberalism's money myth, because there is one? Neoliberalism deliberately treats government finances as if they were household finances. It claims governments must raise money through taxation or borrowing before spending, making government spending appear to be, as a consequence, dependent upon the activities of the wealthy and the companies that they own.

But a government that issues its own currency creates money when it spends, and taxation is not there to fund government activity. It is there to withdraw money from circulation and help control inflation. The neoliberal money myth of dependence, therefore, upon the wealthy and their companies is just a work of fiction. The real limits on government spending include available resources and inflation, but not money. Neoliberalism ignores this to create government dependency on private capital, banks, and wealth. And those three combine together to restrain government activity.

This is not by chance. This is by deliberate political choice. This is the way in which they exercise their control over government, and governments have, for 45 years in this country, and many others around the world, succumbed to that pressure.

So why has neoliberalism survived for so long? It survived mainly because people are told there is no alternative. Margaret Thatcher coined the phrase “TINA”, which did stand for “There Is No Alternative”, and so far social democratic parties right around the world have failed to create that alternative. Governments have created fiscal rules that restrict their own economic choices, succumbing to neoliberal power in the process, and they have given away control of their central banks, the consequence being that the wealth of the wealthy has been increased by those banks who have kept interest rates artificially high. And those who are economically vulnerable because they borrow or are in vulnerable employments have seen the consequence in a reduction in their well-being.

These rules are all intended to make austerity appear necessary rather than a political choice. They discourage governments from using their own powers to address social problems, and the result is a reduction in the choices that democratic governments are willing to make.

So when we talk about democracy, what does neoliberalism do for it? Democracy should allow people to decide how society's resources are used. Neoliberalism has increasingly transferred those decisions to markets and corporations. Those exercising economic power are not democratically accountable in many cases as a consequence. We see that most obviously in our central banks, but we see it too when major corporations make decisions that have a direct impact on our lives because they are in control of outsourced services.

Governments then claim that markets or fiscal rules prevent them from acting. And democracy is weakened as a consequence when elected governments surrender their power to make choices on our behalf. And we have seen that in water, the NHS, so many privatisations, and government outsourcing, all of which have left the government as a hollowed-out and hopelessly inefficient version of its former self.

So is there an alternative to neoliberalism? My argument is that there is. I argue for a caring state that puts people first. Government should use its powers to meet society's needs. Economic policy should be judged by its contribution to people's well-being and not by its financial outcomes. And success should mean better healthcare, education, housing, and employment, and not a growth in wealth without any real meaning as to what that represents. It should also mean greater security, less inequality, and a sustainable environment. Financial metrics do not matter if these things are achieved, but they are not the things that neoliberalism puts focus on.

So how could we make the economy serve everyone? We would start by asking what people need to live fulfilling lives. We would then identify the people, skills and resources available to meet those needs. And the government would then use its economic powers to put those resources to work in the interests of people and not finance.

Now, I'm not saying that markets and businesses have nothing to contribute to all of this. They would. But they should not determine society's priorities. Democratic choices should decide how the economy serves the common good.

So what should we conclude about neoliberalism? Neoliberalism is not simply an economic theory about how markets work. It is a political choice about who should exercise power in society. Its consequences include greater inequality, weaker public services, and reduced democratic control.

We can choose instead to put democracy, care and the common good first. The economy should serve people rather than requiring people to serve the economy. Money is not the purpose of life; living well is, and neoliberalism has got that wrong. It's time to change that. People must come before finance. That means we have to reject neoliberalism.

That's what I think. There is a poll down below for you to offer your opinion. Please let us have your comments.

Please also look down below because this is one of our videos in the Understanding Economics series. There are over 20 videos in this series now, I think. Have a look at the playlist we reproduce below. They show the videos in the sequence in which we made them, which is the order in which they are broadly appropriate. You could shuffle them in a few places, but that will help you understand economics, which is what this channel is seeking to achieve.

I want you to be empowered to understand the way in which the world around you works, and Understanding Economics enables you to do that.

Poll

PDF of article