Last time we talked about what Neoliberalism is, and the arguments that support it. These arguments were deployed—and continue to be deployed—whenever Neoliberalism is questioned.
One common definition of economics is, “the theory of the allocation of scarce resources among competing ends.” And further, that this always involves “trade-offs” and that “there is no such thing as a free lunch.” A similar definition by economist Thomas Sowell is, “The analysis of how finite resources are used to meet infinite wants.”
And so we saw that the basic, core idea animating Neoliberalism is this: that only markets can allocate those resources effectively.
And then we saw the political ideas of Neoliberalism all follow logically from these core assumptions.
Furthermore, the Neoliberal conception of markets also plays a critical role here. Markets are massive “information processors” that allow for “decentralized exchange.” All market actors are “rational” and have access to unlimited information which they use to “maximize utility.” Market exchanges are always “voluntary.” Markets are self-adjusting and naturally head towards “equilibrium” unless they are “interfered” with by governments. All market actors are peers, and interfering with their behavior is constraining “freedom.”
The core tenets of Neoliberalism are based on something called “welfare economics,” whose fundamental theorems are (per Wikipedia):
1. Complete markets with no transaction costs, and therefore each actor also having perfect information.
2. Price-taking behavior with no monopolists and easy entry and exit from a market.
Furthermore, the first theorem states that the equilibrium will be fully Pareto optimal with the additional condition of:
3. Local nonsatiation of preferences such that for any original bundle of goods, there is another bundle of goods arbitrarily close to the original bundle, but which is preferred.
The second theorem states that out of all possible Pareto optimal outcomes one can achieve any particular one by enacting a lump-sum wealth redistribution and then letting the market take over.
[Note: “Pareto optimality” was a core assumption of the “marginal revolution” in economics, which was created in response to socialist critiques. It is a state in which one actor in a system becomes relatively better off with no other actor becoming worse off; in other words, a “win-win.” This gave us mainstream economics as we know it today.]
Furthermore, as we saw, they depict governments as inherently “coercive.” Tax collection, for example is enforced by law, whereas no one makes you buy a latte from Starbucks.
Because governments are not under competitive pressure, and they are monopolies inside their own borders, governments are inherently inefficient and sclerotic, they argue, while markets are correspondingly dynamic and efficient. Because the information available to states is limited, any allocation via government action will be plagued by surfeits and shortages, they claim. Furthermore, they insist, all governments are inherently power-hungry, expansionist, greedy, corrupt, incompetent, lazy, oppressive and must be kept as small as weak as possible (except when it comes to making markets). A lot of this theory comes from “public choice economics” which has been instrumental in justifying constraining the state’s ability to take care of its citizens under market economies (we’ll talk about that, below).
Only private actors in markets can allocate resources efficiently, the thinking goes. This means that the huge ultra-wealthy class of financiers, traders, brokers, bankers, hedge fund managers, advisors, and so forth, are actually doing us all a favor by helping allocate money and resources to their “highest and best uses,” something governments cannot do by design.
The thing is, all of the arguments of Neoliberalism do follow logically from the core premises!
If you read Neoliberal literature, I guarantee you will find those assumptions everywhere, even when they are not stated explicitly. And, while I apologize about going a bit overboard with the quotation marks, they do illustrate the words and phrases you see and hear over and over again reading Neoliberal economic literature (which is kind of redundant, as most mainstream economics is fundamentally Neoliberal by this point).
The point I was trying to make was that Neoliberalism is a consistent ideology, and the political ideas which stem from it do make sense given that one accepts the basic core premises. It’s tempting to see Neoliberals as just making excuses for greed, and that is true for some of them, but not all. I believe it’s important to understand the thinking of people you oppose. Many Neoliberals and people advancing Neoliberalism don’t see themselves as evil. In fact, they see Neoliberalism as actually making the world a better place, despite all the evidence to the contrary! Just peruse Reddit’s r/neoliberal for example. And any rollback or mitigation of Neoliberalism will make the world far worse off, they claim, and typically cite places like the former Soviet Union, North Korea and Venezuela as examples.
I think I did a reasonably good job of explaining how Neoliberals think, and why they think it. Call it the “steelmanning” of Neoliberalism if you like.
So, I thought I should follow up with a post explaining just a few things that wrong with the theories, and hence with Neoliberal economics.
Of course, doing that would require something approaching book length. Not even my posts are that long. So this will necessarily be a just a primer.
Neoliberalism in practice
We’ve looked at Neoliberalism in theory. Now let’s look at the reality in practice.
In practice, Neoliberalism has channeled essential government functions through corporate tollbooths where value is extracted by privateers at multiple points along the system. Health care, higher education, social insurance, incarceration, defense—all now have all sorts of self-interested private actors along the way taking their cut. This has caused the costs paid by the public to grow, not shrink, along with far worse outcomes.
Neoliberalism has also led to a wholesale looting of the public sector. The patrimonies of various countries, built by generations of citizens, have been sold off to a small transnational investor class who then charge the public for what they used to receive for free from their governments.
Public/private partnerships have enabled crony capitalism on an unprecedented scale. When you combine the functions of big business and government, of course it’s going to open the door to all kinds of self-serving corruption. How could it be any other way? While Neoliberals decry “crony capitalism” at every opportunity, in practice channeling important government functions through the private sector makes it an inevitability.
Indeed, “Public/private partnership” has become a code word for corporate welfare. And corporate welfare has expanded, even as welfare for ordinary citizens has been rolled back in the name of “personal responsibility.”
Financialization, as we’ve seen, allows wealth to be extracted via paper instruments and debt leveraging, with no real, concrete benefits to the public at large. Debt and leverage, even where they seem to provide increases in business activity, really just result in bubbles. The entire system becomes more fragile. And financialization has been the primary driver of runaway inequality.
Workers have had to turn to the growing financial sector to maintain their increasingly precarious living standards. Since everything must be “paid for” by shopping in markets, what do you do when you not have enough money to pay for the things you need in such markets? Credit, of course!
Neoliberalism has meant that wages have stopped growing in all of the developed countries. Workers are no longer able to demand a larger share of the economy’s gains relative to the investor class. The addition of several billion workers to the global labor pool has caused wages in developed nations to stagnate, causing workers to lose whatever negotiating power they once possessed in the days of unionization and full employment. This is despite assurances from Neoliberals that economics is not “zero-sum.”
