How the Right Won a Postwar Counterrevolution in Economics

Marshall Steinbaum

The Great Depression thoroughly discredited laissez-faire economics. But over the postwar decades, with the help of generous business funding and political connections, figures like Milton Friedman led a remarkable revival of nineteenth-century economic ideas. They did it by adopting a pseudo-populist rhetoric that celebrated individual choice and autonomy.

Milton Friedman speaks on May 9, 2002 during a White House event in Washington, DC. Alex Wong / Getty

Interview by
Luke Savage

As New Deal–era Keynesianism reigned supreme during the 1930s and ’40s, traditional neoclassical thinking was largely a minoritarian tendency languishing on the intellectual fringes. Within a few decades, however, it had not only become dominant at many universities, but successfully inserted many of its core assumptions and values into the political mainstream as well.

Marshall Steinbaum is an assistant professor of economics at the University of Utah, and his writing has appeared in Current Affairs, the American Prospect, Jacobin, and the Boston Review. We spoke to Steinbaum about how the neoclassical right’s astonishingly successful intellectual revolution came about, its core beliefs, and the profoundly antidemocratic animus it owes to the liberalism of the nineteenth century. This interview has been edited for clarity.


In recent decades economics has been closely associated with neoliberal thought, but this wasn’t always the case. So let’s begin with your own alma mater, the University of Chicago economics department. During the New Deal era, it’s fair to say UChicago became a gathering place for thinking that went strongly against the grain of the emerging Keynesian policy consensus — and key figures in what would become the postwar Chicago School studied there.

What did the intellectual terrain look like in the early 1930s at the University of Chicago Economics Department? Why specifically did it become the locus of (what was then fairly heterodox) conservative economic thinking at that moment?


The University of Chicago economics department had basically been a right-wing department within American economics departments for decades before that, having been founded in the 1890s with an endowment from John D. Rockefeller. In the schema of American higher education when it came to economics departments, Harvard and Yale were conservative while places like Johns Hopkins, Cornell, Columbia, and Wisconsin were progressive.

Chicago was this new university that overall resembled progressive and newer places, but chose to ideologically align its economics department with Harvard and Yale in being more classically oriented. The leading figures of the Chicago department between the 1890s and the early 1930s were, for the most part, people known as being conservatives — the two that I’d mention are Frank Knight and Jacob Viner.

Knight is well-known among economists now because he articulated the view that economists should have nothing to do with public policy — which was then thought to sully the scholarly purity of the research endeavor. At the time, the economics profession was basically divided into a classical or neoclassical school on the one hand and an institutionalist one on the other, with the latter group being more connected to the policymaking world.

In the progressive era, when all of this was getting started, you had economists of all ideological stripes involved in policy to one degree or another. But by the 1930s, the idea that economics should be first and foremost directed toward understanding the economy for the purpose of improving it by changing policies — that had kind of become a progressive credo as the institutionalists gained more control over the discipline. They never had total control.

As I said, Chicago existed throughout and had these neoclassical figures. So, in the context of the 1930s, Knight saying that economists should have no influence over policy was really a barb at the people who were at that time dominant in the discipline (whereas he and his coterie would have felt in the minority). They were basically saying “Well, yes, we’re in the minority, but we are the more scholarly because we don’t have our ideas predicated on an attempt to influence power.”


The New Deal, in the thinking of many conservative economists at the time, was considered an existential threat to free-market capitalism. What exactly was the analysis these figures offered of the New Deal? And what was the substance of the economic alternative they championed?


I think it’s important to understand that dichotomy as not being entirely static because they changed their views as the New Deal changed in very important respects. But basically they viewed themselves as the inheritors of the consensus in nineteenth-century liberalism, which was that the free market operates best when left to itself and therefore the state should have no impact on affecting the distribution of wealth and power — what was called, at least in the nineteenth-century “class legislation” — they viewed themselves as opposed to that, whatever it happened to be. And because what goes under the category of class legislation changed over time between the 1870s and mid-1930s, their stance about it and interpretations of it changed.

But it’s more or less what we understand as Adam Smith’s invisible hand which they were trying to uphold and which they believed the New Deal was threatening. They thought that an economy that had independent entrepreneurs competing with each other was a more efficient economy than one that had the state directing the allocation of resources and the factors of production. They certainly saw the latter in the Soviet Union, especially after the 1920s, and perceived it as a growing threat. You referred to something that I associate with [Friedrich] Hayek that only appeared in the forties, which is that the welfare state leads inexorably to totalitarian communism. You definitely get that in the thirties though, not expressed quite as starkly.

There was important variation in their stance even within the early period we’re describing. As a result of the Depression, there was kind of this shift and acknowledgement that something had failed about free-market capitalism, and they couldn’t just say the same things they’d been saying since the 1870s in the 1930s. But they nevertheless tried to cling to this idea that there’s a role for the free market and to individual entrepreneurship being the locus of decision-making for the allocation of resources rather than the state. From that perspective they endorsed certain aspects of the New Deal that they viewed as in service to that, and opposed aspects that they viewed as going against it. This, for example, led them to be in favor of antitrust enforcement in the 1930s, because they viewed that as preserving the free market.

