Winner of the New Statesman SPERI Prize in Political Economy 2016

Saturday, 14 October 2017

How Neoliberals weaponise the concept of an ideal market



This new book by Colin Crouch will perplex many on the left who simply believe neoliberalism has to be overthrown. Indeed the author starts his book by talking about the Grenfell Tower disaster, which he along with many others believe epitomises the failings of neoliberalism. Yet he writes that the book
“is not a contribution to the demonology of neoliberalism, but an attempt at a nuanced account. Only in that way can we assess its capacity for reform.”

Such an account can of course also be justified on the basis of intellectual curiosity, but in addition the author sees some positive aspects of the ideology: He summarises these as
“the discipline of price and calculation [recognising efficiency and opportunity cost}; helping us appreciate the limitations of democratic government; facilitating trade and reducing barriers to it; and facilitating links among people [reducing national divisions].”

So what exactly is neoliberalism? He defines it as
“a political strategy that seeks to make as much of our lives as possible conform to the economist’s ideal of a free market”

The problems and deficiencies of this strategy come when the conditions required for the free market to be ideal do not hold, and the author’s long discussion of these problems would be useful for any economics undergraduate.

One of these conditions for an ideal market is competition: a free market is an ideal from a social point of view if (alongside many other conditions) each good is produced by a very large number of producers. The author recognises, for obvious reasons, that most neoliberals (as opposed, perhaps, to ordoliberals) tend not to go around wanting to break up monopolies and reduce monopoly power. As a result, he distinguishes between market-neoliberals who might, and corporate-neoliberals who would not. He talks about past competition (that may have resulted in monopoly) and current competition. As Luigi Zingales describes it rather well here, business tends to be in favour of a competitive market before it enters it, but once it has a dominant position in that market it is happy to put up barriers to further competition.

The author goes on to discuss conflicts between corporate and market neoliberalism, and much else besides. I think it is a great book, free from unnecessary jargon that you often find elsewhere. It got me thinking about the concept of neoliberalism again as you can see below. Whether that is a good thing or not, I would encourage you to read the book. The author also of course discusses whether he thinks neoliberalism can save itself. For his answer to that question you will have to read the book.

Now, for what it is worth, are some of the thoughts the book inspired. They go back to the distinction between market-neoliberals and corporate-neoliberals. It seems a little odd to define an ideology as the evangelisation of the free market, and then go on to say most neoliberals happen to exclude a crucial component of that free market (competition) when it suits them. I am quite prepared to believe that some of the people who first wrote about neoliberalism many years ago (and perhaps one or two today) could be described as what the author calls market-neoliberals, but as I have suggested in the past I think neoliberalism has evolved (or if you like been distorted) by ‘big money’ or capital to become a tool for self justification.

As a result, I would tend to suggest a slightly different definition that seems to work quite well today. The definition would be: 
neoliberalism is a political strategy promoting the interests of big money that utilises the economist’s ideal of a free market to promote and extend market activity and remove all ‘interference’ in the market that conflicts with these interests.

This replaces a definition based on following an idea (the author’s market neoliberalism), by one of interests promoting an idea so long as it suits those interests.

This alternative definition seems to fit two cases I have used in the past to question more conventional ideas. Large banks benefit hugely from an implicit subsidy provided by the state (being bailed out when things go wrong), but neoliberals do not worry too much about this form of state interference in the market (whereas economists do). Regulations on the other hand they do complain about. It is a very selective focus on market interference.

The second is executive pay. This is always justified by neoliberals as being something determined by the free market, when obviously it is not. Yet if you pretend that there is a market in executives and salaries etc are set by that market and not the remuneration committees of firms, then you are being a good neoliberal by defending these salaries. This example is interesting because it involves defending one part of ‘big money’ (CEOs or some workers in finance) at the expense of another (shareholders). It is why I do not talk about the interests of capital in my definition. 

Is this alternative definition simply negating the power of ideas and going back to good old interests? Only in part. Interests utilise an idea because the idea is a powerful persuasive tool. There is an obvious lesson for the left here. Because neoliberals promote the concept of an ideal market only when it suits them, so opposing neoliberalism does not necessarily mean opposing the concept of an ideal market. The left should utiliise the same concept to oppose monopoly power, for example. The idea of a free market is too powerful an idea to cede to the other side. 