“Free trade” has really resulted in global wage arbitrage, leading to a race to the bottom in wages and working conditions. That’s why the countries already at the bottom have been the major beneficiaries of Neoliberalism (e.g. China, India, Pakistan, Bangladesh, Vietnam, Mexico, etc.). And, as we’ve said, the relative income increases in these developing economies has become the main (really the only) moral justification for continuing business as usual Neoliberalism.
Markets tend to displace the costs of transactions onto the wider society instead of internalizing them. Such “externalities,” while a part of economic theory, tend to be downplayed by Neoliberals.
Perhaps the biggest—and the most insidious—thing that Neoliberalism has done is to tie the hands of governments, making it impossible for them to deal with the most pressing problems of our age. How are politicians supposed to deal with issues—from unemployment via automation to “fake news” to climate change—if they can’t spend any money or regulate the market? The answer is, they can’t. Kurt Vonnegut once wrote that the charge of “throwing money at a problem” is silly, because, in his words, “that’s what money’s *for*.”
But not for Neoliberals.
Furthermore, mobile capital has tied the hands of politicians across the entire world! And, as we might expect, we’re seeing protests erupting across the entire planet against do-nothing politicians sitting on their hands as the world is melting down and living standards decline. This has also led to the rise of right-wing authoritarian parties, who then claim a mandate to do something (even if that’s scapegoating migrants and other vulnerable populations and building walls).
Very few voters go out and vote for politicians who explicitly claim they will do nothing about pressing social problems. Neoliberalism allows politicians to appear to be solving problems, while in reality doing nothing to solve the problems and continuing to redistribute income and wealth to the investor class. They classify this as a “win-win.” Yet the inherent limitations of Neoliberalism—letting the market sort it out—are becoming apparent, and are engendering protests and radical movements worldwide.
What’s wrong and what’s right
First of all, I think it’s important to acknowledge the grain of truth behind Neoliberalism. Private ownership of resources, and markets driven by supply-and-demand dynamics do seem to have certain advantages in many cases. For many things, they do provide a good way of allocating resources.
It’s also widely acknowledged that trying to centrally-plan an entire advanced technological economy is beyond the capabilities of any state. Centrally-planned economies do not get adequate feedback signals from the market, meaning that top-down allocation of resources by bureaucrats often times does result in the surfeits and shortages that market liberals feared. The bureaucrats suffer from perverse incentives that open markets not under the control of any one entity do not.
This was what the originators of Neoliberalism sought to prove, and the wrote exhaustively and ebulliently about the topic. Most people by now have acknowledged that markets have a role to play in any advanced economy, as well as the problems inherent in central planning.
In fact, markets and commerce have existed throughout all of history. Voluntary exchange has always been a part of human social behavior, although this has taken different forms through time.
And of course, the world has gotten richer overall, if you ignore the distributive effects and ecosystem destruction. But there is no way to simultaneously run a parallel world under a different economic regime to see if growth would have been just as good, and distributed more evenly (and with less environment devastation). This is an inherent problem with calling economics a “science”—its assertions are non-falsifiable. Thus, citing rosy statistics about economic growth or “lifting people out of poverty” is not a valid defense of Neoliberalism.
Extreme Poverty Cut in Half? Only in the Minds of the Capitalists (Naked Capitalism)
In fact, there is very good reason to believe that the world would indeed have been richer under the previous macroeconomic regime than under Neoliberalism, as economist Ha-Joon Chang points out:
[23:07] “We very often hear that thanks to globalization we are richer than ever. In itself it doesn’t mean anything, because we will be richer than ever as per our economy is growing faster than population.”
“So the relevant question is whether we are doing better than what we use to, and the evidence tells you that this isn’t the case. Roughly speaking, for a few decades after the Second World War, the world economy was growing very healthily, 2.6%. In the next 35 years, growth has markedly slowed down. Basically it has been halved down to 1.4%.”
“So we might be richer than ever, but these numbers tell you that we could have been even richer. If we had maintained the previous rate of growth, we would be even richer.”
“Most countries in this earlier period were actually using rather interventionist policies and they had a lot more restrictions on the internationalization of the economy. Globalization was a very controlled affair in those days…”
“So that makes you think, how come you had this period when most countries were using “bad policies,” and the world economy grew much faster than what they have been in the last three and a half decades when lots of things have been opened up and liberalized and so on?
What Is Wrong With Globalization? (YouTube)
Also, much of the growth over the past few decades has been zero-sum; the gains of the developing world have come at the expense of the developed world, because all of the capital has flowed away from the latter and toward the former. If the rosy statistics of the developing world weren’t combined with dire statistics about the developed world, it would be far easier to accept the Neoliberal argument. Also, much of the statistics come from China’s addition to the WTO, which would have had a similar effect under any macroeconomic regime.
Statistics without context mean nothing.
One error of Neoliberalism, in my view, is extrapolating idealized markets to the real world. The real world does not have the frictionless, idealized markets full of rational peers engaging in voluntary exchanges with unlimited information that one reads about in economic textbooks and sees on blackboards.
When pressed, economists usually admit this. Yet they persist in using such idealized markets as the starting point for their discipline, despite them not existing anywhere in the real world outside of perhaps, small local farmer’s markets. Whistling in the Wind has a good rundown (Neo-classicalism and Neoliberalism use the same core assumptions):
Neo-classicalists argue that the market will naturally come to an equilibrium known as perfect competition. In this ideal utopia everything will be perfect. Consumers get the lowest price, workers get a fair wage and businesses earn only ‘normal’ profits. No one is ripped off or exploited because no such nasty things occur. There is no poverty, unemployment, inflation or recessions. There is no need for government to intervene or even exist.
While it does describe agriculture, it is completely irrelevant to the rest of the economy. It is a conservative’s dream, more like Narnia than the real world. Despite being taught in all textbooks and described as the economy without government interference, it is instead a deeply flawed theory. It is based upon 5 unrealistic assumptions that do not reflect the actual economy.
The 5 assumptions of perfect competition (as stated in textbooks) are:
- There are a large number of buyers and sellers in the industry and all have such a small market share that they cannot influence the market. This means every firm and consumer is a price taker.
- All goods are identical (homogeneous)
- There are no barriers to entrance or exit of the market.
- Consumers have perfect information.
