This is part IX of A Teacher Writes to Students Series
Neoliberalism and New Economics
By Annavajhula J C Bose, PhD
Department of Economics, SRCC
Neoliberalism refers to a cluster of various common policy ideas surrounding Austrian School economists such as Ludwig Mises and Friedrich Hayek, and Chicago-School economists such as Milton Friedman, Gary Becker and George Stigler.
It has been in vogue all over the world over the last four decades, and can aptly be christened as Austro-Chicago liberalism (Hodgson, 2021). And its sharp meaning can be described in terms of policy ideas like a view of liberty as primarily the absence of coercion; a neglect of moral sentiments with an accent on self-interest alone; an ethical focus on consequences rather than on duty or virtue; a belief that the individual should generally be treated as the best judge of his or her interests; the promotion of private property and markets as ubiquitous solutions to economic and political problems; the promotion of market-like analysis and terminology in non-market spheres including politics and law; hostility to public enterprise and much state welfare provision; opposition to trade unions and much labour market regulation; a diminished concern about monopolies and large corporations; a toleration of massive economic inequality; and a view of democracy as ancillary or expendable.
This Austro-Chicago liberalism of the Austrian and Chicago Schools of Economics, should be rejected as retrogade, following Hodgson, for the following salient reasons.
Hayek and Friedman defined liberty as the absence of coercion. This is insufficient. As well as the absence of coercion, we must consider the conditions that help the individual to appraise and understand his or her circumstances and then to act freely and knowledgeably, often in cooperation with others. These conditions constitute positive or public liberty, in contrast to the negative or private liberty provided by the absence of coercion. Full liberty is about social ideals and virtue, and not simply egoism or self-interest. It is about the opportunities for self-development and for human flourishing.
The idea that social order emerges out of the interactions of self-interested individuals, seeking to realize their purposes or to maximize their pleasure, is insufficient. While recognising the enduringly selfish aspects of human nature and the importance of individual incentives, what also needs to be stressed are morality, sympathy, justice, and duties to others as essential for enduring social cohesion.
Much of the ‘public choice’ theory from the Chicago economists to address matters such as public provision and the size of government still often assumes that all individuals are self-regarding and selfish. This way of thinking celebrates greed and selfishness; tolerates corporate excesses of power; debases political commitment and moral purpose; commercialises public discourse and practice; treats science, law and politics as markets; and questions the importance of urgent measures to deal with climate change. It has legitimized a financial deregulation that enabled the economic crash of 2008. This in turn has led to the global imposition of austerity upon the disadvantaged. It has aided the rise of populisms of the left and right. Atomistic individualism and the celebration of self-interest have aligned with a market fundamentalist belief in the ability of unregulated markets to solve most politico-economic problems. If greed is good, and all uncoerced deals are moral, then politicians and lawyers cannot be blamed for solely serving their own interests. It is tantamount to telling the public that there is nothing necessarily wrong with corrupt or self-serving politicians, lawyers or journalists.
Hayek and Mises were more sophisticated than Chicago economists in not denying the influence of social or other conditions on individuals. As well as the individual, Hayek stressed the importance of groups and institutions. However, he downplayed the ongoing development and transformation of each individual. He had a half-formed evolutionary story, where individual interactions create and transform institutions, but there is silence on how institutions can mould individual capacities, preferences or goals. Apart from individuals gaining knowledge, processes of individual development are largely ignored. It is better to understand human society as more than a collection of individuals, just like a house is more than a pile of bricks and materials. Society consists of individuals as also social relations between them. Societies and economies involve structures with means of interaction and communication. They can outlast each individual involved. The society into which we enter is more than an aggregate of individuals—it consists of institutions and other structures. While social structures cannot exist without individuals, social structure exists before any one individual, taken separately. This temporal difference is crucial for understanding the nature of human society and human agency within it. It also opens the door to a rich evolutionary account of individual development and social transformation. This suggests that structures should not be treated as attributes of individuals alone.
The massive growth in size and abusive power of business corporations is neglected by Austro-Chicago liberalism, by treating large corporations as simply agglomerations of human individuals. In doing so, the reality of corporate power is denied. If corporations are merely collections of human individuals, then corporations as such cannot be a special problem. It is not corporations, but individuals that engage in political lobbying, to distort or undermine democracy. At a stroke, the huge corporate leviathans, as separate entities, disappeared from view. By emphasizing the maximization of shareholder value and thereby eclipsing the interests of other stakeholders, the wider social responsibilities of the corporation were pushed into the background.
Friedman’s reduction of the corporation to individuals led to impossible outcomes. Hodgson explains this point as follows. For Friedman, a corporate executive is an employee of the owners of the business. By owners, he meant the shareholders. If they together were the actual employers, then they would all be bound by the responsibilities of employment law, and if that law were broken, then every shareholder could be brought to court. Furthermore, if new shares were issued or existing shares changed hands, then each new shareholder would have to enter into an employment contract with every one of the corporation’s employees. All such measures would be unworkable. The corporate form exists precisely to avoid such complications. Friedman also saw corporations as partnerships of shareholders. But in the 19th century, real-world partnerships were found to be cumbersome for much large-scale industry. During the Industrial Revolution, the advantages of corporate organisation in raising and investing large amounts of capital became apparent. As transactions became more complex, the difficulties of dealing with partnerships became more burdensome. In the case of contract default, it was necessary to litigate against all partners, thus incurring high legal costs. Consequently, legislation was passed to facilitate corporate registration. So, corporations are not partnerships. With a corporation, there is only one legal person to litigate against, and legal action in pursuit of redress is vastly simplified. This is not all. For Friedman, business managers should maximize profits while conforming to the basic rules of the society as embodied in law and ethical custom! This means that the greedy were also duty-bound to act morally. But Friedman failed to explain how supposedly self-interested, Max U (utility maximising) individuals could also pay heed to morality and duty.
