What If Neoliberalism Never Became Dominant?

The Actual History

Neoliberalism emerged as the dominant economic paradigm in the late 1970s and early 1980s, representing a dramatic shift away from the Keynesian consensus that had guided Western economic policy since the end of World War II. The post-war period from 1945 to the early 1970s had been characterized by significant government intervention in the economy, robust welfare states, strong labor unions, and regulated financial markets. This era, sometimes called the "Golden Age of Capitalism," saw unprecedented economic growth, reduced inequality, and rising living standards across developed nations.

By the early 1970s, however, this model began facing serious challenges. The 1973 oil crisis triggered by OPEC's oil embargo sent energy prices soaring. Simultaneously, many developed economies experienced "stagflation"—a previously rare combination of high unemployment and high inflation—which the prevailing Keynesian toolkit seemed ill-equipped to address. This economic turmoil created an opening for alternative economic theories that had been developing on the margins.

Neoliberalism, intellectually championed by economists like Friedrich Hayek and Milton Friedman of the Chicago School, offered a different approach. Its core tenets included reducing government intervention, privatizing state-owned enterprises, deregulating industries, cutting taxes (especially for corporations and high-income individuals), weakening labor unions, and liberalizing trade and capital flows. These ideas were first implemented at scale in Chile after Augusto Pinochet's 1973 coup, where the "Chicago Boys"—Chilean economists trained under Friedman—reshaped the country's economy.

The watershed moment for neoliberalism came with the elections of Margaret Thatcher as UK Prime Minister in 1979 and Ronald Reagan as US President in 1980. Thatcher dismantled significant portions of Britain's nationalized industries, confronted and weakened powerful trade unions, and embraced financial deregulation. Reagan implemented substantial tax cuts, deregulated various industries, and adopted an anti-union stance exemplified by his breaking of the air traffic controllers' strike in 1981.

By the 1990s, neoliberalism had become the default economic approach globally, codified in the "Washington Consensus"—a set of policy prescriptions promoted by institutions like the International Monetary Fund (IMF) and World Bank. The collapse of the Soviet Union further reinforced the perception that market-oriented capitalism was the only viable economic system. Democratic administrations under Clinton and Labour governments under Blair continued and sometimes expanded neoliberal policies, demonstrating how thoroughly the paradigm shift had occurred across the political spectrum.

Neoliberalism's ascendancy transformed the global economy, accelerating globalization, creating integrated financial markets, and shifting manufacturing from developed to developing nations. While it produced significant wealth and lifted millions out of extreme poverty, particularly in Asia, it also contributed to widening inequality within countries, financial instability (culminating in the 2008 global financial crisis), and environmental challenges through its emphasis on economic growth and limited regulation.

By the 2020s, neoliberalism's dominance was facing increasing challenges from both the political left and right, with growing skepticism about unfettered markets, rising economic nationalism, and renewed interest in industrial policy and state intervention. However, many of its core assumptions remain deeply embedded in economic institutions and policy frameworks worldwide.

The Point of Divergence

What if neoliberalism had never become the dominant economic paradigm? In this alternate timeline, we explore a scenario where the Keynesian consensus that characterized the post-war era persisted and evolved rather than being displaced by market fundamentalism in the late 1970s and early 1980s.

Several plausible points of divergence could have prevented neoliberalism's rise:

First, different political outcomes in key elections might have altered history's course. If Margaret Thatcher had lost the 1979 UK general election to Labour's James Callaghan, or if Ronald Reagan had been defeated by Jimmy Carter in 1980, neoliberalism would have lost its two most powerful and effective advocates. Without these transformative figures implementing radical market-oriented reforms in the world's leading economies, the neoliberal revolution might have remained a fringe academic theory rather than becoming practical policy.

Alternatively, the pivotal divergence could have occurred in economic management during the 1970s crisis. If Keynesian economists had developed more effective responses to stagflation—perhaps embracing income policies or selective market reforms within the Keynesian framework—the perception that Keynesianism had "failed" might never have taken hold. Successful economic navigation through the oil shocks and inflation of the 1970s would have maintained confidence in managed capitalism.

A third possibility focuses on intellectual history. If Milton Friedman and his Chicago School colleagues had not gained such prominence—perhaps because their monetarist theories did not seem to work in practice, or because they failed to build effective advocacy networks like the Mont Pelerin Society—the intellectual foundation for neoliberalism might have remained marginal. The Ford Foundation and other influential institutions might have continued supporting Keynesian research rather than funding free-market think tanks.

Finally, had Chile under Salvador Allende not been overthrown in 1973, the world would have never witnessed the first "laboratory" of neoliberalism. Without the perceived "Chilean Economic Miracle" (despite its enormous social costs), policymakers might have lacked a tangible example to point to when advocating for similar reforms elsewhere.