- All firms have equal access to resources and technology and there is constant or decreasing returns to scale.
There Is (Almost) No Such Thing As Perfect Competition (Whistling in the Wind)
And, more to the point, we all know that markets are getting less, not more competitive. We all know that there are no real markets, for things like internet access. Where I live, there are a grand total of two (2) internet companies to choose from. They both charge the exact same price (after the introductory offer bait-and-switch), which is massively higher than most people pay in the rest of the world (I pay $70.00 a month; I’m told it’s more in the range of 15-25 Pounds/Euros in Europe). We also have some of the slowest speeds and intermittent performance. It’s not unusual for my internet to go down for days at a time, and throttle during weekends enough to be unusable.
As for equilibrium, it has been known for some time that this too has been a hoax. here’s Whistling in the Wind, again:
Even on its own grounds, the argument for equilibrium to naturally occur is flawed. The market forces that are supposed to push the price towards equilibrium and hold it there are either too weak or non-existent.
But won’t a business that charges too much have too few customers? Won’t a business that sells too cheaply not be able to pay its costs? True, but this does not mean it will reach equilibrium. You see, not all costs are equal, rather they all run on separate time frames. Repaying your mortgage on the building is a fixed cost not related to production. Not all employees are directly productive (managers and security guards provide benefit but are not directly related to the production of goods). Therefore it is not as easy as simply equating supply and demand when it is such a variable cost. It is quite possible for a business to run a loss for quite some time and still remain in business.
Do We Ever Reach Equilibrium? (Whistling in the Wind)
Even appealing to game theory doesn’t work, as this study shows:
…the intuition about tic-tac-toe vs. chess holds up in general, but with a new twist. When the game is simple enough, rationality is a good behavioral model: players easily find the equilibrium strategy and play it. When the game is more complicated, whether or not the strategies will converge to equilibrium depends on whether or not the game is competitive. If the incentives of the players are lined up they are likely to find the equilibrium strategy, even if the game is complicated. But when the incentives of the players are not lined up and the game gets complicated, they are unlikely to find the equilibrium. When this happens their strategies always keep changing in time, usually chaotically, and they never settle down to the equilibrium. In these cases equilibrium is a poor behavioral model.
Equilibrium: When does one of the central ideas in economics work? (Science Daily)
Plus, there’s something called the Lipsky-Lancaster Theorem, or the “Theory of the Second Best.” What this says, basically, is that markets cannot be in equilibrium unless all markets are in equilibrium—an unlikely proposition. While there are a million videos and Web sites talking about workings of the magical equilibrium fairy, finding information on the Theory of the Second Best is very difficult. This is one of the best summaries I could find from the OECD:
The theory of the second best suggests that when two or more markets are not perfectly competitive, then efforts to correct only one of the distortions may in fact drive the economy further away from Pareto efficiency.
Thus, for example, if there is one industry which can never satisfy all the conditions for perfect competition, it is no longer clear that the optimal policy is to move the remaining industries towards perfect competition. Moreover, the conditions under which Pareto efficiency can be achieved under these circumstances are complex and not likely to be implementable.
Thus, the defense of competition policy often requires giving weight to more than Pareto efficiency. For example, competition policy may be defended on the grounds of equity, democracy and incentives. However, achievement towards Pareto efficiency is generally given more weight in the application of competition policy.
Theory of Second Best (OECD Glossary of Statistical Terms)
So, in the real world, perfect competition, equilibrium, and idealized markets are all total bullshit. Not a promising start for Neoliberalism.
Most books about Neoliberalism are about “idealized” free trade, as studied in the lab. They use all sort of science and fancy mathematics to back it up. What they do not do, is look at actual economic history, which I do pretty regularly. Economic history has increasingly been scrubbed from economics curricula in favor of highly mathematized theory.
In the same way, the notion of rational consumers acting with perfect information has been derided nearly since its inception during the marginal revolution. It’s long been recognized that this is just a fiction designed to get highly mathematical blackboard models to work. Again, this is acknowledged by economists when pressed as an unfortunate—but necessary—”simplification.” Yet all their models of markets continue to flow from this assumption! Already back in the nineteenth century, the unconventional American economist Thorstein Veblen remarked,
“The hedonistic conception of man is that of a lightning calculator of pleasures and pains, who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area but leave him intact…
He is an isolated, definitive human datum, in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or another. Self-poised in elemental space, he spins symmetrically about his own spiritual axis until the parallelogram of forces bears down on him, whereupon he follows he line of the resultant”
So, add rational choice theory to the growing discard pile of false assumptions. Most people want a modicum of stability, security and autonomy; the very things that the market does not provide.
Everyone is equal, but some are more equal than others
In order for the axioms of Neoliberalism to work, it must eliminate any asymmetries in power and information, which we all know exist in the real world. Neoliberalism assumes every action in the market place is a “mutually beneficial transaction” and that any transaction is “voluntary” Therefore ipso-facto, if it were not mutually beneficial, it would not take place! Therefore, there can be no oppression. No one can ever be “tricked” or “fooled,” for example.
Neoliberalism also rejects class analysis, and even the very existence of classes. Classes are, of course, where people stand in relationship to the means of production. This means that some classes will have power over others. Neoliberals eliminate any and all consideration of class, and anyone raising the issue of class or power differentials is derided as “Marxist” (the Neoliberals’ favorite snarl word). After all, there can be no class warfare if there are no classes! Rather, say Neoliberals, we are just all equals freely “trucking and bartering” in mutually beneficial exchanges in markets all over the world. For example, employees voluntarily choose to sell their time in exchange for money. Where is the oppression? say Neoliberals. It’s just all a freely chosen contract!
Freedom is just another word…
Critical to the Neoliberal conception of markets, as we’ve seen, is the idea that markets are inherently non-coercive. Everything is portrayed as just a freely-negotiated contract, including the employer/employee relationship, as we noted above.
Of course, this is totally at odds with what most of us actually experience in our day-to-day lives in the real world. Most of us have the “freedom” to work or starve, which is no kind of freedom at all. In reality, those of us without access to the power of capital ownership feel more like we are in an open-air prison, constantly having to hustle for enough money to survive another day, thanks to all-encompassing markets from which we cannot escape.
This is addressed very well in this post by Naked Capitalism:
One issue I’ve long been bothered by is the libertarian fixation on the state as the source of coercive power. The strong form version is that the state is the only party with coercive power. Libertarians widely, if not universally, depict markets and commerce as less or even non-coercive.
