From its origins in interwar Germany to its contemporary usage by social scientists, the term neoliberalism has undergone a remarkable transformation. While today’s scholars frequently use neoliberalism to refer to negative, radical phenomena, the economic philosophers of the German Freiberg School used the term in a positive and self-identifying sense and considered neoliberalism to be a moderate alternative to classical liberalism. In contrast to the current tendency to use neoliberalism in many ways without defining it, the original German neoliberals devoted extensive attention to the term’s meaning and applied it specifically to their economic philosophy. When neoliberalism made its academic debut, the term truly denoted a new form of liberalism, and even those who were critical of the philosophy it represented used it descriptively rather than pejoratively. In other words, neoliberalism was originally used nearly the opposite of how it is today.

What accounts for this historical shift in the usage of neoliberalism? In this section, we trace the evolution of the term from its European roots to its adoption and then modification in Latin America between the 1960s and 1980s. We then analyze the role of the Chilean economic reforms of the 1970s in shaping contemporary scholars’ perceptions of neoliberalism.

Neoliberalism of the German Freiberg School: A Moderate Alternative to Classical Liberalism

The term neoliberalism first appeared in scholarly writings on political economy in the period between the two world wars. The instability of the interwar years, plagued by inflation and depression that bred radical ideologies and unleashed devastation on Europe, convinced many intellectuals and politicians that capitalism was untenable. Yet pockets of liberals remained, including a small circle of economists and legal scholars associated with the German Freiburg School. These “new” liberals sought to resuscitate the liberal creed by offering a fundamental overhaul of classical liberalism. As such, they propounded a notion of neoliberalism (also referred to as ordoliberalism) quite different from the connotations the term carries in present-day scholarly discourse.Footnote 8

Whereas contemporary scholars often equate neoliberalism with market fundamentalism, the Freiburg School’s faith in the free market was moderate and pragmatic when compared to that of nineteenth-century liberals. First, Freiberg School economists argued that for the free market to function, the state must play an active role. The German neoliberals accepted the classical liberal notion that competition among free individuals drives economic prosperity, but they argued that powerful private actors—the monopolies and cartels that decimated Germany’s small businesses in the interwar years—could pose a threat to freedom of competition. To keep private interests in check, the neoliberals supported the creation of a well-developed legal system and capable regulatory apparatus that went well beyond the minimalist, night-watchman state promoted by followers of Adam Smith (Megay 1970: 424–425; Gerber 1994: 36–37). Alexander Rüstow, a prominent German neoliberal, summarized this position in a 1932 essay entitled “Free Economy—Strong State” (Friedrich 1955: 512). In other words, the neoliberals sought to divorce liberalism—the freedom of individuals to compete in the marketplace—from laissez-faire—freedom from state intervention. They argued that a laissez-faire state policy stifles competition as the strong devour the weak (Oliver 1960: 118; Boarman 1964: 25; Gerber 1994: 33).

A second element of German neoliberals’ moderate stance was their willingness to place humanistic and social values on par with economic efficiency. Alfred Müller-Armack coined the phrase “social market economy” in the 1940s to emphasize the egalitarian and humanistic bent of this new form of liberalism (Boarman 1964: 21; Gerber 1994: 60). Walter Eucken, one of the founders of the Freiburg School, claimed in 1952 that “social security and social justice are the greatest concerns of our time” (Gerber 1994: 37). Another prominent neoliberal during this period, Wilhelm Röpke, criticized classical liberalism as “blind to the deep-seated intellectual and social evils of our…civilization” (Megay 1970: 427). The German neoliberals’ concern that the rules of the game not favor the powerful and wealthy also led some of them to favor limited income redistribution (Gerber 1994: 38). While still opposed to full-scale Keynesian employment policies or an extensive welfare state, the German neoliberals held views on social policy “that would have shocked the Manchesterians” (Boarman 1964: 27). To be sure, this support for welfare policies was not purely altruistic; the neoliberals were seeking to restore social order following the chaos of the preceding decades. Nevertheless, their vision of a social market economy clearly sets them apart from the market fundamentalism often associated with neoliberalism today.

