The difference between liberalism and neoliberalism is not a matter of degree but a transformation of the state's role: liberalism, in its classical form, sought to limit government power to protect individual liberty, while neoliberalism assigns the state an active, interAventionist task of constructing and enforcing market conditions—a project its architects called for precisely because they believed laissez-faire had failed. This is the central distinction that most comparisons miss. Neoliberalism is not simply a revival of nineteenth-century liberalism; it is a distinct governing rationality that emerged in the 1930s and 1940s, associated with thinkers like Walter Eucken, Wilhelm Röpke, and later James Buchanan, who argued that markets do not arise spontaneously and must be actively built and defended by a strong state . The irony is that neoliberalism requires more statecraft than the laissez-faire tradition it claims to inherit.
This distinction has been obscured by the term's own tangled history. The word neoliberalism was coined by the German Freiburg School as a positive label for a moderate renovation of classical liberalism, then migrated to Latin America in the 1970s where leftist intellectuals used it to describe Pinochet's Chile, and finally became a general term of opprobrium in the 1990s . By the time it entered popular discourse, it had accumulated meanings that its original architects would not have recognized. Understanding what neoliberalism actually is—as opposed to what it has been called—requires returning to its founding texts and the problem they were trying to solve.
The Founding Problem
Laissez-Faire's Failure
The thinkers who founded neoliberalism did not believe that nineteenth-century laissez-faire had worked. They argued that classical liberals had been naive about the preconditions of a market economy: markets require legal frameworks, cultural norms, and political stability that do not emerge automatically from individual exchange. The German ordoliberals—Eucken, Röpke, and Alexander Rüstow—concluded that the Weimar Republic's collapse and the rise of collectivism were consequences of a liberalism that had failed to defend its own institutional foundations . Their project was not to shrink the state but to redirect it: the state would create and enforce the rules of the market game, not abstain from the game altogether.
This is the crucial break with laissez-faire. The classical liberal slogan was that the state should leave markets alone; the neoliberal argument is that the state must actively construct the conditions under which markets can function. Competition, on this view, is not a natural state of affairs but a fragile achievement that requires legal protection against monopolies, cartels, and the rent-seeking behavior of incumbent firms. Röpke and Eucken were as suspicious of private economic power as they were of state power, and they believed that a strong legal order was necessary to prevent either from dominating the other . The neoliberalism of the founding generation was not a doctrine of deregulation; it was a doctrine of constitutional rules designed to make markets work.
The Positive State
Mark Olssen's analysis of neoliberal governmentality emphasizes the distinction between a negative state that abstains and a positive state that acts. Neoliberalism, on this account, is characterized by a positive conception of the state's role: the state must intervene to create the institutional conditions for competition, to discipline monopolies, and to cultivate the entrepreneurial subject. This is why Olssen argues that neoliberalism entails "the abandonment or severe qualification of laissez-faire" . The neoliberal state is not a night-watchman state; it is a state that governs actively through the market rather than in spite of it.
This positive conception has implications that are often overlooked in popular discussions of neoliberalism. A state that actively constructs market conditions is a state with considerable power, and that power can be used for purposes that classical liberals would have resisted. James Buchanan's public choice theory, for example, used economic analysis to critique bureaucratic behavior and argue for constitutional rules that would constrain government, but it did so by empowering a different kind of state—one that enforces fiscal rules and market disciplines rather than one that provides public goods or redistributes income . The neoliberal state is active, but its activity is directed toward marketization rather than toward welfare or redistribution.
From Theory to Slogan
The Chilean Transformation
The term neoliberalism underwent its decisive transformation in the 1970s, when leftist intellectuals in Latin America began using it to describe the economic reforms imposed by Augusto Pinochet's military regime in Chile. The Chicago Boys, a group of Chilean economists trained at the University of Chicago under Milton Friedman and Arnold Harberger, implemented a program of privatization, deregulation, and trade liberalization that became the template for what critics would call neoliberalism . The association with authoritarianism was not incidental: the reforms were imposed by a dictatorship that had violently overthrown a democratically elected socialist government. From this moment, neoliberalism acquired a connotation that its German founders would have rejected—it became associated with coercion, inequality, and the subordination of democracy to market discipline.
The Chilean episode also revealed a tension within neoliberalism that its theorists had not resolved. If the market order requires a strong state to construct and enforce it, what happens when that state is democratic and the majority opposes market reforms? The Pinochet regime answered by suppressing democracy. The Thatcher and Reagan governments answered by using electoral mandates to push through reforms that were opposed by substantial minorities. In neither case did the neoliberal project demonstrate a comfortable relationship with democratic contestation. This tension between market construction and democratic accountability remains one of the most serious criticisms of neoliberalism as a political program.