What is remarkable is how we’ve blinded ourselves to the coercive element of our own system. From Robert Heilbroner in Behind the Veil of Economics:
This negative form of power contrasts sharply with with that of the privileged elites in precapitalist social formations. In these imperial kingdoms or feudal holdings, disciplinary power is exercised by the direct use or display of coercive power. The social power of capital is of a different kind….The capitalist may deny others access to his resources, but he may not force them to work with him. Clearly, such power requires circumstances that make the withholding of access of critical consequence. These circumstances can only arise if the general populace is unable to secure a living unless it can gain access to privately owned resources or wealth…
The organization of production is generally regarded as a wholly “economic” activity, ignoring the political function served by the wage-labor relationships in lieu of baliffs and senechals. In a like fashion, the discharge of political authority is regarded as essentially separable from the operation of the economic realm, ignoring the provision of the legal, military, and material contributions without which the private sphere could not function properly or even exist. In this way, the presence of the two realms, each responsible for part of the activities necessary for the maintenance of the social formation, not only gives capitalism a structure entirely different from that of any precapitalist society, but also establishes the basis for a problem that uniquely preoccupies capitalism, namely, the appropriate role of the state vis-a-vis the sphere of production and distribution.
What struck me about Heilbroner’s discussion, as if he was tip-toeing around the issue, and it was not clear whether because he could not formulate a crisp description of the power relationships, or that it was clear to him but he really didn’t want to come out and say what he saw.
Ian Welsh ventures where Heilbroner hesitated to go:
The fundamental idea of our current regime is one that most people have forgotten, because it is associated with Marx, and one must not talk about even the things Marx got right, because the USSR went bad. It is that we are wage laborers. We work for other people, we don’t control the means of production. Absent a job, we live in poverty. Sure, there are some exceptions, but they are exceptions. We are impelled, as it were, by Marx’s whip of hunger. It took a lot of work to set up this system, as Polanyi notes in his book “the Great Transformation”, but now that it has happened, it is invisible to us.
The “Fixing Capitalism” Headfake (Naked Capitalism)
Are markets efficient?
To me, this argument has never made sense on it’s face. I’m sure “real” economists would call me clueless, but it seems like a bunch of entities all competing to sell the exact same product is far more wasteful that societies just producing it for themselves.
In nature, competition is inherently wasteful. That’s why we see so little of it. There’s competition in limited arenas, of course, such as for mates. That’s why you see rams butting heads, and birds lekking (engaging in competitive displays). And it’s known that these behaviors are wasteful by design—birds invest in all sort of extravagant behaviors like building bowers and collecting shiny objects, and deer grow horns so big they can’t evade predators. Game theorists refer to this behavior as honest signaling—sending signals that are hard to fake.
Presumably, in these cases, the benefits outweigh the costs. But most of the time species cooperate—you don’t see deer fighting over grazing grounds, for example, or trying to exclude other animals. When a wolf pack brings down a kill, they don’t immediately turn on each other and fight over who gets to eat. If they did that, wolves would have gone extinct a long time ago, replaced by more cooperative species.
Even in an ideal market where there are, say, twenty or thirty competitors to choose from (almost impossible to find in the real world), each is going to have to spend money and resources convincing consumers to buy from them, instead of the other nineteen or so other companies offering the exact same goods and services. This leads to all sorts of wasteful arms races.
This is “efficient?” Really???
The vast waste and bloat of the global advertising industry seems to me to be proof positive that markets are not efficient. Even in markets where there are few or no real competitors, billions are blown every year by companies on wasteful advertising and marketing. Are the millions of dollars paid to LeBron James or Aaron Rodgers to endorse a product really making anything more “efficient?” Are they appealing to “rationality,” or hero-worship? Add to that the fact that the best way to convince people that you have the better product is simply to lie to them. False claims permeate advertising, and always have. The only defense against this practice historically has been government regulations—the same thing that Neoliberals hate and want to strip away.
The last thing any industry wants is a “rational” consumer. The very existence of the entire advertising industry makes a mockery of the concept. As I’ve said before, the business and marketing schools are on the opposite side of campus from the economics department, and the two are totally different majors which barely interact with one another. What a joke!
And as for the lean, mean, and nimble private sector, just try calling customer support.
Also, government is under no obligation to make a profit. It can even produce goods at a loss, unlike private entities in the market. If we get everything solely through the market, and market crashes, then what are we to do? If we rely on government services instead, we do not have to worry about this problem.
Market always crash
And markets always crash. This is by design. Even rah-rah capitalists have to acknowledge this fact. In fact, they must crash: that’s just how markets work! This post, which is hardly from an anti-capitalist Web site, explains why:
Whether it’s stocks not crashing or the economy going a long time without a recessions, stability makes people feel safe. And when people feel safe, they take more risk, like going into debt or buying more stocks.
It pretty much has to be this way. If there was no volatility, and we knew stocks went up 8% every year, the only rational response would be to pay more for them, until they were expensive enough to return less than 8%. It would be crazy for this not to happen, because no rational person would hold cash in the bank if they were guaranteed a higher return in stocks. If we had a 100% guarantee that stocks would return 8% a year, people would bid prices up until they returned the same amount as FDIC-insured savings accounts, which is about 0%.
But there are no guarantees — only the perception of guarantees. Bad stuff happens, and when stocks are priced for perfection, a mere sniff of bad news will send them plunging. As Nassim Taleb wrote in his book Antifragile, there are 14 types of unfortunate events that are forever and always present:
• Incomplete knowledge
These 14 things will always occur, basically everywhere. When they occur, stocks that were erroneously priced for “guaranteed” returns quickly crash.
So, here’s the weird paradox: If stocks never crashed — or if they gain the perception that they don’t crash — prices would rise to the point where a new crash was guaranteed.
This sounds crazy, but it’s exactly what [Hyman] Minsky meant when he theorized that stability is destabilizing. Since a lack of crashes plants the seeds of a new crash, markets will always crash, without exception.
Why Markets Will Always Crash. Get used to it. (The Motley Fool)
Yet, when the housing bubble crashed, economists did not see it coming! They thought housing prices could go up forever.
So what do Neoliberals advocate when markets crash, as they invariably must? Not government intervention, certainly (although in practice, bankers and investors are bailed out). No, they advocate something called “expansionary austerity.”