Finally, there is defective depiction of property rights. Property is simply a matter of individual possession or control, by an individual, over a resource. There is no recognition of a right being sanctioned by, or established with, others. The role of social relations and institutions in sanctioning property rights is ignored. In modern legal systems, property depends on both custom and the state. Property is not simply a relation between an object and an owner. Legal title is endorsed by the state. “This brings us to an important corollary. If our rights can only be sustained through relations with others in society, then our rights must be safeguarded not simply by our declarations and our vigilance, but also by our attention to the relations and institutions that protect them. Hence, our rights do not simply incur duties for others, they also create social duties for ourselves. When privileged by a right, we have a reciprocal duty to help sustain those institutions through which that right is recognised and protected. What are at stake are not simply individual interests, but the need to sustain social institutions that protect individual rights.”
To conclude, the Austro-Chicago liberalism is a premeditated muddled thinking about the individual and society. It confuses and forces us to take a pillow and go to sleep!
By contrast, ‘New Economics’ of Boyle and Simms (2009) and Keen (2022), for example, is clear-soup and worth relishing as an antidote to neoliberalism. It makes us purposive and enthusiastic.
Boyle and Simms hail from the activist New Economics Foundation in the UK. They show us a practical interventionist new path. Keen is “Conan the Barbarian”, so to say. He has shredded neoclassical economics as also Marxian economics and says that the most important alternative theoretical approaches to economics that we should learn are Post Keynesian Economics, Modern Monetary Theory, and Biophysical Economics. A practical new path must follow only after internalising the policy implications of these alternative theories.
Doyle and Simms spook us out of our zombiness in the mainstream economics classroom, like this:
“Conventional economics largely disregards environmental issues, and fails to take account of the damage done to the planet and to people. It ignores those side effects of economic success, the loss of rainforest, the pollution, the crime, dislocation and depression, all of which come under the heading of what economists call ‘externalities’. The GDP is the money value of all the goods and services produced and exchanged in the nation in a year: it is the cornerstone of conventional economic success. Yet it is actually a means and not an end. Forgetting this skews the economic system, encouraging bad things that increase GDP and discouraging good things that don’t. Conventional economics assumes that markets work. It assumes that people have money or assets and can operate in the marketplace. It assumes we are isolated, rational individuals with all the information we need to make free choices, and that the uneven distribution of power is not a problem. It assumes that the price is an accurate reflection of such markets. In fact, of course, those perfect conditions never exist: many people have no power or assets to operate economically, and are anyway overwhelmed by the power of others. There is no level playing field for ordinary working people like the farmers in poor countries. The level playing field assumed in conventional economics is often an unclimbable cliff, dominated by a handful of corporate monopolists, subsidised by tax paid by poor people in rich countries. Most democratic systems are highly short term, based on a short electoral cycle, which encourages politicians to trade long-term change for short-term illusions of success. Financial bonuses in the private sector also fuel a short-term cycle, trapping their employees on the business equivalent of a hamster wheel, having to produce ever greater quarterly earnings. Ownership by individuals of their home and enough land to make them independent is some guarantee of independence. But perpetual ownership by investors of companies excludes and devalues the work and imagination of other people involved in their success, and – since ownership extends way beyond most investment horizons –means an inefficient overpayment to investors. The pursuit of pure markets by conventional economics blinds economists to those aspects that are beyond price – the ethics behind a product or the pursuit of wellbeing by earning less, rather than more. There is an increasing minority of people who want to reflect their values in the way they shop, invest and work. It encourages consumption for its own sake Because of the design of money, which has to be paid back plus interest, and the requirement for constant growth, the economic system has to move faster and faster just to keep still, generating new desires and unsatisfiable wants, leading to depression, disaffection and environmental degradation. Most of the money that circulates around the world was created in the form of debt that must eventually be paid off by somebody, plus interest. This represents a huge demand, not just on the indebted populations of the Earth, but on the planet’s ability to produce enough to meet this constantly increasing demand. Taken together, these criticisms reveal not just an economic system that is partially blind, but one that has no moral compass and is destructive of the environmental conditions on which civilization depends. It is an economics that assumes there is no THE ECONOMIC PROBLEM!”
Steve Keen, the difficult maverick, would drill into our skulls three points that neoclassical economics is economics sans money; economics sans complexity; and economics sans nature.
Everybody knows that capitalism is about money, credit is king and debt is everywhere. But money, credit and debt don’t really matter for neoclassical economics. High private debt which neoclassicists are indifferent to and even encourage is, in fact, the biggest threat to capitalist stability. The economy, just like our brain and the ecosystem, is a complex system. Its components interact in nonlinear ways and the outcomes of these nonlinear interactions are inherently unstable. Neoclassical analysis is oblivious to these patterns. Its models are linear, and the way in which they are conceived and constructed leads to stability rather than instability. Neoclassical economics abstracts from nature. There are no energy inputs or waste in the standard neoclassical production function. This abstraction is not only theoretically misleading but deeply dangerous for capitalism, the human race, and planetary life, more generally. This last point Keen makes, thanks to his Buddhist wife!
References
David Doyle and Andrew Simms. 2009. The New Economics: A Bigger Picture. Earthscan.
Geoffrey M. Hodgson. 2021. Liberal Solidarity. Edward Elgar.
Steve Keen. 2022. The New Economics: A Manifesto. Polity Press.
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