What Francis Fukuyama Gets Wrong about Neoliberalism

The first chapter of Francis Fukuyama’s new book, Liberalism and its Discontents, is titled, “What is Classical Liberalism?” While he never explicitly answers the question, he does list some liberal principles: respect for the individual and individual autonomy, protection of property rights and of the right to transact with others, and inclusion of individuals in the political process via the right to vote.

Fukuyama, the director of the Ford Dorsey Master’s in International Policy at Stanford University, also lists and expands on classical liberalism’s “three essential justifications”:

1. “Liberalism is a way of regulating violence and allowing diverse populations to live peacefully with one another.”
2. “Liberalism protects basic human dignity, and in particular human autonomy – the ability of each individual to make choices.”
3. “Liberalism promotes economic growth and all the good things that come from growth by protecting property rights and freedom to transact.”

Fukuyama observes, however, that liberal values, when taken to extremes, become problematic. Personal autonomy taken as license to disregard and even to eliminate social norms can destroy a culture or a nation. Likewise, the thirst for equality taken beyond equal treatment under the law is virtue become vice.

In his second chapter, Fukuyama identifies “neoliberalism” as the book’s boogeyman, and, in so doing, fills the chapter’s eleven pages with a wealth of misinformation. According to the author, “neoliberalism was allied to what Americans label libertarianism, whose single underlying theme is hostility to an overreaching state and belief in the sanctity of individual freedom.” He then charges neoliberalism, thus defined, with offenses that were committed largely by the very regulatory welfare state he favors, beginning with his claim that:

The nineteenth century was the heyday of unregulated market capitalism, with state intervention playing little role in protecting individuals from a cutthroat form of capitalism, or dampening the impact of the recessions, depressions, and banking crises that occurred with great regularity.

Here, Fukuyama ignores, for example, state laws that, from the nation’s founding until the 1990s, prohibited branch banking. The result was thousands of small banks with undiversified loan portfolios at the mercy of local economies. Banks routinely collapsed when crops failed, produce prices fell, or large companies went bankrupt. During the first few years of the Great Depression, over 9,100 U.S. banks suspended operations. Canada, which by contrast did not restrict branch banking, had no such failures during the Depression. All of this is well documented in the book, Fragile by Design: The Political Origins of Banking Crises and Scarce Credit, by Calomiris and Haber.

The author also informs us that “the severe banking crisis of 1908 led to the creation of the U.S. Federal Reserve System.” One assumes that he was referring to the Panic of 1907, which ended before 1908.

Next, Fukuyama chalks up the 1970’s inflation to OPEC’s “quadrupling” of oil prices (average oil prices actually increased eightfold between 1973 and 1980). But currency expansion, not the increase of specific prices or wages, causes inflation. Without a rise in the amount of currency in circulation, price hikes in some sectors of the economy drive prices down in other sectors as consumers and businesses reallocate their spending, thus there is no general, economy-wide price rise. The Seventies’ “stagflation” was caused, not by “cutthroat capitalism” or even “neoliberalism,” but by the government’s deficit financing of the Vietnam War and the wage and price controls Nixon imposed to deal with that inflation.

Fukuyama rightly criticizes free market economists who were too optimistic about privatization in the former Eastern Bloc countries after the fall of the Soviet Union. Without basic institutions such as an uncorrupt judicial system, established contract law, a tradition of entrepreneurship, and respect for property rights, simply doling out state property to political cronies and former KGB officials did not foster either a healthy free market or a liberal democracy.

On the other hand, there is the author’s woefully inadequate explanation for the 2007-2008 financial crisis: “a poorly regulated American mortgage market” and excessive risks taken by the Lehman Brothers investment bank. This “explanation” ignores a cast of thousands, including:

• The Federal Deposit Insurance Corporation, which bailed out Continental Illinois in 1984 and other companies subsequently, creating “moral hazard,” convincing financial firms that they could make risky investments knowing that they would be bailed out if the investments failed;
• The Federal Reserve, which pumped money into the economy, inflating the currency;
• Congress, which lowered borrowing standards and which pushed Freddie Mac and Fannie Mae to purchase hundreds of billions of dollars in sub-prime mortgages;
• Jimmy Carter who signed the Community Reinvestment Act (CRA);
• Bill Clinton who put teeth into the CRA, which fueled the housing bubble;
• George W. Bush who signed the American Dream Downpayment Assistance Act, which further fueled the housing bubble;
• The SEC, which required companies to follow mark-to-market accounting, amplifying the effects of both boom and bust. Mortgage-based securities, overvalued when housing prices soared, became undervalued as the panic grew and financial institutions saw their assets become virtually worthless almost overnight.
• The Basel Accords—an international banking agreement that encouraged banks to use bundled sub-prime mortgages as “reserves”;
• States whose laws allowed people to walk away from their mortgages with no penalty.

Fukuyama also stumbles when he accuses “neoliberal free trade advocates” for American unemployment. While studies have linked trade with China to the loss of nearly four million jobs between 2001 and 2018, over a million and a half jobs are typically destroyed (and more are created) each month in America’s dynamic economy. Far more jobs have fallen victim to automation and to changing consumer tastes than to global trade.

On page 40, Fukuyama invokes the authority of behavioral economics to question whether people act rationally, apparently unaware of the field’s scandalous replication crisis that has all but killed it as a respectable school of thought.

The author decries economists whose “private interests” and “intellectual capture” lead them to support neoliberal notions such as “deregulation, strict defense of property rights, and privatization.” He seems unaware that far more money and prestige are available to those who support regulation, wealth transfer, and nationalization. Media, universities, and the government can far outbid the “wealthy corporations and think tanks” that so horrify Fukuyama.

Fukuyama is on more solid ground in chapters 4-6, in which he traces the devolution of liberal thought into neoliberalism and then into woke progressivism, which is diametrically opposed to liberalism—that is, to belief in individual freedom and responsibility; free markets; private property; equality under the law; the existence of objective truth; the possibility of rational discourse; and the freedoms of speech, religion, and thought. The author also does an excellent job of defending classical liberalism against the woke left’s various charges.

Fukuyama’s solutions include rebuilding our national identity and renewing our commitments to federalism, individualism, voluntary associations, mutual respect, tolerance, and moderation. The question of how to achieve all this is largely left unanswered.

Francis Fukuyama is a respected political scientist and is widely considered one of America’s foremost thinkers. His writing has made valuable contributions to the national conversation and are deservedly influential.

However, his grasp of economics and of economic history leaves room for discontent.