Neoliberalism, Classical Liberalism and Neoclassical Economics

Between Classical Rhetoric and Neoclassical Theory

The terms liberalism and neoliberalism are clearly related, but the relationship between them has often obscured the more important analytical question of what kind of economics gives neoliberalism its coherence. Neoliberal authors have frequently rejected the label, preferring to present themselves as classical liberals and to claim Adam Smith as their ancestor (Mirowski, 2014). That move is politically useful, since it connects the contemporary defense of markets with Smith’s critique of mercantilist privilege. It is analytically misleading, however, because Smith’s political economy belongs to the classical surplus tradition, whereas neoliberalism depends on marginalist or neoclassical, economics.

The point can be put with a variation on Molière’s joke in Le Bourgeois Gentilhomme, where Monsieur Jourdain discovers that he had been speaking prose all his life without knowing it. Some Austrians, the school of thought more directly associated with neoliberal ideas, and many self-described classical liberals, may insist that they are not neoclassical economists. But insofar as their explanation of prices rests on subjective marginal utility, marginal productivity, and the price mechanism as the central coordinating institution, they are speaking neoclassical prose, whether they know it or not.

This does not mean that neoliberalism is identical with neoclassical economics. Mirowski is right to warn against that type of reductionism (Mirowski, 2016). Neoliberalism is a political movement and a project of social reorganization, not simply a school of economic analysis. But the reverse reductionism is also problematic. Neoclassical economics is more encompassing than neoliberalism, since neoliberalism requires some notion that markets are generally superior coordinating mechanisms and that government intervention is more likely to distort than improve market outcomes (Vernengo, 2016). All neoliberals are neoclassicals in the relevant analytical sense, even if not all neoclassicals are neoliberals.[1]

Definition and history

Neoliberalism is not merely a synonym for conservatism, libertarianism, or laissez-faire. For Mirowski (2020) neoliberalism appears as a historically identifiable movement, associated above all with the Mont Pèlerin Society after 1947, and concerned with reconstructing society around the market. This was not a doctrine of a weak state. Neoliberals often required a strong state capable of creating and protecting the institutional conditions for markets, property rights, and competition.

Quinn Slobodian’s book Globalists, provides a more detailed history of the origins of the movement pushing it back before Mont Pèlerin (Slobodian, 2018). He locates the genealogy of neoliberalism in the collapse of the Habsburg Empire, first in Vienna and later in Geneva, where a group of economists associated with Ludwig von Mises and Friedrich Hayek attempted to create an international legal and institutional order that would protect capital from democratic claims. Some of the authors of what Slobodian refers to the Geneva School, often forgotten in more popular discussions, like Wilhelm Röpke, were central for the development of the neoliberal movement.

The term neoliberalism emerged in the interwar period, most famously at the Walter Lippmann Colloquium in Paris in 1938, as a way of naming the attempt to renovate liberalism after the crisis of laissez-faire and the rise of planning, socialism, and Keynesianism. This was tied less to a simple defense of self-regulating markets than to the search for institutional and legal mechanisms capable of protecting capitalism, including at the international level.

The key notion is encasement, as opposed to embeddedness. Neoliberalism was not simply a project of liberating markets, but one of encasing them in institutions beyond the reach of popular sovereignty. In that sense, the origins of neoliberalism lie not only in the postwar Mont Pèlerin network, but also in the interwar search for a post-imperial world order favorable to the freedom of capital. This in fact, critically links the movement to the definition used by David Harvey, in his survey of neoliberalism, who suggests that the neoliberal project was to simply disembed capital from the constraints imposed during the so-called Golden Age of Capitalism (Harvey, 2005). In this view, it is not just the disembedding of capital, but the encasing of markets against workers’ rights and democratic redistribution that defines neoliberalism. In fact, the fundamental antecedence of economic over political freedom, exposed explicitly by Hayek and Friedman, attests to the centrality of the encasement of markets. The idea was that economic freedom, understood as the freedom of capital, was a necessary condition for political freedom.