Since government debts are bad and “undermine confidence,” Neoliberals advocate for paying down government debts, i.e. “austerity,” even in a downturn. They claim this will actually benefit the economy by “restoring confidence” (of who?) Paul Krugman describes it as “the proposition that cuts in government spending would actually cause higher growth despite their direct negative impact on demand, thanks to the confidence fairy.”
There’s no evidence that it works, however. As Krugman stated in a column for The Guardian, “The austerian ideology that dominated elite discourse five years ago has collapsed, to the point where hardly anyone still believes it. Hardly anyone, that is, except the coalition that still rules Britain – and most of the British media.”
The problem, of course, is that one person’s spending is another’s income. When everyone is saving at the same time, the overall economy contracts. If the government is not taking up the slack, the deficit will get worse, not better, because there is less money to tax and deficits will be correspondingly higher, not lower. This really isn’t that hard to understand.
Add to that the fact that taxes do not fund government spending. Rather, the government must spend in order to tax. Otherwise, where will the additional tax revenue to pay down the deficit come from? Private corporations do not have money printing presses, after all. The money to buy their goods and services has to come from somewhere. The public sector’s debts are actually the private sector’s surpluses. By decreasing the government’s debt, you decrease the private sector’s surpluses.
This is, of course, nothing more than basic Keynesianism—the arguments made by economist John Maynard Keynes—which Neoliberalism opposes.
In fact, Neoliberalism came about specifically in opposition to Keynes, as David Graeber describes:
Keynes’s opponents…were determined to root their arguments in…universal principles.
It’s difficult for outsiders to see what was really at stake here, because the argument has come to be recounted as a technical dispute between the roles of micro- and macroeconomics. Keynesians insisted that the former is appropriate to studying the behavior of individual households or firms, trying to optimize their advantage in the marketplace, but that as soon as one begins to look at national economies, one is moving to an entirely different level of complexity, where different sorts of laws apply. Just as it is impossible to understand the mating habits of an aardvark by analyzing all the chemical reactions in their cells, so patterns of trade, investment, or the fluctuations of interest or employment rates were not simply the aggregate of all the microtransactions that seemed to make them up. The patterns had, as philosophers of science would put it, “emergent properties.” Obviously, it was necessary to understand the micro level (just as it was necessary to understand the chemicals that made up the aardvark) to have any chance of understand the macro, but that was not, in itself, enough.
The counterrevolutionaries, starting with Keynes’s old rival Friedrich Hayek at the LSE and the various luminaries who joined him in the Mont Pelerin Society, took aim directly at this notion that national economies are anything more than the sum of their parts. Politically, Skidelsky notes, this was due to a hostility to the very idea of statecraft (and, in a broader sense, of any collective good). National economies could indeed be reduced to the aggregate effect of millions of individual decisions, and, therefore, every element of macroeconomics had to be systematically “micro-founded.”
One reason this was such a radical position was that it was taken at exactly the same moment that microeconomics itself was completing a profound transformation—one that had begun with the marginal revolution of the late nineteenth century—from a technique for understanding how those operating on the market make decisions to a general philosophy of human life. It was able to do so, remarkably enough, by proposing a series of assumptions that even economists themselves were happy to admit were not really true: let us posit, they said, purely rational actors motivated exclusively by self-interest, who know exactly what they want and never change their minds, and have complete access to all relevant pricing information. This allowed them to make precise, predictive equations of exactly how individuals should be expected to act.
Surely there’s nothing wrong with creating simplified models. Arguably, this is how any science of human affairs has to proceed. But an empirical science then goes on to test those models against what people actually do, and adjust them accordingly. This is precisely what economists did *not* do. Instead, they discovered that, if one encased those models in mathematical formulae completely impenetrable to the noninitiate, it would be possible to create a universe in which those premises could never be refuted. (“All actors are engaged in the maximization of utility. What is utility? Whatever it is that an actor appears to be maximizing.”) The mathematical equations allowed economists to plausibly claim theirs was the only branch of social theory that had advanced to anything like a predictive science (even if most of their successful predictions were of the behavior of people who had themselves been trained in economic theory).
This allowed *Homo economicus* to invade the rest of the academy, so that by the 1950s and 1960s almost every scholarly discipline in the business of preparing young people for positions of power (political science, international relations, etc.) had adopted some variant of “rational choice theory” culled, ultimately, from microeconomics. By the 1980s and 1990s, it had reached a point where even the heads of art foundations or charitable organizations would not be considered fully qualified if they were not at least broadly familiar with a “science” of human affairs that started from the assumption that humans were fundamentally selfish and greedy.
These, then, were the “microfoundations” to which the neoclassical reformers demanded macroeconomics be returned…
Against Economics (LRB)
This totalitarian idea of economics as the foundation for all human behavior can be seen in von Mises’ supremely arrogant definition of economics: “The science of human action.”
Rational choice theory argues that individuals rationally seek to maximize “utility” (whatever than means). It argues, as this site puts it, that “human actions are calculated and individualistic.” Of course, when they’re not, Neoliberalism argues that they must be made to be so, as we saw with “nudge theory.” Rational choice argues that even when people seem to be acting in a non-self-interested or altruistic manner, this is merely a ruse. In reality, they are motivated by some sort of “hidden” self-interest that is not apparent to us.
Atomized individuals, of course, cannot unite and agitate for their collective benefit, which is by design:
Worship of markets has many effects. One we see in the origins of the reigning neoliberal faiths. Their origin is in post-World War I Vienna, after the collapse of the trading system within the Hapsburg empire. Ludwig von Mises and his associates fashioned the basic doctrines that were quickly labeled “neoliberalism,” based on the principle of “sound economics”: markets know best, no interference with them is tolerable.
There are immediate consequences. One is that labor unions, which interfere with flexibility of labor markets, must be destroyed, along with social democratic measures. Mises openly welcomed the crushing of the vibrant Austrian unions and social democracy by state violence in 1928, laying the groundwork for Austrian fascism. Which Mises welcomed as well. He became economic consultant to the proto-fascist Austrian Chancellor Engelbert Dollfuss, and in his major work Liberalism, explained that “It cannot be denied that Fascism and similar movements aiming at the establishment of dictatorships are full of the best intentions and that their intervention has, for the moment, saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history.”