21 comments:

  1. This is a very interesting post with a lot of truth to it.

    I would say that the fact that supporters of an idea (say, neoliberals) only support an idea (say, market-liberalism) as far as it supports their interests does discredit to the supporter rather than the idea.

    Also, I imagine it applies more broadly to ideas other than neoliberalism. The appeal of many ideas lies in its partial support for our interests.

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  3. As a layman, not having read the book, a fundamental for a functional market would be feedback loops that move prices to include all costs, so that buyers can change their behaviour.
    Modern, especially corporate, sellers are adept at breaking that loop, e.g. Facebook, Google, selling advertising, while being apparently providing another service for free to their "customers".
    Pensions, and other long term/once in a life investments, are dysfunctional, because customers can't learn to make informed decisions. So, what is competition based on? Not value to the customer? Value to an intermediary, like brokers?
    Similarly, corporate sellers are adept at socialising costs, like environmental damage.
    A free market model should surely insist that *all* costs are included in the price presented to the discerning customer?
    But as markets have become more sophisticated the ability to hide costs from the customer seem to have become vegan to pricing models, to the extent that a generation now expect all sorts of products and services to be free.

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  4. Well now, ideal markets require more than just competition and a lack of bank bailouts. The truth is that the free market is entirely a fiction, which can never exist under any circumstances. All transactions have externalities. Perfect information is impossible and even adequate information is not the rule. There must be rules about such matters as fraud, non-discrimination, and so on. There are public goods, and non-exclusive goods. There are natural phenomena that affect scarcity and abundance, and the fortunes and needs of individuals. I could go on and on but this is the truth:

    There is no such thing as a free market, never will be and never can be. It is a fantasy, which is internally contradictory and inconsistent with observable reality, everywhere, through all of history.

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  5. CC's definition is a definition of economic liberalism aka laissez-faire and "market fundamentalism" as reducing government (political) influence in markets.

    SWL more correctly defines neoliberalism in terms of promoting class (network) interests politically.

    The key difference between economic liberalism and neoliberalism is that classical liberal want government out of the picture, while neoliberalism wants government to promote policy that this favorable to special interests.

    Neoliberalism cloaks itself in the language of classical economic liberalism so it often sounds like market fundamentalism, while working to control the political process in favor of the ownership and the top managerial classes, whose interests overlap, especially owing to financialization.

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  6. I don’t agree with everything here, but it is a very good post.

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  7. I think you have to go much deeper to understand neo-liberalism. Neo-liberalism is something that has been largely driven by foreign ministry objectives. Importance was the link it made between capitalism and democracy - linked by the notion of individual liberty. This linked well with orthodox economics because of how it views and defines the composition of a society.

    The idea after 1945, becoming very strong after the collapse of the cold war, was
    capitalism would spread democracy. And for a while the triumph of capitalism and the collapse of ex-Soviet and other communist dictatorships supported this. For the most famous Neo-Liberal, Francis Fukuyama this was the "End of History". To push forward the spread of capitalism it was important to integrate international capital, goods and labour markets. An oustanding feature of neo-liberals is that they are pro-globalisation.

    So the ambition of neo-liberals was not to support moneyed interest, even though that is what it did. It's mission was to spread capitalism as a foreign policy objective. It was a 'soft power' instrument. Through financialisation caused by deregulation of markets etc, the empowerment of the owners of capital, however, was arguably the consequence. Economists did not stand in the way of this and were fully behind the deregulation of capital, labour and goods markets. They saw globalisation as an unambiguously good thing and said silly things to sceptics (eg. they did not understand economic theory such as comparative advantage). In a similar way classical economics caused a crisis for classical liberalism in the nineteenth century.

    Essential reading on this is Noah Chomsky.

    NK.

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    1. I should add, although neo-liberals are pro-free markets, they are not as a rule against anti-cyclical macro-policy. Although sometimes they have been - such as during the Asian Financial Crisis (when MIT's Stanley Fischer was at the IMF). They are also not necessarily against welfare states (they would not have a problem with the second welfare theorem - and would not be against lump sum transfers). They would, however, be against prices and incomes policies and collective bargaining or anything that interferes with orthodox economics market price signalling, such as that which occurs in continental Europe.

