• In the past few decades, the theory of laissez-faire liberalism was revived with a new vigour. It sought new grounds of keeping the state away from interference in the market forces. It is variously described as neo-liberalism, neo-classical liberalism. The chief exponents of neoliberalism include F.A. Hayek , Isaiah Berlin , Milton Friedman and Robert Nozick .
  • It is interesting to recall that towards the end of the nineteenth century and the beginning of the twentieth century, liberalism tended to accommodate some tenets of socialist and idealist thought, which was responsible for the emergence of the theory of ‘welfare state’.
  • However, during the second half of the twentieth century some thinkers in the liberal tradition found the theory of ‘welfare state’ to be inimical to individual liberty, and sought to revive the original concern of this tradition with laissez faire philosophy.
  • It particularly defends the right to acquire and hold property and freedom of contract. These rights are by no means the product of the state itself, hence the state cannot be allowed to intervene for any artificial balancing of rights.
  • Neo liberalism stands for rolling back of the state. Sometimes described as ‘market fundamentalism’. It started in 1970s, in western countries like Britain in the form of ‘Thatcherism’. And in USA in the form of Reaganism in 80s. By 1990s, it was extended to the former communist states of eastern Europe including Russia in the form of ‘Shock therapy’. Further expanded to the third world countries including India in the form of structural adjustment programs. (SAP).
  • Thus by 1990s, neo-liberalism became global. The present globalization is called as neo-liberal or the expansion of capitalism on the global scale. The highest point of achievement of neo-liberalism has been the establishment of WTO in 1995

Welfare State Perspective

  • Modern liberalism promoted the idea of welfare state, as it pleaded for positive role of the state in securing welfare of its citizens, particularly of their vulnerable sections.

Exponents of Welfare State

John Stuart Mill:

  • Mill gave a positive direction to liberal theory.
  • Positive Role of the State
    • He argued that the right to property was not absolute or sacrosanct, and went to the extent of advocating considerable restrictions on the rights of inheritance and bequest.
    • He maintained that the right to property in land was not sacrosanct because no man made the land; it was the original inheritance of all mankind. Rent was the effect of natural monopoly—not a product of an individual’s effort: it was a fit subject for taxation.

Thomas Hill Green:

  • He sought to revise liberal theory of the state under the influence of idealist theory, derived from the teachings of Rousseau, Kant and Hegel.
  • Concept of Moral Freedom
    • At the outset, Green recognizes ‘moral freedom’ as the distinctive quality of man. He proceeds to distinguish between negative and positive freedom. Negative freedom consists in the satisfaction of one’s desires, acting according to one’s own choice or sweet will.
    • It is the sphere where man enjoys being left alone. On the other hand, positive freedom consists in acting according to reason, achieving self-realization or self-perfection. True liberty or positive freedom of man, therefore, consists in the act of ‘good will’, whereby man identifies himself with his ideal self or character.
  • Theory of Rights
    • Exercise of true liberty, according to Green, postulates rights. Rights do not emanate from any transcendental law as Locke had imagined, but they emanate from the moral character of man himself.
    • Under a system of rights, each individual recognizes in his fellow, and each claims from his fellow, that he shall recognize in him the power of pursuing ideal objects.
  • Green draws a clear distinction between the state and society and holds that the recognizing authority in the matter of rights is not the state, but the moral consciousness of the community. The consciousness of the community signifies an eternal consciousness.
  • Role of the State
    • According to Green’s line of argument, human consciousness postulates liberty; liberty involves rights; rights demand the state. The state is, therefore, an instrument of perfection as the liberal theory holds; it is not an embodiment of perfection—as the idealist theory claims.
    • The state owes its origin to the social nature of men. Genuine human personality is essentially a social phenomenon.
    • It is inconceivable that an isolated natural man should be a moral agent. He exercises his moral freedom within the social organization, for which he needs rights. But rights are maintained by the state; hence the state serves as an essential base for moral freedom.
  • In other words, the function of government is to maintain conditions of life in which morality shall be possible. Morality consists in the disinterested performance of selfimposed duties, not in obeying the commands of the state.

Harold J. Laski:

  • He sought to achieve the socialist goal through the mechanism of liberal democracy. He was so critical of the capitalist system and its underlying principles that at times he advocated the abolition of the right to property which was the mainstay of the capitalist system. But he was so deeply attached to liberal democratic values that ultimately he compromised in favour of making necessary changes in the capitalist system so as to make it an instrument of securing social justice.
  • Laski, however, did not approve of doctrinaire communism or the repetition of the Russian Revolution for the emancipation of mankind. He insisted on the unity of the working class, but hoped that they could achieve their goal within the framework of a liberal democracy.
  • In fact he saw no inherent contradiction between the goals of Marxian socialism and the method of political democracy. Laski, therefore, proceeded to identify certain positive characteristics and tendencies of the ‘modern state’ which held some promise for the underprivileged sections.
  • Laski is so deeply impressed by this softening attitude of the liberal state that he refuses the Marxist interpretation of the state as a class-instrument. Laski remarks: “The State is the keystone of the social arch. It moulds the form and substance of the myriad human lives with whose destinies it is charged.” As a true liberal, however, Laski does not take the state as such to be an embodiment of perfection, as the idealist theory of Hegel had held.
  • In short, Laski seeks to transform the capitalist state by the democratization of economic power, that is, by ensuring larger public control over vital instruments of production and distribution, reducing enormous economic disparities by a progressive system of taxation and establishing a democratic state increasingly concerned with the welfare of its citizens.

