With so much intellectual firepower arrayed against socialism, Keynesianism, and the legacy of the New Deal, one might have expected public policy to move to the Right. In the short term, that did not happen. Instead, in 1971 Republican President Richard Nixon declared, “We are all Keynesians now.” Nixon’s predecessor, Democrat Lyndon Johnson, had actually expanded the New Deal welfare state under the rubric of the “Great Society,” launching new entitlement programs such as Medicare and Medicaid, creating new programs for the poor such as food stamps and Head Start, and declaring a “War on Poverty.” For his part, Nixon instituted unprecedented peacetime wage and price controls and severed the last links between the dollar and the price of gold. But while politicians proved reluctant to listen to free-market economic theorists, before long they were forced to face the consequences of their own policies.
The consequences for civil society and the family of decades of welfare economics and social engineering had been objectively disastrous, with rising rates of crime, illegitimacy, and urban decay, evils which afflicted the poor and minorities—the very people that welfare programs were intended to help—much more severely than they did the middle class. Although it became the pretext for further Great Society programs, a 1965 report by Assistant Secretary of Labor Daniel Patrick Moynihan (later a U.S. senator), “The Negro Family: The Case for National Action,” was one of the first documents to call attention to family dissolution, rather than poverty, as a source of social pathology. That same year, journalist Irving Kristol and Harvard sociologist James Q. Wilson launched the Public Interest, a policy journal aimed at rethinking the Great Society and examining its ill effects. Five years later, Wilson’s colleague Edward C. Banfield published The Unheavenly City, a book that further contested the premises of the War on Poverty.
These scholars, unlike libertarians and most old-guard conservatives, were not arguing for a repeal of the New Deal; most of them had begun their careers, and many remained, on the political Left. But their criticisms of the Great Society earned them the hostility of their peers, one of whom, the social democrat Michael Harrington (whose 1962 book The Other America did much to inspire the War on Poverty) dubbed these apostate liberals “neoconservatives.” Neoconservative critiques of the welfare state mounted over the next twenty years, culminating with Charles Murray’s 1984 book Losing Ground: American Social Policy, 1950–1980, which documented the effects of thirty years of government intervention into civil society and gave impetus to the welfare-reform movement. By 1996, when President Bill Clinton signed welfare reform into law, Murray’s arguments had become conventional wisdom.
Keynesian theory itself, meanwhile, failed spectacularly as an explanatory and policy tool in the 1970s, when the United States, mired in low economic growth, experienced simultaneously rising unemployment rates and inflation. This “stagflation” defied the expectations of Keynesian analysts, who believed that inflation and recession should provide natural breaks on one another. At the same time that stagflation shook policymakers’ confidence in Keynesianism, the Carter administration began to deregulate industries such as telecommunications, trucking, and air travel—not, to be sure, out of any commitment to free-market principles, but out of necessity. These measures accelerated during the Reagan era.
Ronald Reagan’s economic advisors included a new school of free-market advocates, the so-called supply-siders. While Keynesianism emphasized the need for government to stimulate aggregate demand, Reagan’s supply-side advisors, who included Arthur Laffer, Jack Kemp, Jude Wanniski, Paul Craig Roberts, and Bruce Bartlett, argued that cutting taxes was a better way to stimulate the economy, by providing incentives for greater capital investment. (Like the Keynesians, however, supply-siders did not see federal deficits as a grave problem.) The “Laffer curve”—as legend has it, sketched by Arthur Laffer on a napkin at a meeting with Wanniski and Dick Cheney—illustrated how cutting taxes, by leading to greater economic growth, could actually increase government revenue. Supply-side economics was not without its critics, even on the Right, but throughout the Reagan administration it enjoyed unprecedented influence for a modern free-market economic philosophy.
By the 1990s, free-market advocates of all schools could claim a number of successes. Although entitlement programs such as Social Security in the United States and national health services in many other countries remained politically untouchable (despite their long-term insolvency) the center of gravity in Western economic thought had moved from Keynesianism and soft forms of socialism to a belief that lighter regulations, lower taxes, and freer economies were generally more conducive to national prosperity. Free trade enjoyed similar support on an international scale; “globalization,” both economic and cultural, became a buzzword of the late 1990s, generating angst in some quarters, rhapsodies in others—even in the op-ed pages of the New York Times, where columnist Thomas Friedman did much to popularize the phenomenon. With tax and regulatory burdens waning, innovation—particularly in computers and telecommunications—boomed, and the United States enjoyed exceptional prosperity.
Most decisively, of course, the collapse of the Soviet empire in 1989, followed in 1991 by the dissolution of the Soviet Union itself, essentially settled the “great question” of whether or not there should be private property in the means of production. The specter that had “haunted” Europe—and the world—since the middle of the nineteenth century (communism) was dispelled. The fundamental moral legitimacy of free market economics reached an all-time high. But events in the 1990s also showed that traditional conservative qualifications to classical liberalism had cogency. Classical liberalism emphasized the “naturalness” of free-market relations when state restraints on individuals were removed. In the wake of communism’s collapse, however, lawless oligarchies arose in Russia while the economic performance of the nations of eastern Europe was most often disappointing. It quickly became evident that the benefits of a free-market system depend upon habits and virtues that are not immediately elicited by the mere absence of restraints.
What was “missing” in the postcommunist countries was civil society itself, the intermediary institutions with their attendant habits of association that Tocqueville recognized as the “seedbeds of virtue.” Civil society had effectively been destroyed under communist tyranny. At the same time, new empirical work by the Harvard political scientist Robert Putnam reinforced the understanding that democratic political systems and vibrant free-market economies—two of the great achievements of the West—depend in decisive respects upon the richness and depth of the associations of civil society. In both politics and economics, the habits of liberty must be learned.