      NK.

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  8. An interesting post.

    I think you've put your finger on quite an important point re monopolies. In my view almost any capitalist wants monopoly; it would be foolish not to want it so there is always a tendency towards it which has to be countervailed by strong and resolute state power and this is something which has to be accepted in the interests of making the system work. In practice it is not accepted which, to my mind casts doubt on the legitimacy of the project as a whole and, as others have indicated, it simply has the feel of special pleading in the disguise of a respectable intellectual project.

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  9. I would not assume to disagree SWL's analysis of economic theory. The point about not ignoring the power of the idea of free markets is astute. I believe what we need is debate about market failures - thanks mainly macro, for its part in that process. However, the problem with this is another point raised by SWL. Getting the traditional media to discuss this is extremely difficult/unlikely, which tends to concentrate debates on specifics: e.g. power company greed or the unfairness of banking charges, rather than universal causes. A second problem is this leads to temporary solutions, that are specific to a sector and part thereof, e.g. capping energy bills.
    It seems to me that a fundamental problem with neo-liberalism, and free markets, relates to price signals and the ingenuity of human nature. For long as price signals encourage profit maximisation, its accumulation will encourage, and enable, human beings to 'game' the free market system for their own benefit. From monopoly power to misleading advertising. Furthermore, as success enables gamers to better defeat free market mechanisms, the problem is self-perpetuating and becomes more damaging in its consequences.
    One way to deal with this, is through an active programme of regulation, which the corporate neoliberals will protest limits markets. However, as profits enable semi- (and) monopolists to capture price signals (and to degrees government institutions) it becomes very difficult to combat. The exception being when media message and reality become so out of sync, that large numbers of people switch off from the traditional media message. Evidence suggests, we're approaching one these moments. This is not necessarily a good thing as, I suspect for many it will be an against, more than a for protest and an understanding of the why.
    Often, I wonder whether free market followers study, and make more use of, market failures than those on the left, which might be part of the weakness SWL alludes to.
    shaun127

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  10. I think that one area we ignore in the neo-liberalism debates is that of the national interest and protective tendencies that influence national governments.

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  11. Classical economics was born in the era of classic liberalism, and still bears the imprint, in its focus on markets, contracts and individuals as setting the standards (note, not "non-market successes", but "market failures"). Yet most of the economic history of the last century and more has been marked by departure from the market, as its evident failure as a mechanism becomes intolerable in one area after another. Households were all non-market. Education, health-care,social security, infrastructure have all been taken off market (although often this departure has been disguised). Corporations found out that markets do not coordinate complex processes of production.

    In this light, neo-liberalism is a reactionary movement. Like all reactions, it finds that the conditions which made possible the original have gone, and sets out to recreate them artificially. But this, of course, involves a contradiction, in that a "market" set up by government, managed by regulators, hedged about with rules, is not actually a free market at all. It is the illusion of a market, conjured up to satisfy an ideological belief and then rapidly set to other ends. One of which is, as the post notes, greater freedom for the rich.

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  12. Isn't the 'interests of big money' kinda problematic conceptually? In that their interests are not monolithic, in general.

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  13. Proof of the inherent instability of the market economy
    Comment on Simon Wren-Lewis on ‘How Neoliberals weaponise the concept of an ideal market’

    The foundational tenet of economics is that the interaction of free markets tends, in principle, to produce an inherently stable optimal outcome with all factors fully employed or, with regard to labor, at worst ‘naturally’ unemployed.

    This tenet has NEVER been proven. General Equilibrium Theory is known to be a methodological disaster and economics is known to be in need of a paradigm shift: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al.)

    As a result, economic policy guidance in ALL variants between outer right-wing and outer left-wing has no sound scientific foundations since 200+ years. It can be proved that the market economy is inherently unstable.