In our alternate timeline, we'll consider a scenario where a combination of these factors—particularly the electoral defeat of both Thatcher and Reagan, coupled with a more successful adaptation of Keynesian economics to the challenges of the 1970s—prevented the neoliberal turn and led to a different economic trajectory for the global economy.

Immediate Aftermath

Political Landscape Rearranged (1979-1985)

In this alternate timeline, the 1979 UK general election resulted in a narrow victory for James Callaghan's Labour Party. Despite the "Winter of Discontent" and economic challenges, voters ultimately proved reluctant to embrace Thatcher's radical agenda. In the United States, President Jimmy Carter managed to resolve the Iran hostage crisis in early October 1980 through diplomatic channels, providing him with a foreign policy victory that, combined with concerns about Reagan's age and perceived extremism, secured his reelection.

These electoral outcomes fundamentally altered the trajectory of economic policy in the Western world. While both Carter and Callaghan recognized the need for economic reforms to address inflation and stagnation, they pursued more moderate adjustments within the Keynesian framework rather than wholesale abandonment of it:

Negotiated Incomes Policies: Rather than breaking unions, Labour in Britain and Democrats in America pursued negotiated "social contracts" with organized labor. Unions accepted wage restraint to combat inflation in exchange for greater workplace democracy and maintained collective bargaining rights.
Selective Deregulation: Some industries, particularly transportation and telecommunications, still saw regulatory reform, but this was targeted rather than sweeping, preserving public interest regulations while eliminating excessive bureaucracy.
Industrial Policy: Instead of letting market forces alone determine industrial outcomes, both governments implemented strategic industrial policies to manage transitions in declining industries while investing in emerging sectors, particularly early computer technology and renewable energy.

Modified Monetarism (1981-1984)

The Federal Reserve under Paul Volcker still implemented tight monetary policy to combat inflation, but in this timeline, it was complemented by fiscal support for affected sectors and workers, cushioning the social impact. The recession of the early 1980s proved shallower and briefer, with unemployment peaking at 8% rather than exceeding 10% as it did in our timeline.

In Britain, the Bank of England similarly raised interest rates but coordinated closely with the Treasury on a balanced approach. North Sea oil revenues, rather than funding tax cuts, were directed into a "British Investment Fund" modeled on Norway's approach, creating a sovereign wealth fund to ease the transition of industrial regions and invest in future industries.

International Economic Order (1982-1988)

The debt crisis that engulfed Latin America beginning in 1982 unfolded differently in this alternate timeline. Without the staunch free-market advocates in power in the US and UK, the IMF and World Bank maintained more flexibility in their approach to indebted nations:

Orderly Debt Restructuring: Rather than forcing harsh austerity as the primary solution, international institutions facilitated negotiations between creditors and debtors, resulting in partial debt forgiveness, longer repayment schedules, and more gradual fiscal adjustments.
Capital Controls Maintained: The dismantling of capital controls that accelerated financial globalization in our timeline proceeded much more cautiously. Countries retained more tools to manage international capital flows, reducing financial instability.
Reformed GATT Negotiations: The Uruguay Round of GATT negotiations that began in 1986 still pursued trade liberalization but included stronger labor and environmental standards, reflecting the continued influence of social democratic principles rather than pure free-market ideology.

Technology and Innovation (1983-1990)

The technology sector evolved somewhat differently without the venture capital boom that followed financial deregulation in our timeline:

Public-Private Partnerships: Government funding played a larger role in early internet development, with the National Science Foundation maintaining oversight of internet infrastructure longer and implementing open-access principles more firmly.
Regional Technology Centers: Rather than concentrating in Silicon Valley, technological innovation spread more evenly across different regions, with government policies encouraging technology corridors in former industrial areas to replace manufacturing jobs.
Earlier Open Source Movement: Without the enormous commercial pressure of the software industry that developed in our timeline, computer scientists and programmers developed stronger open-source ethic earlier, leading to greater collaboration in software development.

Social Policy Evolution (1985-1990)

The welfare state, rather than being retrenched, underwent reform to address genuine inefficiencies while maintaining its core functions:

Healthcare Reform: In the US, the Carter administration implemented a version of universal healthcare in its second term, establishing a public option alongside private insurance. In the UK, the NHS received consistent funding increases rather than the efficiency-focused constraints of our timeline.
Housing Policy: Public housing programs were modernized rather than dismantled, with greater emphasis on mixed-income developments and community management rather than the large-scale privatization seen in our timeline.
Education: Greater investment in public education continued, with particular emphasis on vocational training and community colleges to address changing workforce needs, rather than the market-based reforms and reduced public funding that characterized our timeline.