The Americanization of the Austrian School was a crucial development for the future of the neoliberal movement or thought collective given the geopolitical dominance of the United States in the post-war era. Austrian ideas found a fertile soil in the American context, and with the publication of Hayek’s The Road to Serfdom became central in the rise of the Conservative movement, even if the main intellectuals of the movement, including Hayek, and later Milton Friedman, rejected the label and maintained a preference for the term liberalism (Friedman, 1962).[2]

Slobodian (2025) is persuasive in showing how Austrian ideas fed into the libertarian and radical right currents of the post-Bretton Woods world, when neoliberal currents became dominant as the Keynesian ideas retreated. The appeal of neoliberalism comes from its status as a non-formalized and accessible version of the broader marginalist claim that markets are the privileged mechanism of coordination. It provides a moral economy in which markets are self-correcting and intervention is inherently suspect.

This is particularly important in the case of Hayek. Hayek was not a marginalist in the narrow sense of the old Austrian (e.g. Böhm-Bawerk) or Walrasian formal theory of allocation after the 1930s. But that does not place him outside neoclassical economics in the broader analytical sense. His earlier work moved in the direction of intertemporal equilibrium (Milgate, 1979), and his later work on knowledge, dispersed information, and spontaneous order did not abandon the claim of market superiority. It reformulated it. The market was no longer defended primarily as the formal solution to an allocation problem, but as the only institutional process capable of coordinating dispersed plans and knowledge. In that sense, the later Hayek provides a non-formalized version of market efficiency, not a break with the neoclassical conception of the market as the privileged coordinating mechanism.

As Alessandro Roncaglia’s discussion of Hayek suggests, the emphasis on complexity, dispersed knowledge, and spontaneous order does not imply an abandonment of the claim of market efficacy (Roncaglia, 2019). Rather, Hayek shifts market efficiency from a formal demonstration to a postulate. For him, the price system is treated as an adjustment mechanism tending toward a superior market order, even if the logical necessity of that result is never demonstrated.

In sum, neoliberalism is a political movement that seeks to reorganize state power, and social institutions, including the laws that regulate and encase the functioning of the economic system, so as to expand the domain of markets and protect capital from democratic, redistributive, and labor-based constraints. Its economics is marginalist, analytically founded on some notion of market efficiency. Its political rhetoric may invoke Adam Smith and classical liberalism, but its analytical apparatus belongs to the neoclassical or marginalist traditions.

Classical liberalism and neoclassical economics

The difference between classical liberalism and neoliberalism must begin with the difference between classical political economy and marginalist economics. Smith was a liberal in the eighteenth-century sense, meaning that he opposed feudal privileges, mercantile monopolies, and restrictions that limited the expansion of the market and the division of labor. But Smith’s theory of value and distribution was not marginalist. Classical political economy analyzed production, accumulation, and distribution among social classes. Competition meant free entry and the tendency toward normal profits, not a world of powerless price-taking agents whose incomes reflect marginal productivity. More importantly, there was no mechanism that guaranteed the optimal allocation of resources, as in neoclassical economics.

Smith’s defense of commercial society, as he referred to capitalism, was not grounded in allocative efficiency. It was a historically specific argument against mercantilism and feudal constraints, aimed at promoting accumulation and development. By contrast, the neoliberal defense of markets is rooted in the marginalist framework, where prices reflect preferences and scarcity, and equilibrium allocations are optimal. The former was an attack on the status quo, the latter a conservative defense of the establishment. These are not two versions of the same theory. They are incompatible systems.

Marginalism did not simply reproduce the old classical liberal case for laissez-faire. Alfred Marshall, Arthur Cecil Pigou, and the Cambridge welfare tradition developed a neoclassical basis for intervention (Medema, 2009). The reason was the recognition of what would later be called market failures. A myriad of failures, externalities, increasing returns, monopoly, public goods, and other divergences between private and social costs or benefits provided the basis for minor interventions. In other words, marginalism was theoretically different from classical political economics, and it also generated a different basis for policy activism or its absence. Intervention was justified not because the state stood above classes in a classical political economy framework, but because competitive markets could fail to produce optimal results.

