How the Welfare State Became the Neoliberal Order

Today's neoliberalism emerged when US policymakers built New Deal–style projects abroad—for private gain rather than the public good.

Within his famous “first hundred days” in office, President Roosevelt signed into law the Tennessee Valley Authority (TVA), an infrastructure-development project. The TVA organization was intended to build infrastructure so as to deliver hydroelectric energy to the very rural, very poor countryside. To do so, the TVA had the prerogative to acquire land and relocate occupants in order to build new dams. And although the organization’s main aim was to push forward economic development, the TVA also included a broader modernization program. The TVA didn’t just focus on rural electrification; it also fostered educational programs, directed toward farmers, to improve agricultural practices by introducing new technology. Indeed, the TVA is now considered a crown jewel among FDR’s New Deal development programs: a prime example of how government, at a federal level, can bypass local business and local politicians to make sweeping economic change.

But if such large development programs worked for the federal government, then, perhaps, they could also work for big corporations. Indeed, the coming decades would feature government planners—many having trained under the New Deal—seeking their fortunes as commercial and financial developers. These were men like David Lilienthal, who, after running the TVA, were hired away to develop similar projects around the world. But this time, rather than building these projects in the public interest, Lilienthal built new TVA-style projects that created the conditions (especially in partnership with local businessmen) for private gain.

In telling the story of Lilienthal and other ex–New Deal officials, Amy C. Offner’s Sorting Out the Mixed Economy remakes a popular understanding of how today’s neoliberalism was built. Offner shows that neoliberalism, rather than having been imposed by the Washington Consensus, was in fact first developed at a local level. The book shows American entrepreneurs, trained in big government as Lilienthal was, working together with Latin American businesses, banks, and landlords. It was when these new kinds of partnerships returned to the US—when private companies, treated as public concerns and sustained by government funds, began to take shape in the “developed” world—that neoliberalism truly began.

In focusing on this exchange between New Deal developers and Latin American businessmen, Offner corrects many misunderstandings. Neoliberalism, she shows, was more than a set of ideas and a political agenda forged in the core to be applied in the periphery. Instead, the movement that we now know as neoliberalism emerged from the entangled histories of the US and Latin America. And while Offner is right to focus on the history of ideas and public policy, neoliberalism also presented different ways to solve social conflict.

Typically, Latin America has been portrayed as home to the first neoliberal experiments: where those from the global North came to impose their will, top down, on the global South. Before Margaret Thatcher and Ronald Reagan deregulated core Northern economies, it was understood that Latin America was the North’s playground. Here, the “Chicago Boys” (Latin American economists trained in the US under the new monetarist orthodox dogma), in conjunction with military juntas, tried out the first radical free-market liberalization projects in the 1970s. Chile loomed large, for it was there, after the coup against the socialist government of Salvador Allende, that Augusto Pinochet hired the Chicago Boys to accomplish free-market reforms.

Generals and economists together imposed the neoliberal ideas coming from the global North, as they coalesced in the minds of Friedrich Hayek and Milton Friedman. To impose these ideas, the generals and economists used “shock therapy”: first, they aroused terror among the population, then they introduced unpopular economic reforms. Along the way, these generals and economists dismantled the developmental dreams of the 1950s and 1960s, dreams of upward social mobility and welfarism granted by state interventions to regulate the market. At least, that’s the story we have been told.

What actually took place, Offner reveals, was quite different. During the 1950s and 1960s, alumni of FDR’s New Deal led development projects in Colombia and forged forward-looking plans, which were later absorbed by private businessmen and repurposed when the neoliberal turn hit the US.

Offner’s case in point is David Lilienthal. After graduating from Harvard Law School, Lilienthal spent the 1920s working as a lawyer in Chicago, while specializing in public-utility law. After the Great Depression, FDR appointed him to run the TVA; he would also later run the Atomic Energy Commission.

In the United States, the TVA under Lilienthal had demonstrated the benefits of decentralization in big public corporations. On the one hand, autonomy from Washington granted greater efficiency in decision-making. On the other, it fostered popular involvement and local control over public administration.

It was this argument, by the 1950s, that prompted Lilienthal to enter the realm of private business as a consultant. He began to travel around the world advising governments with his ideas on land reform, productivity gains, and decentralization.