By 1990, the global economic landscape looked markedly different from our timeline—more regulated, less financialized, with stronger labor protections and welfare systems, yet still dynamically responding to technological change and global competition, albeit at a somewhat more measured pace.

Long-term Impact

Economic Structure and Performance (1990-2005)

By the 1990s, the economic structures of major Western economies diverged significantly from our timeline:

Financial Sector Developments

Without the sweeping deregulation epitomized by the UK's 1986 "Big Bang" and the gradual dismantling of Glass-Steagall in the US, the financial sector evolved along different lines:

Regulated Innovation: Financial innovation still occurred but within stronger regulatory frameworks. Derivatives markets developed more slowly and transparently, with requirements for exchange trading rather than over-the-counter deals.
Banking Structure: The banking sector remained more segmented, with clearer divisions between commercial and investment banking. Financial institutions were generally smaller, less interconnected, and less globally dominant.
Compensation Patterns: Without the deregulatory environment that facilitated explosive growth in financial sector compensation, income disparities grew more modestly. The phenomenon of CEOs earning hundreds of times more than average workers, common in our timeline, remained rare.

Industrial Base and Manufacturing

The alternate timeline saw significantly different outcomes for manufacturing sectors in developed economies:

Managed Deindustrialization: Rather than rapid deindustrialization driven primarily by market forces, governments implemented industrial policies that managed the transition more gradually. Manufacturing declined as a percentage of employment but remained a larger share of GDP in the US, UK, and other developed economies.
Automation vs. Offshoring: With stronger labor protections and more skepticism about unrestricted trade, companies invested more heavily in automation and productivity improvements rather than relocating production to low-wage countries. This resulted in fewer manufacturing jobs overall but maintained more high-skilled production work in developed nations.
Regional Economic Balance: Geographic inequality—the stark contrast between prosperous metropolitan areas and declining industrial regions—while still present, was less severe. Government regional development programs, combined with industrial policies, prevented the extreme hollowing out of manufacturing regions seen in our timeline.

Globalization's Alternative Path (1995-2010)

Globalization proceeded along a different trajectory in this timeline:

Trade Regimes

Balanced Trade Agreements: The global trade architecture that developed emphasized not just reducing tariffs but ensuring labor rights, environmental protections, and policy space for national development strategies. The World Trade Organization, established in 1995 as in our timeline, included stronger social and environmental standards.
Selective Protection: Strategic industries received selective protection rather than being fully exposed to global competition. "Infant industry" arguments remained more accepted in international economic discourse, allowing developing countries greater latitude in industrial policy.
Managed China Integration: China's integration into the global economy proceeded more gradually. Its 2001 entry into the WTO (as in our timeline) came with stronger requirements regarding labor standards, environmental protections, and limits on state subsidies, resulting in a more balanced trade relationship with Western economies.

Capital Flows and Financial Crises

Asian Financial Crisis Prevention: The maintained system of capital controls allowed Southeast Asian economies to manage foreign investment flows more effectively, preventing or significantly reducing the severity of the 1997-98 Asian Financial Crisis that devastated several "tiger economies" in our timeline.
Alternative Development Models: Without the Washington Consensus imposing a one-size-fits-all approach, developing nations experimented with various development strategies. Some, like Malaysia and South Korea, successfully combined strategic market engagement with strong state direction and social policies.
Reduced Financial Contagion: The 2007-2008 Global Financial Crisis that originated in the US subprime mortgage market either didn't occur or was substantially milder in this timeline. With stronger regulation of mortgage lending, limits on securitization, and better capitalized banks, the housing correction that inevitably came didn't cascade into a systemic financial crisis.

Social and Political Consequences (2000-2025)

The different economic trajectory produced profound social and political differences by the 2020s:

Inequality Trends

Moderated Income Inequality: While some increase in inequality still occurred due to technological change and globalization, it was significantly less dramatic than in our timeline. The income share of the top 1% increased moderately rather than doubling or tripling as it did in the US and UK.
Maintained Middle Class: The middle class in developed economies remained larger and more economically secure, with stronger collective bargaining, higher minimum wages, and more comprehensive social benefits providing a bulwark against economic precarity.
Asset Ownership: Home ownership rates remained higher among younger generations, as housing markets didn't experience the same degree of financialization and speculation seen in our timeline. Retirement security remained more dependent on defined-benefit pension plans rather than individual investment accounts.