In contrast to the negative connotations and asymmetric use of neoliberalism in contemporary social science, the “neo” qualifier of German neoliberalism was intended to convey a positive notion of renovation, and multiple groups of scholars sought to lay claim to the term. While no contemporary scholar self-identifies as neoliberal, the Freiberg economists not only used the term to describe themselves and their philosophy, but also debated whose liberal theories truly deserved the “neo” label. Supporters of a more traditional form of liberalism, such as Austrian economist Ludwig von Mises, were “referred to by the neo-liberals as ‘palaeo-liberals’” for clinging to an outdated faith in unfettered markets (Friedrich 1955: 512n). Other liberal economists with fundamentally different ideas sought to appropriate the desirable neoliberal label, though members of the Freiberg School resisted these efforts. Rüstow complained in 1960 that “contemporary representatives of paleoliberalism call themselves neoliberal, although our neoliberalism arose precisely in contrast to…paleoliberalism” (Megay 1970: 427).

Finally, in contrast to the diverse ways that neoliberalism is used in present-day scholarship, the Freiberg School primarily assigned the term to a normative ideology, with specific claims about how society should be organized around conceptions of liberty and humanistic values (Hanslowe 1960: 96). As Reinhard Behlke wrote in 1961, “neoliberalism is not to be viewed as a direction in economics or economic policy, but as a humanistically based intellectual orientation” (Gerber 1994: 36n). This neoliberal ideology was hardly confined to the ivory tower; Freiberg School economists occupied key positions in the post-war government, and their ideas were influential in German economic policy (Gerber 1994: 58–59). Ludwig Erhard, the economics minister who presided over the two post-war decades of economic growth that came to be known as the “German miracle,” identified with the neoliberals and implemented many of their prescriptions (Friedrich 1955: 510; Oliver 1960: 119; Boarman 1964: 24; Gerber 1994: 61). Nonetheless, Erhard referred to his overall development model as a social market economy, with the term neoliberalism reserved for the philosophy that inspired it.

While present-day scholarship often identifies Friedrich Hayek and Milton Friedman as the fathers of neoliberalism, most scholars of the period understood the term as referring to the German experience and its principal economic theorists. In academic articles and book reviews published in the 1950s and 1960s, neoliberalism was most often associated with Germany or specifically with the Freiberg School and such economists as Eucken, Röpke, Rüstow, and Müller-Armack.Footnote 9 The earliest reference we found to neoliberalism as an economic philosophy was also specific to the German experience (Burns 1930: 490). Although Hayek enjoyed important intellectual ties to the neoliberals, serving as an editorial board member and frequent contributor to their journal Ordo, he much more vigorously opposed state intervention in the economy, even with respect to antimonopoly legislation (Friedrich 1955: 512; Hanslowe 1960; Oliver 1960: 119; Megay 1970; Gerber 1994: 32). Given his more fundamentalist stance, Hayek’s name was only occasionally mentioned in conjunction with neoliberalism during this period, and Friedman’s essentially never appeared.

Early Latin American References to Neoliberalism: Admiration for the German Model

In the 1960s, groups of Latin American (particularly Chilean) pro-market intellectuals began to notice the ideas of the Freiberg School and their implementation in post-war Germany. These intellectuals often used the Spanish term neoliberalismo—a direct translation of the German neoliberalismus—to refer to this school of thought. Pro-market intellectuals in Latin America were particularly impressed by Erhard’s “German miracle” and speculated about the possibility of accomplishing similarly rapid growth and effective inflation control in their own countries. Given this close intellectual connection to the German experience, neoliberalism in 1960 s Latin America meant essentially the same thing as it had for the Freiberg School—a philosophy that was more moderate than classical liberalism and favored using state policy to temper social inequality and counter a tendency toward monopoly.

