From Neoclassicism to Neoliberalism

From Neoclassicism to Neoliberalism In the second half of the 19th century, economic theory underwent a radical transformation—the “marginalist revolution.” The new, neoclassical economics abandoned the class perspective of the classical economists and Marxism, shifting the focus to individual choice and market equilibrium. In the 20th century, these ideas formed the foundation of neoliberalism—an influential doctrine that shaped the economic policy of many countries.

The Marginalist Revolution

In the 1870s, three economists independently of each other—William Jevons (England), Carl Menger (Austria), and Léon Walras (Switzerland)—proposed a new approach to economic theory:

• Subjective Theory of Value. Value is determined not by labor costs (as with the classical economists), but by subjective utility for the consumer. The value of a diamond is determined by people’s desire to possess it, not by the labor expended in mining it.
• Marginal Analysis. The key concept is marginal utility: the additional utility from an additional unit of a good. The law of diminishing marginal utility explains why we value the first glass of water more than the tenth.
• Methodological Individualism. Economic phenomena are explained through the decisions of individuals, maximizing utility (consumers) or profit (firms). Classes disappear from the analysis.
• Equilibrium. The economy is modeled as a system tending toward equilibrium. Prices coordinate supply and demand, ensuring efficient allocation of resources.

Development of Neoclassical Theory

The 20th century brought further development of neoclassicism:

• General Equilibrium Theory (Walras, Arrow, Debreu) models the entire economy as a system of interconnected markets in equilibrium. The existence of equilibrium and its efficiency has been proven (the first welfare theorem).
• Welfare Economics analyzes the conditions for efficiency and “market failures”—situations where the market outcome is inefficient (external effects, public goods, monopolies).
• Monetarism (Milton Friedman) emphasized the role of the money supply in the economy. Inflation is “always and everywhere a monetary phenomenon.” The central bank should follow simple rules, not discretionary policy.
• Rational Expectations Theory (Robert Lucas) assumes agents use all available information and do not make systematic errors. This undercuts Keynesian arguments about the possibility of stimulating the economy through monetary policy.

Neoliberalism as a Political-Economic Doctrine

Neoliberalism is not just an economic theory, but a politico-economic project combining theoretical ideas with a political program:

• Intellectual Origins. Neoliberalism was formed in the 1930s–1940s as a reaction to Keynesianism and socialism. Key figures: Friedrich Hayek, Ludwig von Mises, Milton Friedman. The center of crystallization was the Mont Pelerin Society (1947).
• Key Principles:
  • The market is the most efficient mechanism for resource allocation
  • State intervention distorts price signals and generates inefficiency
  • Private property is the basis of freedom and efficiency
  • Competition is the driving force of progress
  • Individual freedom supersedes collective goals
• Washington Consensus. By the 1980s, neoliberal ideas had taken shape as a concrete political program—the “Washington Consensus” (term coined by John Williamson, 1989). The recipe for developing countries included: fiscal discipline, reduction of subsidies, tax reform, liberalization of interest rates, competitive exchange rate, trade liberalization, attraction of foreign investment, privatization, deregulation, protection of property rights.

Neoliberal Reforms

Neoliberalism was manifested in radical reforms in different parts of the world:

• Thatcherism and Reaganomics. Margaret Thatcher in Great Britain and Ronald Reagan in the USA carried out large-scale privatization, deregulation, tax reductions, weakening of labor unions.
• Reforms in Latin America. Chile under Pinochet became a “laboratory” for neoliberalism. Mexico, Argentina, Brazil carried out structural reforms under IMF pressure.
• Transition Economies. After the collapse of socialism, Eastern European countries and the former USSR carried out “shock therapy”—rapid liberalization, privatization, opening up the economy.

Criticism of Neoliberalism

Neoliberalism is criticized from various positions:

• Rising Inequality. Neoliberal reforms were accompanied by rising income and wealth inequality. The benefits of growth were concentrated at the top, while the middle class and the poor lost out.
• Financial Crises. Financial deregulation contributed to a series of crises—from Mexico (1994) and Asia (1997–1998) to the global crisis of 2008.
• Undermining Democracy. Critics argue that neoliberalism limits democratic choice, placing “market requirements” above democratic decisions.
• Social Costs. Cuts in social spending, precarity of labor, weakening of worker protections—all these are social costs of neoliberal reforms.

Crisis and Transformation

The financial crisis of 2008 called neoliberal orthodoxy into question. State intervention to bail out banks, quantitative easing, fiscal stimulus—all this contradicted neoliberal principles.

The current situation is characterized by uncertainty. Neoliberalism has been weakened, but an alternative paradigm has not emerged. Some speak of a “return of the state,” others—of new forms of neoliberalism.

Understanding this evolution is key to making sense of contemporary economic policy.