Those very same people had opposed antitrust policy when it was at the center of the progressive agenda setting in the 1900s and 1910s. They then viewed it as interference with big business, which is basically how their intellectual descendants view antitrust policy now, but in the thirties, they argued “Oh, this is actually the free market. We want to split up these monopolies. The problem with the New Deal is actually that it’s empowering powerful corporations to act as governments and command and control and not leave a place for competition.” They then abandoned that view when the New Deal switched its view on antitrust, so in the late thirties the Roosevelt administration — having been relatively laissez-faire on the subject of enforcing the antitrust laws — took them up and used them much more aggressively than had ever been done before. And that’s basically what gave rise to the Chicago School view on antitrust in the postwar period.


In the decades immediately following the Second World War, even as right-wing economics gradually gained steam, it continued to remain fairly marginal. Its breakthrough would come later. What was happening during this period?


There’s a sort of fairytale they like to tell about themselves about this period, and then there’s what I would consider to be a more accurate history of it told by actual intellectual historians and historians of postwar conservatism. Both of these are fundamentally constructive in that they tell how a political movement came into being and gained influence, and between the two, they disagree about why that movement achieved success.

What they both overlook, however, but should not be ignored, is the extent to which destruction of their intellectual opponents was crucial to these ideas gaining steam. In particular, the Red Scare was a body blow to the school of economics I previously referred to as institutionalism that had been associated with the New Deal. The institutionalist economists and associated intellectual types were to the left of the elites who had implemented the New Deal and who staffed agencies in Washington. And they are the ones who were targeted by the Truman administration’s loyalty boards — even before McCarthy actually got going in Congress — to be rooted out of the federal bureaucracy and, in the case of universities, to lose places there.

Some prominent figures basically changed ideologically to protect themselves from those attacks. So we should understand the Red Scare not as an unfortunate episode of popular paranoia that “we” thankfully overcame, as it’s frequently but wrongly portrayed in today’s culture, but rather as a highly successful elite-driven enterprise to root left-wing intellectuals out of government and academia in retaliation for the New Deal, using the Cold War as an excuse.

So people who had basically been socialists in the late thirties became kind of Keynesian defense people in the late forties and early fifties. Because then you could kind of make common cause with the growing military industrial complex by saying, “Well, actually we should build lots of weapons to confront the Soviets because that’s good for the macroeconomy.” That was basically a sort of armor of protection against the ravages of the Red Scare. And it wasn’t just the right-wing economists who perpetrated that within the profession. Other factions of the economics profession collaborated with one another in rooting out the institutionalists and excluding them from the postwar economics profession.

Various factions kind of mutually decided that institutionalism didn’t have a scientific basis and wanted to claim the mantle of economics as a science: As the queen of the social sciences and the most rigorous, which is to say the least left-wing, of all the social sciences. So that meant cutting off any relationship with the New Deal and the people who had put it in place, even though they were in many cases academic economists in good standing. It was kind of a total break, such that the received wisdom that the field tells about itself in the postwar era is basically that — aside from Adam Smith and David Ricardo and Alfred Marshall and a few individual luminaries dotting the eighteenth and nineteenth centuries — economics basically started in 1946. Because they want to hive off institutionalism and say it’s not part of the intellectual history of the discipline.


We’ve been talking about all of this in relation to economic ideas, but over time the ideas associated with the Chicago School accrued a very real political dimension. I suppose one could argue that the whole thing had a political impulse from its outset. As early as the 1960s with figures on the right like Barry Goldwater, you start to see a kind of populist political rhetoric become more visibly associated with these ideas. How did this cross-pollination happen? How was this esoteric economic thinking synthesized into popular and mainstream language?


I think the short answer is that it was useful. That’s always what determines which ideas gain adherence in politics — whether they can be put to a certain purpose. Neoclassical economics was useful in aggregating a conservative coalition against the New Deal. It turned out they were able to reconstitute their rhetoric and their political actions in such a way that it became a core kind of part of the anti–New Deal conservative coalition that gradually grew in strength after the late forties.

I mentioned earlier that Knight expressed disdain toward the idea of economists having any influence over policy. He was using that as a rhetorical weapon to discredit his ideological opponents within the discipline, by saying “You’re involved in politics, therefore that tarnishes your scholarship, I’m separate from politics, therefore that gives mine credibility.” Obviously Milton Friedman and everyone who advised the Goldwater campaign didn’t share that same view, or at least if they did, they overcame whatever reluctance it gave them — because they totally inverted it to serve their own intellectual purposes.

So, in the hands of a Milton Friedman or a George Stigler, this idea that neoclassical economists have influence over policy became a way of crediting their scholarship rather than discrediting it. I think there’s an obvious reason for why right-wing economic scholarship became useful to political actors, because it’s essentially a validation of the idea that the existing distribution of wealth and power is just and efficient and that’s something politicians who serve capitalist interests obviously want to hear. In his presidential address to the American Economic Association in 1964, Stigler welcomed the growing acceptance of neoclassical economics thinking into policy spaces and pointed to it as validating the superior quality of their scholarship — exactly the opposite of the view expressed by Knight in the thirties.