To assess early Latin American use of the term neoliberalism, we examined the Chilean magazine PEC, a weekly published from 1963 to 1973, which is considered one of the main outlets for right-wing economic ideas in pre-Pinochet Chile (Valdés 1995; Pollack 1999).Footnote 10 Although the relatively new term neoliberalism was not used extensively in PEC, the instances of its use were always consistent with the original German formulation, often referring specifically to the German miracle and the policies of Ludwig Erhard. The earliest appearance of the term was in an essay by Freiberg economist Wilhelm Röpke (1964) on the foundations of neoliberal thought. Soon after, the term was embraced by Latin Americans such as Enrique Chirinos Soto (1964), who criticized the Jorge Alessandri government’s failure to tame inflation in Chile and argued that Alessandri “should have implemented a neoliberal economic policy identical to that of Erhard in Germany.”

Usage of neoliberalism in PEC was also consistent with its original German meaning in that it emphasized humanistic values, a preoccupation with social welfare, and moderation vis-à-vis classical liberalism. As Santiago Labarca (1965: 12) says of Chilean politician Manuel Rivas Vicuña:

He was a liberal, but not a 19th-century liberal; rather, he was…a ‘neoliberal.’ He placed the idea of freedom above all other values. Nonetheless, that freedom was only unlimited in the ideological realm, while in the economic realm it should be bounded by solidarity with all mankind…. [H]e concerned himself with preventing man’s exploitation of man, which had been the outcome of the old laissez-faire, laissez-passer liberalism. Thus, his enthusiastic work on the foundations of social legislation and his membership on the Labor Legislation Commission.

While neoliberalism was used primarily by pro-market scholars in Latin America in the 1960s, we found no evidence that critics of the free market sought to distance themselves from the term or employ other language. Marxist scholar Hernando Aguirre (1962), for instance, invokes neoliberalism similarly to that of the right-wing intellectuals publishing in PEC. While critical of the content of neoliberal thought, he does not use the term pejoratively, he accurately characterizes neoliberalism’s claims about when the state should intervene in the economy, and he identifies neoliberalism with Erhard’s “German miracle” and the theories of Röpke.

The Term Neoliberalism in the 1980s: Critiquing Market Fundamentalism

Two decades after it was first used by pro-market intellectuals in the 1960s, the term neoliberalism had come into much more prevalent use in Latin America. The way that neoliberalism was most commonly employed in the 1980s was quite different from what neoliberalism had originally meant for Latin American scholars or the German Freiberg School. The first patterns of asymmetric use had begun to appear: critics of market reform used neoliberalism more often than proponents, who were already showing a preference for alternative terminology. Moreover, those who regularly used the term neoliberalism in the 1980s typically applied it in its present-day, radical sense, denoting market fundamentalism or a system that sought revolutionary changes in the relationship between state and society.

To assess how neoliberalism was used in Chile in the 1980s, we examined all instances of its appearance in the journal Estudios Públicos between 1980 and 1990.Footnote 11 Pro-market scholars did not invoke neoliberalism frequently during this period—of the 18 articles in which the term was employed, only six made an unambiguously positive assessment of free markets (Fontaine 1980, Peña Vial 1985; Gallo 1986; Medina and Arreóla 1986; Valdés 1989; Irarrázaval 1990). These mentions were largely historical references to the Freiberg or Austrian schools; pro-market authors avoided applying the neoliberal label to their own philosophy or the economic changes implemented in Chile and other countries of the Southern Cone. Most usage of neoliberalism came from scholars critical of the economic reforms under Pinochet, even though such scholars published only sporadically in the journal overall. These scholars used neoliberalism not only in reference to an economic philosophy, but also to characterize the economic system put in place in Chile after 1973, as well as its Chilean proponents (García 1983; Flisfisch 1984; Tironi 1985; Boeninger 1986; Berger et al. 1990).

Asymmetric use of neoliberalism was also evidenced by the language that critics and proponents of the free market used when engaging each other in debate. Particularly revealing are three transcripts of roundtable discussions with participation by academics of the right and of the center-left (Flisfisch and Fontaine 1983; Echeverría et al. 1985; Berger et al. 1990). In each instance, only free market critics used the term; pro-market scholars always employed other language, such as using the phrase “contemporary liberal authors” to refer to economic theorists that a critical scholar had labeled “neoliberals” (Echeverría et al. 1985). Similar preferences for the term neoliberalism can be found among free market critics on the nationalist right (e.g. Góngora 1986: 301).