The age of the welfare state and the age of neoliberalism express not simply competing models concocted by experts and policy makers, but different outcomes of social conflict.

One of his first stops was in Colombia. Together with local businessmen, Lilienthal crafted the Cauca Valley Corporation (CVC), in 1954. Although inspired by the TVA, the CVC was rather different, starting with its setting. Unlike the Tennessee Valley, one of the poorest regions in the United States, the Cauca Valley was one of the richest regions of Colombia. Cauca Valley’s local group of businessmen had been trying to improve agricultural productivity during the first half of the 20th century, although without much official support. But now, the presence of Lilienthal was a lever to get the country’s de facto president, Gustavo Rojas Pinilla, on board. Rather than working to uplift an impoverished region, Lilienthal’s project borrowed the lessons of the New Deal and the TVA to help enrich local elites.

The CVC was the first autonomous regional development endeavor in Colombia. It was a public corporation acting as a private one, meaning that capital accumulation should back its growth.

The CVC gave Lilienthal the opportunity to spread his ideas, which, in the new Colombian context, were substantially transformed. While in the US he emphasized the role of grassroots participation in creating these public-private initiatives, in Colombia the agricultural-developmental project did not promise any kind of local involvement. While grassroots democratic participation had vanished in transit from the US to Colombia, the regional autonomy exercised by the CVC was instead tied to the technocratic ideals of management and efficiency.

Even outside the region, the CVC exercised an outsize influence. In fact, when Colombia launched a land-reform project in 1961, the CVC became the authority responsible for its implementation across the whole valley. And in this role, the CVC gave carte blanche to local capitalists. Although the project ostensibly aimed to promote equality and land redistribution, the actual result was the expansion of private business, the concentration of land ownership, and the displacement of local peasants. Local communities undoubtedly resisted this massive privatization of lands; however, the search for productivity and professional management blessed the whole operation. Ultimately, the local businessmen prevailed.


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After reinventing himself as a private consultant and an expert on decentralization projects abroad, Lilienthal, a former New Dealer, now found a new audience back in the US. Capitalists at home were facing increased pressure from social movements and unions during the 1960s and 1970s, and both the free market and private business had become subject to bitter critique.

Since the New Deal, businessmen in the US had been fighting the welfare state from the outside. Claiming that the state should decentralize some of its functions by delegating them to private companies—as he had demonstrated with his international development projects, including the CVC—Lilienthal offered a new model of administrative efficiency. This was music to the ears of many American businesses. Rather than struggle against the welfare state, businesses could likely make a profit from it.

The trajectory of “self-help housing” illustrates these new opportunities. In a “self-help housing” project, the government provided the land, mortgage loans, materials, and supervision over the building process; future residents had to work on and build the housing themselves. Low-budget governments, like Colombia’s, saw in “self-help housing” a means to perform some of their welfare functions by creating new homeowners, using unpaid labor.

Before the 1960s, such “self-help housing” had been used mostly as a developmental tool in the Third World, while at home, more traditional public-housing projects prevailed: the government, after the New Deal, simply built and owned homes for the public. During the Johnson years, “self-housing” became part of the War on Poverty. The funding came from the federal government, but it was mostly channeled by nonprofit organizations into rural areas and Native American territories.

During Nixon’s administration, private companies stepped in. “Self-housing” organizations began to use private capital instead of just federal funding. With for-profit contractors involved, mortgage rates rose, and thus lower-income families could not take part. Self-housing gained traction during the 1970s and 1980s, when austerity became a governmental goal. Not only did self-housing projects involve less expenditure from the federal government, but their extent was significantly smaller than that of earlier public-housing projects.

Public housing, once a triumph of New Deal liberalism, gradually withered. And its decline can be directly linked back to these new ideas and practices—developed by the likes of Lilienthal in Latin America—that transformed how US capitalists exploited the state’s public contracts for private gain.

What new social compromises—and conflicts—will reconfigure the markets and states to come?

The developmental years provided many opportunities for private business to profit. Some of these opportunities then became central to American political economy after the neoliberal turn.