I think another way of understanding this, understanding this on a sociological or political sociological level is that you characterized Friedman’s use of neoclassical economics in the Goldwater campaign as “populist,” and I think that’s absolutely right but still bears some examination. Friedman would phrase his, say, opposition to the minimum wage, as being in itself egalitarian. He would say, “The minimum wage kills jobs, so it’s actually bad for the people that it’s trying to help. While I agree with your goal of making the economy more egalitarian, the method that you’re advocating will have the opposite effect and people will go from earning a wage that’s less than the minimum wage to a wage of zero.” He was very good at inverting the criteria of policy evaluation.

And when posed as the inconvenient truth espoused by some anti-establishment upstart against the stultifying hegemonic monolith of New Deal liberalism that prevailed in the fifties and sixties (and which the Goldwater campaign rejected), you can see how it would have a populistic aesthetic about it. Whereas now, conservative economists sound a lot like conservative economists sounded in the 1890s: that the rich deserve what they have, and everyone else should do as they’re told. They’ve totally shed the rhetoric of populism that was once so useful to them.


Something the populist right has done very effectively has been to capture the broad idea of “individual freedom” — when the market rules, people are free and relations are voluntary; when the welfarist functions of the state get bigger, when more regulatory structures are put in place, etc., that’s “collectivism” and individuals become less free. But the garnish of small “d” democracy that this kind of rhetoric implies really obscures the antidemocratic and elitist conception of society the Right’s most influential economic intellectuals had. Can you talk a bit more specifically about this animus toward democracy?


In order to motivate the idea that a free-market economy is “free” in the sense that individuals are at their most autonomous while inside of it (and that welfarism reduces freedom because it makes people less autonomous in their economic activities) — that requires, in my view, eschewing any notion of power in studying the economy. Which in practice means your investigations into how the economy works can’t possibly be successful because you’re ignoring the force that’s most relevant to determining how the economy works! But that’s the move they make. So you get lots of scholarship on their part which implies that the whole notion of power is “uneconomic,” whatever that means. As a result, economics as a discipline comes to consist of studying the economy without attention to the concept of unequal power relations between the various actors. And I think that’s gotten them into a lot of empirical trouble and it’s something they’re having trouble covering up for these days.

Notwithstanding Friedmanite-type populistic rhetoric about individual autonomy stemming from unconstrained relations in the economic sphere, they are very deeply antidemocratic — and that is a direct legacy of the nineteenth century. There is a direct through-line from the orthodox economics of the 1870s right to the present day, including in the thirties and forties, where people on the right of the economics profession openly disdain democracy and view the exercise of democratic rights as subverting the natural economic order.

This is salient right now because these same people are trying to say that the progressive economists that were the predecessors of institutionalism espoused eugenicism and the reduction of individual freedom is service to the state — whereas classical economics of the nineteenth century, they were the true egalitarians who were actually antiracist, because they didn’t think that people should be consigned to certain roles in the economy based on their backgrounds.

That’s an elaborate way of saying that allowing child labor rather than prohibiting it is egalitarian! Disdain for democracy, as I said, is the through-line. They just don’t view the political sphere and the democratic sphere as a place where autonomy or rights are exercised or should be exercised. So, these same people who say, “Oh, yes, children should be free to supply their labor. We can’t have a free market without child labor!” — their notion of freedom definitely does not include everyone voting in an election and they were in favor of restricting the franchise, in favor of executing trade unionists. All manner of things that a normal person would think of as falling under the category of freedom and the exercise of individual rights they viewed as threats to the social order.


The journey of right-wing economic ideas was from intellectual and political marginality in the 1930s and ’40s to astonishing hegemony in the present. Is there anything the socialist left might learn from their experience?


I used to feel that we had a lot to learn from them and I’ve come to not believe that anymore. It’s not to say we can’t learn anything, but I think there are aspects of the way that they operated and organize themselves that are inherently elitist and that require a prior ideology that the wealthy and powerful should have total control over society and that the economy should be organized to their benefit. Given that the way that it’s organized is so top-down, and so authoritarian, you have to have a consonance between the ideology that they’re looking to put in place and the way that the forces that put in place that ideology are themselves organized in order to make it work.

One lesson one could take is the role of intellectuals in a political movement, and disputes between those intellectuals, actually matter. Keynes was right about that and, in his lifetime, he experienced essentially the opposite of what we’ve been talking about, which is that he came up in a Cambridge where classical economics was totally hegemonic and successfully shifted the ideology of the economics profession decisively away from that, even though he himself was not a leftist by any stretch of the imagination. He was a brilliant man who was on the outside for decades and suddenly events came to validate his point of view and he subsequently had a great deal of influence — which is basically also the template that Friedman followed.