By the 1980s, neoliberalism in Latin America had not only become a term with negative connotations employed principally by critics of market reform; it also had shifted in meaning from a more moderate to a radical or fundamentalist form of liberalism. Alejandro Foxley (1982: 149), for instance, argued that “the final objective of neoliberalism in Latin America is nothing less than radically transforming the way the economy operates and, in its most extreme version, the way society and political institutions are organized.” Perhaps most significant, some pro-market scholars in Latin America began to accept neoliberalism’s radical connotations and to reconceptualize “liberalism”—which previously referred to nineteenth-century “raw savage capitalism”—as something more moderate. Miguel Sang Ben and Andrés Van der Horst (1992: 368) argue:

We liberals should understand the inner-workings of society and economy so as to differentiate ourselves from the reductionist neoliberals with whom we are often confused…. Neoliberalism reduces solutions to the social crisis to market-based economic recipes, even absent the ideal social conditions for the implementation of this market. The neoliberals should be labeled antiliberal because they prefer to sacrifice social welfare in the name of their “economy-first” proposals.

Latin American scholarship in the 1980s had not only moved quite far from the notion of neoliberalism originally formulated by the Freiberg School, it had also ceased to identify the Germans as neoliberalism’s intellectual progenitors. Rather, scholars writing during this period tended to associated neoliberalism with the theories of Hayek and, above all, Friedman (Echeverría et al. 1985; Góngora 1986; Ramos 1986), even though neither economist used the term to refer to himself.Footnote 12

Explaining the Terminological Shift: Scholarly Response to Pinochet’s Radical Reforms

What explains the change in usage of neoliberalism between the 1960s and the 1980s? We argue that the shift from a positive term implying moderation to a negative term connoting radicalism resulted from neoliberalism’s association with the economic reforms in Augusto Pinochet’s Chile and other countries of the Southern Cone in the 1970s. Indeed, Pinochet’s 1973 coup emerges as something of a watershed in usage of neoliberalism. The earliest studies of Latin American political economy using neoliberalism in its negative, radical sense appeared just after this date (Chossudovsky 1975; Irisity 1975), while the most complete Spanish-language overview of German neoliberalism was published immediately before that (Ruiz 1972). Clearly, something occurred in this period to shift the meaning that Latin American scholars attached to neoliberalism, and Pinochet’s coup and subsequent economic and political reforms constitute a strong candidate.

Though the economic philosophy of the Freiberg School found a positive reception among pro-market scholars in 1960s Latin America, the influence of these ideas in Chile was increasingly overshadowed by the more fundamentalist philosophy of Friedman and Hayek. In 1955, the University of Chicago launched a program in which a select group of Chilean students was invited to Chicago to pursue postgraduate studies in economics. These “Chicago Boys” worked directly under Friedman and his disciple Arnold Harberger, while also being exposed to Hayek, a professor at Chicago’s Committee on Social Thought during this period. Returning to Chile in the 1960s, the newly minted economists began a concerted effort to spread the philosophy and policy recommendations of the Chicago and Austrian schools, setting up think tanks and publishing in ideologically sympathetic media (Valdés 1995; Silva 1996; Pollack 1999). The economic philosophy of Friedman, Hayek, and their followers did not yet go by the name neoliberalism, but it was one of the dominant orientations among Chilean right-wing intellectuals by the time of the 1973 coup.

Though the first several years of Pinochet’s military government were characterized by an ambiguous economic policy stance, the Chicago Boys eventually emerged as the primary architects of a reform program that sought a truly radical transformation of Chilean economy and society (Valdés 1995; Silva 1996; Kurtz 1999; Pollack 1999). Beginning with measures introduced in April 1975, the latter half of the 1970s witnessed rapid and extensive privatization, deregulation, and reductions in trade barriers. Eduardo Silva (1996: 97) explicitly justifies his use of the “radical” label for Chile’s reforms:

First, the draconian nature of the stabilization measures and the speed and thoroughness of the market liberalization were without parallel in the recent history of Chile or Latin America. Second, the policies were intended to set in motion a sweeping transformation of the Chilean economy. Neoliberalism in Chile was also radical in its insensitivity to adversely affected economic sectors, including many capitalists and landowners.