This is where Mirowski’s view must be qualified, not by denying the heterogeneity of neoliberalism, but by distinguishing its policy rhetoric from its theory of value and distribution.[3] He is right that neoliberalism exceeds economics. It has a theory of law, politics, education, and science. It cannot be reduced to the Arrow-Debreu model or to textbook microeconomics. But neoliberalism still requires the neoclassical claim that the price mechanism is the central form of social coordination. Hayek’s market as an information processor, Chicago price theory, law and economics, and general equilibrium are different idioms, but they share the same underlying marginalist view that relative prices are determined by supply and demand and that markets tend, unless obstructed, to allocate resources efficiently. Neoliberalism is essentially marginalist economics with a laissez-faire policy bias.

Laissez-faire policies, associated here with Smith, and neoclassical economics, associated here with Kenneth Arrow, are not the same thing (figure 1). The figure is meant to distinguish the two dimensions of neoliberalism. On policy and rhetoric, neoliberalism invokes the older liberal language of free markets, free trade, and opposition to state interference, and in that limited sense it claims Smith as an ancestor. On theory, however, neoliberalism does not derive from Smith’s classical political economy. It draws on the post-classical, marginalist tradition in which prices coordinate decentralized decisions and markets are treated as the privileged mechanism of economic order. Hayek and Friedman, placed at the bottom, represent two influential channels through which this policy rhetoric and theoretical apparatus were joined in a public and political language.

The figure does not imply that Hayek and Friedman invented neoliberalism, or that neoliberalism can be reduced to Chicago or Austrian economics. It suggests instead that neoliberalism borrows its public policy legitimacy from classical liberalism, while its analytical legitimacy comes from neoclassical economics. The relation to classical liberalism is therefore largely rhetorical and political, while the relation to neoclassical economics is theoretical.

A key shift from non-neoliberal neoclassical economics to neoliberal economics was the move from market failure to government failure. The Pigouvian and later welfare-economics tradition accepted the marginalist framework but argued that markets often fail. The state might therefore tax, subsidize, regulate, stabilize, or provide public goods. The Chicago School did not need to reject neoclassical economics to reverse this conclusion. It only had to insist that government failure was more pervasive, more dangerous, and more costly than market failure. In many ways, it was the work of Ronald Coase, and his so-called theorem that changed everything (Coase, 1960).

George Stigler, who named the theorem, was equally important for the rise of neoliberal ideas. Stigler’s theory of regulation shifted attention from monopoly and market power to regulatory capture (Stigler, 1971). Coase’s challenge to Pigouvian welfare economics suggested that, under certain institutional arrangements, bargaining and property rights could solve externality problems without direct state correction. The policy lesson drawn by Chicago was not simply that markets were perfect, but that government attempts to correct markets would typically be captured, inefficient, or distortionary. The neoliberal case for non-intervention was therefore not the old Smithian case against mercantilist privilege. It was a neoclassical case built around the priority of government failure.

In policy terms, this Chicago-inflected neoliberalism first acquired its most consequential form not in Britain or the United States, but in Latin America. After the collapse of Bretton Woods, the end of the Golden Age, and the crisis of the Keynesian consensus, Chile after the 1973 coup and Argentina after the 1976 coup became early laboratories for trade liberalization, financial deregulation, privatization, anti-labor policies, and monetary stabilization. The debt crisis of the early 1980s generalized this shift, and the Washington Consensus later codified it for the region and beyond.

Conclusion

Neoliberalism is a broad political movement. However, it is also directly associated with certain economic ideas. Neoliberalism cannot be understood apart from neoclassical economics, and should be distinguished from the old liberalism of classical political economy authors. While it borrows from classical liberalism a rhetoric of liberty, free trade, and opposition to privilege, it dismisses its analytical structure based on distributive conflict. From neoclassical economics it borrows the analytical claim that markets, through prices, coordinate decentralized decisions and allocate resources efficiently. The first connection is largely rhetorical, while the second is theoretical.