These themes resonate through the modern neoliberal era. The U.S. has an unusually violent labor history, but the attack on unions gained new force under Reagan with the onset of the neoliberal era. As the business press reported, employers were effectively informed that labor laws would not be enforced, and the U.S. became the only industrial society apart from Apartheid South Africa to tolerate not just scabs, but even “permanent replacement workers.” Neoliberal globalization, precarity of employment, and other devices carry the process of destroying organized labor further.
These developments form a core part of the efforts to realize the Thatcherite dictum that “there is no society,” only atomized individuals, who face the forces of “sound economics” alone — becoming what Marx called “a sack of potatoes” in his condemnation of the policies of the authoritarian rulers of mid-19th century Europe.
A sack of potatoes cannot react in any sensible way even to existential crises. Lacking the very bases of deliberative democracy, such as functioning labor unions and other organizations, people have little choice beyond “looking away.” What can they hope to do? As Mises memorably explained, echoed by Milton Friedman and others, political democracy is superfluous — indeed an impediment to sound economics: “free competition does all that is needed” in markets that function without interference.
Noam Chomsky: “Worship of Markets” Is Threatening Human Civilization (Truthout)
Public choice theory is the application of rational choice theory to political institutions. It argues that politicians do not care about the public good at all; rather, they are just in it for themselves (and thus can never be trusted). This has become a self-fulfilling prophecy. Rational choice theory was developed by a Neoliberal economist named James McGill Buchanan n the 1960’s.
Although most people base some of their actions on their concern for others, the dominant motive in people’s actions in the marketplace—whether they are employers, employees, or consumers—is a concern for themselves.
Public choice economists make the same assumption—that although people acting in the political marketplace have some concern for others, their main motive, whether they are voters, politicians, lobbyists, or bureaucrats, is self-interest. In Buchanan’s words the theory “replaces… romantic and illusory… notions about the workings of governments [with]… notions that embody more skepticism.”
Two insights follow immediately from economists’ study of collective choice processes. First, the individual becomes the fundamental unit of analysis. Public choice rejects the construction of organic decision-making units, such as “the people,” “the community,” or “society.” Groups do not make choices; only individuals do. The problem then becomes how to model the ways in which the diverse and often conflicting preferences of self-interested individuals get expressed and collated when decisions are made collectively.
Or, as Margaret Thatcher famously put, it, “There is no such thing as society; there are individuals, and there are families.” As Blair Fix writes, “The message of neoclassical economics is that we are all self-sufficient Robinson Crusoes –islands unto ourselves. Economists have built a towering theoretical edifice on the idea that there is no such thing as society.”
Democracy in chains
Buchanan’s ideas were instrumental in the hamstringing of democracy effected by the oligarchy since the 1980’s. As mentioned above, Neoliberalism has removed any democratic control over globalized economic institutions by design. It has also transferred economic sovereignty to unelected, undemocratic institutions which trump (no pun intended) elected national governments. This is explored in a couple of books. I’ve already mentioned Wendy Brown’s Undoing the Demos: Neoliberalism’s Stealth Revolution:
Neoliberalism…is not simply about markets, money or social class; it is rather a condition under which a raw economic rationality is applied to all forms of human activity and becomes the basis of a certain style of political governance. For Brown, nothing is now sacred or exempt from this process. Using Obama as her primary example, she argues that democratic principles of equality or liberty are today being displaced by new concerns for ‘economic growth, competitive positioning, and capital enhancement’. The fabric of political life is thus said to be changing for the worse: we are losing our appetite for democratic values not least because liberty is being individualised and recast as a form of market conduct.
Another book which deal directly with this topic is Nancy MacLean’s Democracy in Chains:
Democracy in Chains first tells the story of the emergence of a branch of economics, or political economy, known as ‘public choice theory’ and most closely associated with the work of the economist and Nobel Prize winner James Buchanan…MacLean’s argument is that neoliberalism, at least in this variation, has sought not only to promote markets and market mechanisms, but also to shape the structure of politics…They make rules and construct barriers so that when voters democratically elect governments committed to raise taxes and increase spending and expand programmes, those governments are hamstrung – democracy, in such circumstances, finds itself ‘in chains’.
This is hardly a novel claim (just study the early neoliberals – Hayek, von Mises, Friedman and others – or Thatcher and Reagan). But what makes MacLean’s insight newly relevant is how well it describes key features of recent American politics…
MacLean …begins with a letter Buchanan wrote in 1956 to the president of the University of Virginia (former governor of the state), Colgate Whitehead Darden, Jr., promising that his new research centre would create a “line of new thinkers” who would fight against the “increasing role of government in economic and social life”.
The political implications are transparent. Positing government and bureaucracy as inherently self‐serving and parasitic clearly weakens support for all variety of public policies; and labelling well‐to‐do and often well‐connected businessmen or industries and trade unions alike as ‘special interests’ discredits unions. It is not hard to see how these ideas would gather support among the wealthy.
The thing is, the ideals of democracy and ideals of the market are inherently at odds. Democracy treats all people as equals. Markets sort people by cash income. In a democracy, everyone has “equal rights.” Under capitalism, you only get what you can pay for.
If you want to know the root cause of the political instability roiling the entire world right now, this is it. It’s also the root cause of our environmental destruction—the drive to endlessly increase GDP as the only measure of a political success, with no thought to distribution. This is what happens when markets are your only way of understanding the world, and growing them is your only option for ameliorating pressing social concerns.
We have a global system of capital movement and trade protections. But we don’t have a globalized system of politics or taxation; those remain strictly local to the nation-state.
Because politicians have essentially no control over domestic economic policies anymore, all they can do is play their citizens against one another to gain popularity in a divide-and-rule strategy. Right-wing populists stoke fear of immigration and minorities and preach a return to some ephemeral “past greatness.” Left-wing politicians talk a good game about inclusiveness, social justice and “wokeness,” while making sure that, as Joe Biden assured his wealthy supporters, “nothing will fundamentally change.” None of this rhetoric does f*%k all for solving actual problems, of course. The reason politicians campaign on these things is because they can’t campaign on anything else! Their hands are thoroughly tied under the rubric of Neoliberalism. As Wolfgang Schäuble told Yannis Varoufakis during the Greek crisis, “Elections cannot be allowed to change an economic programme of a member state!”