    Economics is a system science. Accordingly, the correct approach is not microfoundations but macrofoundations.#1 The elementary version of the objective, systemic, behavior-free, macrofounded employment equation is shown on Wikimedia:
    https://commons.wikimedia.org/wiki/File:AXEC62.png

    From this equation follows:
    (i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio).
    (ii) Increasing investment expenditures I exert a positive influence on employment.
    (iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

    Item (i) and (ii) cover the familiar arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the macroeconomic price mechanism. Fact is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R and vice versa. This is the OPPOSITE of what microfounded economics teaches.

    “We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price. If this is prevented by combinations in restraint of trade or by government regulations, then those impediments to competition should be removed.” (Tobin)

    This is false: a reduction of the average wage rate W in the situation of unemployment INCREASES unemployment. In general terms: at the heart of the market economy is a positive feedback loop, i.e. the very OPPOSITE of what is required for a self-stabilizing system.

    The lethal methodological blunder of the microfounded market theory consists in the Fallacy of Composition, i.e. the illegitimate generalization of truths that hold for one firm/market onto the economy as a whole.

    The free market system is neither efficient, nor self-correcting, nor stable. Neoliberalism has no sound scientific foundations.

    Egmont Kakarot-Handtke

    #1 New Economic Thinking: the 10 crucial points
    https://axecorg.blogspot.de/2017/07/new-economic-thinking-10-crucial-points.html

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  14. typo? "remove all ‘interference’ in the market than conflicts with these interests"
    should be
    "remove all ‘interference’ in the market that conflicts with these interests"

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  15. I didn´t read the book yet but according to Mainly Macro, I recall an old phrase: he discovered the gunpowder.For me, the main issue is that in any political or economic system, empowerment of the citizen through clear and fair rules of the game, transparency, rotation in government (which not always implies rotation in power) together with active participation in defending these are the only means to avoid or at least limit the abuses and concentration of wealth and power in a few hands. As for organizations (not only for profit ones) the discipline of price and calculation is essential. Also essential is the continuous overseeing of the fairness of the system and the respect of all of the rules of the game.

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  16. Perhaps I've misunderstood you but it seems like you've just redefined neoliberalism so that you can still be against it. Wouldn't it be easier to accept the standard definition and admit that its theory is in part sensible, even if in practice it has been corrupted by big money?

    p.s. large banks being bailed out is not neoliberal so a straw man.

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    1. That's about the size of it. Point at anything you don't like and say 'Neoliberal'.

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  17. I think economists complicate what is to my mind a very simple issue, who and what does the economy work for?

    In truth economists make all sorts of claims for success or failure of a system and there is a preponderance of those that think they can invent equations that can predict anything. In that I wonder what genius predicted the Japanese Tsunami in their calculations.

    Economics is just a record of events, not a perfect system that defines human behaviour and predicts outcomes from it. Neo-Liberalism is a creation by individuals who wrap up corporate interests into a saleable commodity as though the benefits were universal when they are clearly not.

    Competition is a fallacy, when people compete they create winners and losers,by definition there can only be one winner and in a capitalist society that is the last man standing.

    People are the real creators of wealth, and you don't need competition to achieve that, all they need is the means to do it. Anyone that has worked will recognise how destructive the introduction of competition becomes when people openly hide information and undermine their fellow workers in order to climb the greasy pole. Competition does not recognise a meritocracy.

    Finally, Capitalism falls because of conflict of interest.








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  18. So, following the sickening spectacle of Jeremy Corbyn using this tragedy for political gain, Mr Crouch uses it to sell books.
    Those nasty Neoliberals, eh? In charge of UK local authorities, with their programme of up-grading mid-century social housing projects. Bastards.

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    1. Perhaps you should acquaint yourself with the facts before casting aspersions.

      Neo-Liberalism has been a worldwide disaster, causing misery wherever it is practised, if you look back to the 1970s you would see that South American countries collapsed under the advice of Friedman, then when questioned, why where each country that pursued his policies did everything get much worse and collapsed? He replied "they did not cut deep enough or fast enough". with that kind of logic, no wonder they rejected it, and then became "The Tiger Economies" until the Neo-Liberal World Financial Crash. When all economies went into melt down.

      Interestingly Neo-Liberal theory tells us the state is a burden, until it comes to bailing out the capitalist Banks.





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