Political Landscape

Reduced Polarization: The extreme political polarization that characterized the 2010s and 2020s in our timeline was significantly muted. Without the acute economic insecurity and dramatic inequality that fueled populist movements of both left and right, political discourse remained more centered on pragmatic policy differences.
Trust in Government: Public trust in government and institutions declined less precipitously than in our timeline. With the state demonstrating continued competence in managing economic transitions and providing public goods, the anti-government sentiment that fueled movements like the Tea Party found less fertile ground.
Different Globalist-Nationalist Balance: The backlash against globalization that produced Brexit and similar nationalist movements was less intense. A more managed form of globalization that visibly benefited ordinary citizens rather than primarily multinational corporations and investors generated less resentment.

Technological Development

Digital Economy Governance: The internet and digital economy developed with stronger public interest governance from the outset. Social media platforms emerged with clearer regulation regarding privacy, data ownership, and responsibility for content, preventing some of the more harmful effects seen in our timeline.
Innovation Patterns: Technological innovation remained robust but followed different patterns. With less extreme wealth concentration in the hands of a few tech billionaires, technological development was more directed by public needs and less by the pursuit of monopoly rents and venture capital returns.
Green Technology: With consistent public investment in renewable energy starting in the 1980s rather than the stop-start pattern of our timeline, the transition to green energy progressed more rapidly. By 2025, renewable energy constituted a significantly larger portion of the energy mix, and climate change mitigation efforts were more advanced.

Global Economic Balance of Power (2010-2025)

By the 2020s, the global economic order looked markedly different:

Modified American Hegemony: The United States remained the world's largest economy but exercised leadership through multilateral institutions rather than unilateral action. The dollar's role as reserve currency continued but with greater accommodation of regional currency arrangements.
European Integration: European integration proceeded somewhat more slowly but more solidly, with greater emphasis on social cohesion alongside market integration. The Eurozone was established with stronger fiscal coordination mechanisms from the outset, avoiding some of the structural problems that plagued it in our timeline.
Developing Nations: Developing economies, particularly in Africa and Latin America, experienced more consistent, if sometimes slower, growth without the boom-bust cycles often triggered by volatile capital flows in our timeline. Income convergence between rich and poor nations proceeded more steadily.
Climate Response: With neoliberalism's emphasis on market solutions and resistance to regulation never becoming dominant, the global response to climate change began earlier and proceeded more systematically, with coordinated carbon pricing mechanisms and green industrial policies implemented gradually from the 1990s onward.

By 2025, the world economy of this alternate timeline was more equitable, somewhat less dynamic in pure GDP growth terms, but significantly more sustainable environmentally and more stable financially than the one that emerged from the neoliberal revolution of our timeline.

Expert Opinions

Dr. Mariana Rodriguez, Professor of Comparative Political Economy at Columbia University, offers this perspective: "The neoliberal turn of the 1980s represents one of history's most consequential ideological shifts, transforming not just economic policy but our fundamental conceptions of the relationship between state, market, and society. In an alternate timeline where this shift never occurred, we would likely see a more evolutionary adaptation of the Keynesian model rather than its revolutionary overthrow. The result would be economies with lower productivity in some sectors but greater resilience and equity. The financial sector would be smaller and less innovative but also less crisis-prone. Most significantly, the extreme wealth concentration we've witnessed since the 1980s would be substantially moderated, with profound implications for political dynamics and social cohesion."

Professor James Harrington, Economic Historian at the London School of Economics, provides a contrasting view: "While it's tempting to romanticize the pre-neoliberal economic order, we must remember that the Keynesian consensus faced genuine challenges by the 1970s. In an alternate timeline without the neoliberal ascendancy, Western economies would have eventually been forced to implement significant reforms regardless. The question is whether they could have selectively incorporated market mechanisms while preserving social protections—a 'third way' that emerged organically rather than as a political rebranding exercise. I suspect such a path would have produced more balanced outcomes than either pure neoliberalism or a rigid defense of the post-war settlement in its original form. Crucially, developing nations might have found more policy space to pursue heterodox development strategies rather than being forced into the Washington Consensus straitjacket."

Dr. Li Wei, Senior Research Fellow at the Beijing Institute for Global Political Economy, adds an international perspective: "The neoliberal era coincided with and facilitated China's dramatic economic rise, but through a model that actually defied core neoliberal prescriptions. In a timeline where Western economies maintained stronger industrial policies and managed trade relationships, China's integration into the global economy would necessarily have followed a different trajectory—likely more gradual and balanced. The extreme global imbalances that characterized the 2000s would be moderated. Interestingly, the Chinese approach of 'crossing the river by feeling the stones'—pragmatic experimentation rather than ideological purity—might have found more parallels in Western economic management in such a timeline, potentially leading to more constructive international economic dialogue rather than the ideological confrontations that have increasingly characterized US-China relations."