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CHAPTER 3 and sustained growth. Doubts consequently developed about whether it was in the power of government at all to solve economic problems. Hayek and Friedman, for example, challenged the very idea of a ‘managed’ or ‘planned’ economy. They argued that the task of allocating resources in a complex, industrialized economy was simply too difficult for any set of state bureaucrats to achieve successfully. The virtue of the market, on the other hand, is that it acts as the central nervous system of the economy, reconciling the supply of goods and services with the demand for them. It allocates resources to their most profitable use and thereby ensures that consumer needs are satisfied. In the light of the re-emergence of unemployment and inflation in the 1970s, Hayek and Friedman argued that government was invariably the cause of economic problems, rather than the cure.
KEY FIGURE
FRIEDRICH VON HAYEK (1899–1992) An Austrian economist and political philosopher, Hayek was a firm believer in individualism and market order, and an implacable critic of socialism. His pioneering work, The Road to Serfdom (1944) developed a then deeply unfashionable defence of laissez-faire and attacked economic intervention as implicitly totalitarian. In later works, such as The Constitution of Liberty (1960) and Law, Legislation and Liberty (1979), Hayek supported a modified form of traditionalism and upheld an Anglo-American version of constitutionalism that emphasized limited government.
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The ideas of Keynesianismwere one of the chief targets of neoliberal criticism. Keynes had argued that capitalist economies were not self-regulating. He placed particular emphasis on the ‘demand side’ of the economy, believing that the levels of economic activity and employment were dictated by the level of ‘aggregate demand’ in the economy. Milton Friedman, on the other hand, argued that there is a ‘natural rate of unemployment’, which is beyond the ability of government to influence. He also argued that attempts to eradicate unemployment by applying Keynesian techniques merely cause other, more damaging, economic problems, notably inflation . Inflation, neoliberals believe, threatens the entire basis of a market economy because, in reducing faith in money, the means of exchange, it discourages people from undertaking commercial or economic activity. However, Keynesianism had, in effect, encouraged governments to ‘print money’, albeit in a well-meaning attempt to create jobs. The free-market solution to inflation is to control the supply of money by cutting public spending, a policy practised by both the Reagan and the Thatcher administrations during the 1980s. Both administrations also allowed unemployment to rise sharply, in the belief that only the market could solve the problem. Neoliberalism is also opposed to the mixed economy and public ownership, and practises so-called ‘supply-side economics’. Starting under Thatcher in the UK in the 1980s but later extending to many other Western states, and most aggressively pursued in postcommunist states in the 1990s, a policy of privatization has effectively dismantled
both mixed and collectivized economies by transferring industries from public to private ownership. Nationalized industries were criticized for being inherently inefficient, because, unlike private firms and industries, they are not disciplined by the profit motive. Neoliberalism’s emphasis
Inflation: A rise in the general price level, leading to a decline in the value of money.
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