So Offner is right: certain ideas and plans that originated in Colombia were reabsorbed—and transformed—by neoliberal policymakers in the US. Her book reveals, then, that Latin America was much more than an experimental ground for foreign ideas. Instead, Latin Americans hybridized new ideas with local ones, and from this mixture emerged some of the ideas and public policies that became mainstream after the neoliberal turn.

How should we understand the significance of these “islands” of private business—like the CVC in Colombia, or privately built self-housing in the United States—nested under the protection of the state? Offner’s argument mirrors Vanessa Ogle’s “archipelago capitalism.” For Ogle, tax havens between the 1920s and the 1970s represented the two central values of what later would be known as neoliberalism: low taxes and deregulation. The logic behind tax havens, explains Ogle, traveled from the periphery of capitalism to its very core after the 1970s, when financial deregulation took place.

Something similar happened with decentralization and for-profit contracts, in Offner’s argument: born in the Third World, these ideas entered the US massively after the 1970s. From being marginal, they became central.

Still, other things happened during and after the 1970s. Social movements and trade unions were smashed, and welfarism vanished. The redeployment of ideas and economic plans from the developmentalist years after the 1970s could only happen because workers suffered a defeat. Because this ground was cleared, the new ideas from Latin America could take root—and flourish—in new climes, before spreading with renewed strength around the world.

In the drama of neoliberalism’s rise, intellectuals, businessmen, and policymakers moved to center stage. They left records, speeches, and personal papers. They were persuaders, and proud of what they had to say.

Yet those who played the lead roles in social conflict—workers, trade unionists, social activists—were quieter. If we want to understand the neoliberal turn, we also need to look at them.

Take the case of two countries with strong welfare systems and solid workers’ movements. In Argentina during the dictatorship that lasted from 1976 to 1983, workers and unionists were the target of state terrorism. They were threatened, executed, disappeared. Without their leaders, unions crumbled. Neoliberal reforms could have not taken place against their opposition.

Something similar happened in Chile under Pinochet’s dictatorship. The military regime dismantled the welfare state that Chile had begun to build after the 1930s. To do so, the regime attacked any form of political organization that stood with workers.

In both cases, the Chicago Boys of the world had a role, although not a crucial one. Behind the imperative to defeat unions and dismantle social protection were local businessmen—just as in Lilienthal’s CVC—who were eager to increase their wealth.

Yes, there was a conservative revolution happening in the 1970s and 1980s: neoliberalism did take over, with new ideas and new plans. But as deep as this transformation was, the neoliberal turn did not alter the modern political economy’s essential contradiction between businessmen and workers. It only reinforced the power of the former over the latter.

This contradiction has deep roots. For example, the robust welfare state of the 1950s and 1960s wasn’t just an idea of New Dealers and gracious businessmen. Rather, years of struggles by workers throughout the Americas led to better living conditions. The welfare state targeted by neoliberalism should be seen as a compromise in the conflict between unions and social movements, on the one hand, and private companies looking for extra profit, on the other. Struggles between private companies and workers affected the public policies that, in turn, would regulate social conflict.

Therefore, the age of the welfare state and the age of neoliberalism express not simply competing models concocted by experts and policy makers, but, indeed, different outcomes of social conflict. Moreover, neoliberalism could be seen as a reaction: not against developmental plans, but against the balance of power—that is, the power of workers in relation to the power of capital—that underpinned the welfare state.

Mixture got remixed, and, under neoliberalism, a new blend of state regulation and pro-market mechanisms reflected a new compromise between capitalists and workers. What changed was the balance of power behind the always precarious way in which politics and markets are embedded.

Contrary to a naive free-market narrative, the new order did not disentangle the market; instead, the state imposed new kinds of regulations and, most of all, produced new kinds of profit opportunities—such as, of course, the CVC and privately built public housing. The circulation of capital, the fragmentation of the labor market, and tax cuts for the rich were among the ways in which the state changed the game, but without changing the fundamentally mixed nature of the economic model.

Offner’s book has left us better equipped to understand this past, and to look ahead toward future turbulence. Nowadays, resurgent nativism and economic protectionism have thrown the state and the market back into the blender. And so it is worth asking: What new social compromises—and conflicts—will reconfigure the markets and states to come?


This article was commissioned by Caitlin Zaloomicon

Featured image: TVA sign in Tupelo, Mississippi. Photograph by Tennessee Valley Authority / Flickr