In the late 1930s a group of intellectuals, including Hayek, Ludwig von Mises, and others adopted the term “neoliberalism” to describe their agenda based on the conviction that laissez faire was not enough. The Great Depression paired with the rise of mass democracy meant that the market would not take care of itself. Wielding their ballots, electorates would always vote for more favors for themselves — and, thus, more state intervention into the economy — crippling the combination of market prices and private property upon which capitalism depended. From this time onward, as I describe in my recent book, one of the primary dreams of neoliberals was for institutions that would constrain democratic demands and protect the free movement of capital, goods, and (sometimes, but not always) people across borders.
Neoliberalism’s Populist Bastards (Public Seminar)
Rulers used to desire the unity of their people above all else. Now they want divisiveness. They need divisiveness. Thus you get solidarity among the minority ruling class, and “reverse solidarity” among the majority electorate. It’s the only way Neoliberalism can continue unabated, even if such divisiveness blasts society apart at the seams.
Of course, politicians who want to roll-back Neoliberalism have more lateral freedom to act. But such politicians find the entire mainstream political establishment and corporate media universally arrayed against them (e.g. Sanders, Corbyn, et. al.)
Markets (not) in everything
The problems with citizens consumers expressing “choice” by going out and shopping for healthcare in the one big market has some problems. As James Kwak points out in this important post, those problems are not with markets. Rather, “properly functioning” markets will inventively condemn some people to sickness and death by design! The only way we can have markets function for health care, he points out, is by making sure they don’t function like normal markets. In other words, the corporations offering the plans must be deliberately blinded to the risks they are taking on. Also, as we’ve seen, people must also be forced to buy the product, undermining the whole Neoliberal emphasis on “free choice.”
The CBO report specifically discusses the “stability of the health insurance market,” which they define in these terms: the market is unstable “if, for example, the people who wanted to buy coverage at any offered price would have average health care expenditures so high that offering the insurance would be unprofitable.” In their analysis, instability will result in some states that waive both the essential health benefits package and the prohibition on medical underwriting (charging premiums based on applicants’ health status).
In that case, healthy people will choose cheaper policies with less comprehensive benefits. Only sick people will buy more generous policies, which will soon become apparent to insurers, who will raise premiums (to account for sick people’s higher expected health care costs), which will make insurance unaffordable for the people who need it most.
This is all true. But that’s not a *dysfunctional* market. That’s just a market.
It’s a common characteristic of markets that suppliers offer different products, each designed to meet the needs of a different segment of buyers. In fact, this is generally considered a positive feature of markets. Market completeness—meaning, roughly speaking, that all possible goods and services can be traded—is an assumption of some of the most important theorems in economics.
In the example above, health insurers are offering one low-frills, low-priced product and another gold-plated, high-priced product. In most contexts, we would consider this a good thing. Can you imagine if everyone had to buy the same Toyota Camry? Isn’t it good that people with low incomes can buy a Honda Fit, while those with high incomes can buy a BMW M6? And we don’t worry about the fact that most people can’t afford an M6.
Say you have treatable cancer. Your expected medical costs are $50,000 for the next year. In a functioning market, your health insurance policy should cost about $60,000. (The extra $10,000 covers administrative costs and the cost of capital.) It’s still insurance, because you’re protected against the risk that your medical costs will unexpectedly be $100,000. That’s the right product for you: it’s the one you need, and it’s priced appropriately. That’s what markets are supposed to provide. The world where you can buy an individual policy for $3,000 because the insurer doesn’t know you have cancer, or because Obamacare prohibits the insurer from using that information—you may get treatment in that world, but only because we prevent the market from functioning the way it’s supposed to.
The core problem, of course, is that cancer treatment isn’t like a BMW that can go 150 miles per hour; we’re not willing to call it a luxury that most people can’t afford. Most people can’t afford to pay $60,000 for a health insurance policy. A world in which sick people are priced out of health care is not a world we want to live in. And that’s why markets are the wrong way to distribute essential health care…
How Markets Work (The Baseline Scenario)
One a more basic level, health care is a fictitious commodity: it is not a product which is expressly made to be sold. It only comes into existence in response to how well or sick your population is. And your need for it is in no way related to your ability to pay for it. As Polanyi pointed out with labor, this “commodity” cannot go unsold without inviting the death of its bearer (or recipient). For Neoliberals, by contrast, everything is a commodity, or a potential commodity, to be allocated by markets.
A similar problem exists with turning education into just another commodity distributed in “free and open” markets, as this post points out:
The failures of for-profit education reflect both the specific characteristics of education that make a market model inappropriate and more fundamental failings of market liberalism.
Students, by definition, don’t know enough to be informed consumers. Whether the course is good or bad, they are unlikely to be repeat customers. In these circumstances, relying on consumer choice and competition between providers is a recipe for superficial, low-quality courses and exploitation.
As centuries of experience has shown, only the dedication and professional ethos of teachers can ensure high-quality education. Reliance on incentives and markets is inconsistent with that ethos.
The broader problem with the reform agenda is that for-profit businesses paid to provide public services are more tempted to make profits by exploiting loopholes in the funding system than by innovating or providing better services.
Why the profit motive fails in education (The Conversation)
More to the point, is efficiency even desirable? Efficiency for it’s own sake is not the goal of education or health care, per se. An “efficient” health care market probably wouldn’t serve poor or sick people, because that’s not efficient. But efficiency isn’t the goal of health care—healing sick people is! Similarly, an “efficient” education market might exclude those who aren’t able to pay. It might put students into overcrowded classrooms by design. But efficiency isn’t the goal of education–educating people is! Sometimes efficiency is actually an impediment to the social goals we want to accomplish. An “inefficient” system might be far better at accomplishing various social goals than an “efficient” one.
But under Neoliberalism, all other values besides economic growth do not matter, and all other metrics besides GDP are irrelevant. Growth, it is claimed, will solve all problems, and therefore societies must orient themselves toward “efficiency” and “growth” at all costs under Neoliberalism. Making the numbers go up on the stock market becomes the driving goal of all humanity.
Protection from Instability
In order to have markets, you must have a functioning society underlying and backstopping such markets. They may seem obvious. But when the market is all-encompassing—when absolutely everything can be bought and sold—there is no longer any “ground” for the market to stand on. Even the laws which undergird markets become simply products to be bought and sold, and the politicians and regulators who are relied upon to keep markets fair and honest are purchased, sponsored and traded around by corporations like Major League sports stars.