The Washington Consensus
The term neoliberalism became globally influential in the 1990s through the Washington Consensus, a set of policy prescriptions for developing countries that John Williamson labeled in 1990. The Consensus included fiscal discipline, privatization, deregulation, trade liberalization, and secure property rights . These policies were promoted by the International Monetary Fund, the World Bank, and the U.S. Treasury as conditions for loans and aid, and they were implemented across Latin America, Eastern Europe, and parts of Asia and Africa. The Washington Consensus was neoliberalism in practice: a set of institutional reforms designed to integrate countries into the global market order on terms favorable to capital.
The results of the Washington Consensus are fiercely contested. Defenders point to economic growth in countries that adopted the reforms, particularly in East Asia and Latin America during the 1990s. Critics point to rising inequality, the erosion of public services, and the vulnerability of developing economies to financial crises. The United Nations' analysis of the Consensus notes that its critics focused on three shortcomings: a conceptual faith in markets that contradicted even neoclassical theory, a systematic ignorance of the costs of neoliberal policies themselves, and a failure to account for the disproportionate burden borne by the poor during adjustment . The debate over the Washington Consensus is, in effect, a debate over whether neoliberalism delivers on its promises.
Where Liberalism and Neoliberalism Diverge
The Question of State Power
The most fundamental difference between liberalism and neoliberalism concerns the state. Classical liberalism treats state power as the primary threat to liberty and seeks to limit it through constitutional constraints, bills of rights, and the separation of powers. Neoliberalism treats state power as a tool to be used for the construction of market order. This does not mean that neoliberals are indifferent to tyranny; the German ordoliberals were profoundly shaped by the experience of Nazism and were committed to constitutional government. But their conception of constitutionalism was oriented toward protecting market competition rather than toward protecting individual rights against the state. The state, on this view, is not the enemy of the market but its guarantor.
This difference has practical consequences. A classical liberal would oppose state intervention in the economy because it violates individual liberty; a neoliberal might support state intervention if it is designed to enhance competition or discipline monopolies. The neoliberal state is more active than the classical liberal state, but its activity is directed toward market ends. This is why some critics argue that neoliberalism is not a form of liberalism at all but a distinct political rationality that uses liberal rhetoric to justify a new form of state power . The argument is contestable, but it identifies a real tension: the neoliberal state is liberal in its commitment to markets and illiberal in its willingness to use state power to enforce them.
Deregulation as a Misnomer
The popular association of neoliberalism with deregulation is misleading. Neoliberalism does not seek the absence of regulation; it seeks a particular kind of regulation—rules that protect property rights, enforce contracts, and maintain competitive markets. What neoliberals oppose is regulation that interferes with market outcomes: price controls, labor protections that raise the cost of hiring, environmental rules that impose costs on firms, and welfare programs that reduce the pressure to work. The neoliberal project is to redesign regulation so that it serves market efficiency rather than social protection. This is not deregulation but re-regulation: the replacement of one set of rules with another.
The distinction matters because it explains why neoliberal reforms often involve more law, not less. The privatization of public services requires contracts, regulatory agencies, and dispute-resolution mechanisms. The liberalization of financial markets requires central banks, securities regulators, and international institutions. The creation of a free market in labor requires the dismantling of unions and the rewriting of employment law. In each case, the state is actively involved in constructing the market, not withdrawing from it. The rhetoric of deregulation obscures this active role, which is why critics argue that neoliberalism is a form of statecraft disguised as anti-statism.
The Democratic Deficit
The tension between neoliberalism and democracy is one of the most important themes in the critical literature. If markets must be constructed and defended by the state, and if democratic majorities sometimes oppose market reforms, then the neoliberal project faces a dilemma: either it must accept that democratic majorities can reverse its reforms, or it must insulate economic policy from democratic control. The Pinochet regime resolved this dilemma through dictatorship. The Thatcher and Reagan governments resolved it by using executive power and electoral mandates to push through reforms that were deeply unpopular in the short term. The European Union has resolved it by delegating monetary policy to an independent central bank and constraining national budgets through fiscal rules that are not subject to democratic vote.
This democratic deficit is not an accident of neoliberal politics; it is a structural feature of the neoliberal project. The construction of market order requires long-term commitments that democratic majorities cannot be trusted to honor. The neoliberal solution is to bind future governments through constitutional rules, independent agencies, and international treaties. The result is a political system in which important economic decisions are made by bodies that are not directly accountable to voters. Critics argue that this is a betrayal of the liberal commitment to self-government; defenders argue that it is a necessary constraint on majoritarian tyranny. The debate is unresolved, and it is one of the central fault lines of contemporary politics.