The central point is therefore that neoclassical economics is more encompassing than neoliberalism. Many neoclassical economists are not neoliberals, because they emphasize market failures and accept wide domains for public policy. But neoliberals must be neoclassicals in the relevant sense, because their argument depends on the market as the privileged mechanism of order. The Chicago School’s decisive role was to translate that belief into a practical policy program by shifting the focus from market failure to government failure.

Notes

[1] This claim requires a clarification. It build on an old debate on neoliberalism on INET. Neoliberalism is not identical with any single school of neoclassical economics, and it cannot be reduced to Chicago price theory, Walrasian general equilibrium, or Austrian economics. The neoliberal movement brought together heterogeneous currents — Chicago, Austrian, Ordoliberal, Geneva, and libertarian, among others — that often disagreed over method, equilibrium, formalization, and the precise function of markets. Yet these differences should not obscure their common break with classical political economy. What unifies them is not one model, but a shared post-classical conception of value and distribution. Prices are understood as coordinating signals arising from scarcity, subjective valuation, property rights, in the exchange process, rather than as expressions of the technical and social conditions of production and of conflict over the surplus.

[2] Joseph Schumpeter's Capitalism, Socialism and Democracy (CSD) is a precursor to Hayek's book, less as a doctrinaire neoliberal than as a conservative theorist of the incompatibility between democratic-social reform and the survival of capitalism. He does not make Hayek’s calculation argument, and he is not simply a Misesian anti-planner. But CSD does anticipate the Hayekian insight that democratic politics, welfare-state expansion, intellectuals, bureaucracy, and mass claims on the state undermine the institutional and cultural foundations of capitalism.

Schumpeter is not a neoliberal in the later Chicago sense, and he is less radically laissez-faire than Mises or Hayek. But he does anticipate one central neoliberal anxiety. For him, capitalism must be protected from the consequences of mass democracy, especially when democratic politics becomes tied to labor rights, welfare expansion, Keynesian stabilization, and social-democratic reform.

[3] Mirowski’s history is attentive to institutional and epistemic differences inside neoliberalism, but less attentive to the marginalist/post-classical common ground that unifies the several strands of marginalist/neoclassical economics.

References

Coase, R. H. (1960) ‘The Problem of Social Cost,’ Journal of Law and Economics, 3: 1-44.

Friedman, M. (1962) Capitalism and Freedom. Chicago: University of Chicago Press.

Harvey, D. (2005) A Brief History of Neoliberalism. Oxford: Oxford University Press.

Hayek, F. A. (1944) The Road to Serfdom. Chicago: University of Chicago Press.

Medema, S. G. (2009) The Hesitant Hand: Taming Self-Interest in the History of Economic Ideas. Princeton: Princeton University Press.

Milgate, M. (1979), ‘On the Origin of the Notion of “Intertemporal Equilibrium”.’ Economica, 46: 1-10.

Mirowski, P. (2014) ‘The Political Movement that Dared not Speak its Own Name: The Neoliberal Thought Collective Under Erasure.’ INET Working Paper.

Mirowski, P. (2016) ‘This is Water (or is it Neoliberalism?): A meditation on Vercelli, Vernengo and Levitt & Seccareccia.’ Institute for New Economic Thinking, May.

Mirowski, P. (2020) ‘Neoliberalism,’ in The New Palgrave Dictionary of Economics. London: Palgrave Macmillan.

Roncaglia, A. (2019) The Age of Fragmentation: A History of Contemporary Economic Thought. Cambridge: Cambridge University Press.

Slobodian, Q. (2018) Globalists: The End of Empire and the Birth of Neoliberalism. Cambridge, MA: Harvard University Press.

Slobodian, Q. (2025) Hayek’s Bastards: Race, Gold, IQ, and the Capitalism of the Far Right. New York: Zone Books.

Stigler, G. J. (1971) ‘The Theory of Economic Regulation,’ Bell Journal of Economics and Management Science, 2(1): 3-21.

Vernengo, M. (2016), ‘Who is afraid of Neoliberalism? A comment on Mirowski,’ Institute for New Economic Thinking, May.