The people living under such a system—tossed about to-and fro, with nowhere to turn in a storm—will demand protection from such unbearable chaos. Even businessmen cannot survive under a system where profits soar and sag from one quarter to the next with the vagaries of global supply and demand, and will clamor for some sort of protection form market anarchy.
This means that a “pure” market society as envisioned by Neoliberals is an “impossible utopia.” That was the conclusion of economic historian Karl Polanyi. He felt that the attempts to construct this utopia in the real world by liberals (“Classical Liberals” in his day) would lead to what he called the “demolition of society.” The more market logic engendered the sole governing principles of society, the more people would clamor for protection from such cold logic—what he called the “double movement.” This pushback played a critical role in the rise of European Fascism, he argued, which put restrains on unrestricted Gesellschaft, and grounded nations in a harsh sort of “blood-and-soil” Gemeinschaft.
Polanyi’s belief in the dominance of the social…led him to the conclusion that a society that elevated economic motivation to absolute priority could not survive. For this reason, he insists that the nineteenth-century self-regulating market was a utopian experiment that was destined to fail. This was one of Polanyi’s most important insights, and it provides the basis for his argument concerning the protectionist countermovment.
Pure human greed, left to its own devices, would place no limit on competition, Polanyi argues, and the result would be a destruction of both society and environment. Workers would be exploited beyond the point where they could even reproduce themselves, food would be systematically adulterated to expand profit margins, and the environment would be devastated by pollution and the unrestricted use of resources.
Moreover, even before these catastrophes, a society in which each individual pursued only his or her economic self-interest would be unable to maintain the shared meanings and understandings that are necessary for human group life. As with Durkheim’s emphasis on the noncontractual basis of contract, Polanyi saw that market transactions depended on collective goods such as trust and regulation that could not possibly be provided by market processes. For this reason, the protectionist countermovement was a necessary response to the threatened destruction of society caused by the unregulated market.
Polanyi…discovers that…market societies must construct elaborate rules and institutional structures to limit the individual pursuit of gain or risk degenerating into a Hobbesian war of all against all. In order to have the benefits of increased efficiency that are supposed to flow from market competition, these societies must first limit the pursuit of gain by assuring that not everything is for sale to the highest bidder. They must also act to channel the energies of those economic actors motivated largely by gain into a narrow range of legitimate activities. In sum, the economy has to be embedded in law, politics, and morality.
Fred Block and Margaret Somers, The Power of Market Fundamentalism: Karl Polanyi’s Critique
By applying cold, rational “market logic” to every factor of life, Neoliberalism is bound to destroy the social contract—the very basis of human society. And that’s not even accounting for the market’s destruction of the biosphere and the ecosystems upon which we all depend. In other words, the demolition of society. I think we’re seeing that right now all over the world.
Politics got weird because neoliberalism failed to deliver (BoingBoing)
I’ll conclude with some polemical thoughts from Umair Haique about what happens when politics is reduced to simply making us all into gladiatorial combatants for scarce resources in the market arena, and not citizens with a shared common destiny:
The neoliberal assumption is that no one deserves anything, and everyone should have to do mortal combat for everything. That is, no one deserves healthcare, an education, an income, retirement—these things only belong to the “winners” of a never-ending social contest, in which the stakes are life or death. So it’s not exactly a surprise that neoliberalism set fire to the world. That the Champs Elysees is in flames, that Britain melted down, that American life simply fell apart. The fundamental idea was always going to fail: to make everyone fight everyone else for everything all the time?
That sounds grim, dystopian, and horrific—because it is. The result has been things like armed teachers and medical bankruptcy and the wholesale corruption of democracy at the hands of greasy, shiny-suited oligarchs. Only the strong survive. Translation: nobody but the super rich gets the gains. The result has been a tsunami of social destabilization sweeping the globe, as people revolt against the failure of the neoliberal order—even as they turn backwards, atavistically, towards supremacies of darker times.
Because when a society is made to fight itself for the basics of life — when everyone must wake up, every day, and perform a kind of mortal combat, for things like healthcare, medicine, food, water — then of course people turn against each other, too. They see each other as adversaries and enemies and rivals for the basic resources needed to live. That is what capitalism has made them…
The moral of that story is very simple, and brutally clear. There are many things capitalism just can’t and won’t provide. Some of those things are healthcare, affordable education, functioning transportation systems, clean energy, and so on. When the system breaks down to the point that the people who create the basics of what a society needs — food, water, education, safety — can’t give them those things right back, then implosion is on the horizon. In a capitalist society, that implosion is fascist — because the hungry prole will blame his starving family on the migrant laborer, on the subhuman, whom he cannot exploit enough, as he is exploited in turn by those above him.
If you live in a society where decent food, medicine, and water have become luxuries — what kind of society are you really living in? A collapsed one
4 thoughts on “What’s Wrong with Neoliberalism?”
Best post ever. It could be a book, but I think the short form has more punch. Of making many books there is no end.
Very little to add. A thought: funny how ‘the left’ started out as a movement to transfer power to the merchant class. In the UK this idea has now been fully assimilated by the ‘right’, and the ‘left’ is whatever opposes it (forbidden, of course). Perhaps this explains some of the weirdness that happens whenever this issue gets discussed. I mean, how is ‘authoritarian liberal’ even a thing?
Please tell me there shall be a 3rd part to this series.
This is the best intro to neoliberalism I’ve seen, I already shared the 1st part to a few of my friends.
One of the young guys at work – really nice guy – was concerned the other day because his kid’s school report (age 5 or so) said something like ‘needs to be less competitive’. I laughed and said that was teacher-speak for ‘beats up the other kids’. He was most indignant, insisting that competitiveness is really important. Then everyone chipped in and it all kicked off. Competition’s the most important thing, don’t you know? Schools aren’t preparing our kids for the real world. You have to win, all the time!
I mumbled something about co-operation and left the room.
Universities used to be places which exchanged hard work for a degree of knowledge. Now they exchange money for certificates. It can’t go on.
One more thing, because it’s the UK elections today: here, opposition to the extreme-neoliberal incumbent is divided across several parties. Therefore the status quo is likely to be re-elected with a solid majority, on about 40% of the votes.
A united opposition would be a different story. But we shall see.