Robert M, MacIver:

  • Men seek to serve their varied interests through several associations. The state is only one of such associations.
  • The state is not superior to all other associations in the moral sense, although it may claim superior authority as an instrument of law. Law itself exists above the state, but it is declared and enforced by the state. In Maclver’s own words: “The government has power as the guardian of the constitution, as the executor of law, not in its own right.”
  • Maclver, therefore, holds that the state does not regulate the internal affairs of other human associations. It cannot determine their purpose, nor their methods for the most part. The state comes into the picture only when the interests of one group encroach upon another. The state acts only in order to resolve the conflicting claims of different social groups. The state is not entitled to impose its own will on any human association for the protection of the ‘common interest’. It can only harmonize different social interests.
  • Maclver has sought to base the authority of the state on the functions it performs. The state is subservient to society; it derives its authority from society for which it fulfils certain conditions. The state neither serves all interests of men in society, nor does it command their undivided loyalty. The sphere of the state is not coextensive with that of society.
  • Maclver is convinced that only a democratic state can perform the unifying function most effectively.

Why rolling back of the state?

  • Welfare state became unsustainable. Welfare state was introduced first in USA, in 1930s based on the ideas of Keynes and Galbreath. USA introduced welfare state in the form of New Deal Acts. under Roosevelt. In Britain, it was introduced in 40s, on the basis of recommendations of Beveridge report. Welfare state started facing problems of fiscal deficit.
  • State became too big, came to be known as Nanny state, state was expected to take care of the people from ‘cradle’ to ‘grave’. Welfare state has given rise to ‘New Despots’. It has strengthened the hands of bureaucracy. It resulted into huge corruption and black money. It has not benefitted the targeted sections.
  • Hence Margarete Thatcher, the prime minister of Britain introduced neo-liberal policies calling it ‘TINA factor’. TINA means the only alternative is that there is no alternative.
  • The policies of neo-liberalism can be understood on the basis of the 10 principles known as ‘Washington Consensus’, given by economist John Williamson in 1989.

Policies of Washington Consensus

  • Reduce fiscal deficit
  • Pro-industry reforms.
  • No indiscriminate subsidies. Only targeted pro-growth subsidies.
  • Market determined interest rates.
  • Competitive exchange rate for promotion of exports.
  • Trade liberalization, removing the tariff and non-tariff barriers.
  • Promotion of FDI.
  • PSU disinvestment.
  • De-regulation reducing the control of state.
  • Protection of right of property.

What is neo-liberal approach for poverty eradication?

  • They support the theory of trickle down effect.

Philosophical Basis of Neo-Liberalism.

  • Neo liberalism is a philosophy which favors the rich. There is no difference between neo-liberals and neo-rightists with respect to economic policies. e.g. In India, congress represents neo-liberalism and BJP represents neo-rightists.
  • Neo liberalism is a revival of classical liberalism. However neo-liberals are more fundamentalist than classical liberals. More fundamentalist means market fundamentalism.

Difference in the rightists and the liberals.

  • Rightists only favour free market economy but otherwise they are not liberal with respect to culture and traditions. They also support strong state. Neo-rightism, if stretched too far, it becomes fascism. e.g. The Republican party in USA or the conservative party in Britain.

Difference in classical and neo-liberals.

  • Adam Smith only supported Laissez Faire in economy. Adam Smith even proposed that state should take up those economic activities which private sector will not take.
  • However neo-liberals believe that market is a solution for all. For them market is God, hence it is called as market fundamentalism.

Neo Liberal Philosophers


  • Hayek is known as the father of neo-liberalism. He was major inspiration for Margaret Thatcher.
Prominent ideas of Hayek.
  • He was against the concept of planning, calls planning ‘road to serfdom’, a fruitless exercise. It is bound to fail. According to him, even the most expert planners cannot make full proof plan. Planning means increasing the powers of the state. It means adverse impact on economic growth as well as freedom.
  • According to him, no planner can be as intelligent as market. He compares market with ‘huge central nervous system.’ Market has a capacity to intercept millions of messages  at the same time. Hence only market can do the best allocation of resources.
  • He considers social justice as a ‘mirage’. Thus social justice is unachievable. In the name of social justice, state increase its powers. Justice is not a feature of society, it is a characteristic of human soul. Person is just or unjust.
  • He does not support progressive taxation. He compares progressive taxation as bonded labour. It contradicts the principles of ‘non-aggression’. When state takes money, it does not reach to the targeted section. It goes into the pockets of bureaucrats and politicians. It adversely impacts the growth. It results into withdrawal of resources from productive sector and give rise to black economy or parallel economy.
  • He does not believe that there is anything called ‘inner freedom’, higher freedom’, ‘moral freedom’. He defines liberty in a very simple sense as absence of coercion. (negative liberty). According to Hayek, if a person is poor it is not the fault of the rich that rich is punished. It is his bad luck. Hayek does not suggest that poor should not be helped, he is against state-led model. He suggests ‘charity’ is a better approach.


  • He also believes in principle of non-aggression. He also considers progressive taxation as bonded labour. Nozick believes that ‘minimal state is inspiring as well as right’. It motivates man to work hard. And it is in accordance to the principle of non-aggression and respect for human dignity. He criticizes welfare state and supports ‘night watchman’ state.


  • He has reversed the order. Instead of asking freedom for market, he believes that freedom is possible only through market. If people want to be free, they should bring capitalism.

Murray Rothbard

  • He compared politicians and bureaucrats as gang of robbers and thieves. He calls central bank as legislative fraud.

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