Not only did Pinochet’s reforms seek a “sweeping transformation of the Chilean economy,” but they also sought to fundamentally alter the nature of social and political organization in Chile. In late 1978, when free-marketer José Piñera took over the Labor Ministry, state corporatist mechanisms were abandoned in favor of the “seven modernizations,” policies that would reduce the role of the state and infuse competition and individualism into areas such as labor relations, pensions, health, and education (Pollack 1999). The seven modernizations were not merely policy reform; they constituted an attempt at fundamentally restructuring Chilean politics and society by undermining the basis for collective organization, mobilization, and demand making. This effort, in the words of Piñera himself, to “create the basis of a new political, economic, and social reality” (Kurtz 1999: 415) is what made Pinochet’s reforms a truly revolutionary project.

During the height of military rule in Chile, neoliberalism acquired a new meaning as opposition scholars began using it to describe a set of political and economic reforms quite distinct from those advocated by the Freiberg School. According to Oscar Muñoz, one of the first opposition economists to use the term in academic writing, Chilean scholars’ use of neoliberism was not a specific reference to the German neoliberals or any other theoretical revision of liberalism. Rather, it described the new “market fundamentalism” being implemented in Chile—one which differed from classical liberalism because it dispensed with political liberty, which classical liberalism (as well as the philosophy of Hayek) had always seen as inseparable from economic freedom.Footnote 13 Characterizing Pinochet’s project as neoliberal did not imply cognitive dissonance. Moreover, Muñoz notes that in the polarized political climate of the 1970s, opposition scholars intentionally imbued the term with pejorative connotations, and using it constituted a “fairly open and blunt criticism” of the government’s radical reforms.

It is important to recognize—but not overstate—the similar structural conditions that inspired both the philosophy of the Freiberg School and the policies of the Pinochet regime. The Germans sought to revise classical liberalism to “save the market” from the rising threat of socialism, whereas Pinochet and the Chicago Boys similarly sought to prevent any possible recurrence of a socialist experiment like that of Salvador Allende. However, key differences between these episodes explain the different connotations that neoliberalism acquired. Pinochet’s policies were inspired by the more fundamentalist theories of Friedman and Hayek. They also responded to a real rather than potential shift toward socialism, and a much more polarized ideological climate. In addition, it was critics and not proponents of the free market who attached the neoliberal label to a new set of economic policies in Chile. Given their opposition to these reforms and the dictatorial conditions under which they were implemented, it is easy to understand how neoliberalism became a normatively negative term.

Opposition scholars’ use of neoliberalism to denounce Pinochet’s economic policies does not necessarily explain why the Chilean pro-market right chose to abandon instead of defend the term. One possibility is that the Chicago Boys still thought of neoliberalism as referring to the Freiberg School and wanted to emphasize the distinct origins of their own ideas. Yet propaganda concerns are an even more likely explanation. The military government’s preferred term for its own economic model was a “social market economy” (Ffrench-Davis 1983: 163n)—a phrase that was closely associated with neoliberalism in Erhard’s Germany, but never acquired the same negative connotations. For a government seeking to suggest that far-reaching economic reforms would not have deleterious social consequences, a term that prominently featured the word “social” was undoubtedly preferable to the more obscure “neoliberalism.” Abandoning neoliberalism to its critics, while embracing the notion of a social market economy, may well have been an obvious choice.

Once established as a common term among Spanish-speaking scholars, neoliberalism diffused directly into the English-language study of political economy, such that its present-day usage is heir to the critical Latin American scholarship of the 1970s and 1980s. In one very important way, contemporary usage of neoliberalism has changed fundamentally since that period: it no longer denotes a new form of liberalism with specific features and empirical referents, but has become a vague term that can mean virtually anything as long as it refers to normatively negative phenomena associated with free markets. As the term neoliberalism has diffused broadly, nothing has prevented its meaning from drifting even more broadly. Why have scholars allowed this process to occur, rather than preserving neoliberalism as a term that should be applied more narrowly to the authoritarian free-market experiences of the Southern Cone? We turn to this question in the following section.