The Neoliberal Subject
From Citizen to Entrepreneur
One of the most distinctive features of neoliberalism, emphasized by Michel Foucault and his followers, is its production of a particular kind of subject. Liberalism treats individuals as bearers of rights who are entitled to protection from the state. Neoliberalism treats individuals as entrepreneurs of themselves—agents who invest in their own human capital, make choices about their lives as if they were business decisions, and bear responsibility for their own outcomes. This shift from citizen to entrepreneur is not merely rhetorical; it shapes how welfare, education, and even health care are organized. The neoliberal welfare state does not simply provide support; it seeks to activate the recipient, to make them responsible for their own well-being, and to punish dependency.
This emphasis on self-responsibility is not without appeal. It resonates with liberal themes of individual agency and autonomy. But critics argue that it ignores the structural conditions that shape individual outcomes: a person born into poverty, or into a failing school system, or into a discriminatory labor market, is not simply a failed entrepreneur. The neoliberal subject is a fiction, and the policies that follow from it often punish people for circumstances beyond their control. The debate over the neoliberal subject is therefore also a debate over the limits of individual responsibility and the obligations of the state.
The Cultural Critique
The neoliberal subject has also been the target of cultural criticism. Critics argue that neoliberalism produces a society in which everything is commodified, in which relationships are evaluated in terms of their economic value, and in which the market model is applied to domains where it does not belong—education, healthcare, family life, even friendship. This critique is often associated with the left, but it has been taken up by conservatives as well. The National Review, for example, has published criticism of neoliberalism from a conservative perspective, arguing that it has contributed to the atomization of society and the decline of community . The convergence of left and conservative critiques suggests that the cultural effects of neoliberalism are a genuine concern that crosses ideological lines.
The cultural critique is not easily dismissed. If neoliberalism is more than an economic doctrine—if it is a form of governmentality that shapes how people understand themselves and their relationships—then its effects extend far beyond economic policy. The neoliberal emphasis on competition, self-investment, and personal responsibility can erode the solidarity and mutual obligation that sustain a democratic society. Whether this erosion is a necessary consequence of neoliberalism or a contingent feature of its implementation is a question that the tradition has not answered. But the critique has been influential enough that even some neoliberals have begun to acknowledge it.
The Contested Legacy
The Term's Instability
One of the most striking features of the neoliberalism debate is the instability of the term itself. As the historical analysis shows, the word has undergone a series of transformations: from a positive label for a moderate renovation of classical liberalism, to a descriptor of Pinochet's Chile, to a general term of opprobrium used to describe everything from the Iraq War to American social dysfunction . This instability is not merely a semantic inconvenience; it makes analysis difficult because different people mean different things by the word. Some use it to refer to a specific set of economic policies; others use it to refer to a cultural formation; still others use it as a synonym for capitalism itself.
The term's instability has led some scholars to argue that it should be abandoned. Adam Tooze, quoted in a recent analysis, notes that the term is often used to paint with "a rather wide brush, decrying the state of late-stage capitalism and its deleterious effects as being the fault of the neoliberals" . This is a fair criticism: a term that means everything means nothing, and the rhetorical use of neoliberalism as a catch-all for everything the left dislikes has made it less useful as an analytic concept. But abandoning the term would also lose something important: the specific tradition of thought and policy that emerged in the 1930s and 1940s is a real historical phenomenon, and it deserves a name.
What the Distinction Reveals
The distinction between liberalism and neoliberalism is valuable not because it allows us to categorize politicians or policies, but because it illuminates a tension within the liberal tradition. Liberalism contains two impulses that are in permanent conflict: the impulse to limit state power in the name of individual liberty, and the impulse to use state power to create the conditions of a good society. Neoliberalism is a resolution of that tension that prioritizes market order over democratic self-government. It is a liberal project in its commitment to markets and individual responsibility, but it is illiberal in its willingness to constrain democracy in the name of market stability. This is why the question of whether neoliberalism is a form of liberalism or a departure from it cannot be answered with a simple yes or no.
The comparison between liberalism and neoliberalism is therefore ultimately a comparison between two different answers to the question of how to secure a free society. The liberal answer is to limit state power and trust that free individuals will build a good society. The neoliberal answer is to use state power to construct a market order and trust that competition will produce prosperity and freedom. Neither answer is obviously correct, and both have been tried with mixed results. The value of the comparison lies not in choosing a winner but in understanding the costs and benefits of each approach—and in recognizing that the choice between them is a choice about what kind of society we want to live in.
The distinction between liberalism and neoliberalism is not merely academic. It shapes how we understand the political conflicts of the present moment, from debates over austerity and welfare to arguments about globalization and national sovereignty. The neoliberal project is not simply a revival of classical liberalism; it is a distinct political rationality with its own logic, its own history, and its own costs. Recognizing this allows us to evaluate it on its own terms rather than through the lens of a tradition it both invokes and transforms. The question is not whether neoliberalism is liberal or illiberal but what kind of freedom it delivers—and at what price.