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Weekend read – The great re-boot. Perhaps.

From Peter Radford I keep coming upon ideas that seem to make such sense that, surely, they have been imported into economics.  But, no, hubris prevents an expansion of the discipline to include such novelty.  The threat they represent to the entire mainstream edifice is too much of a threat.  The guild closes ranks.  The guild closes its mind.  And gets quite snooty in the process.  Outsiders are seen as simple, lacking in basic understanding, or naively misunderstanding the great explanatory powers hidden in some distant niche of economic theory.   Yes, the guild closes ranks.  It is sensitive to criticism from without.  Perhaps it feels vulnerable? [Cue a great deal of eye-rolling amongst economies tired of being criticized.  Why can’t we just all leave them alone to get on with

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from Peter Radford

I keep coming upon ideas that seem to make such sense that, surely, they have been imported into economics.  But, no, hubris prevents an expansion of the discipline to include such novelty.  The threat they represent to the entire mainstream edifice is too much of a threat.  The guild closes ranks.  The guild closes its mind.  And gets quite snooty in the process.  Outsiders are seen as simple, lacking in basic understanding, or naively misunderstanding the great explanatory powers hidden in some distant niche of economic theory.   Yes, the guild closes ranks.  It is sensitive to criticism from without.  Perhaps it feels vulnerable?

[Cue a great deal of eye-rolling amongst economies tired of being criticized.  Why can’t we just all leave them alone to get on with whatever it is that they do.]

To understand this ongoing problem we must revisit well-worn history:

The neoliberal project was from its inception about power.  Simple power.  The power to undo the democratic progress represented by the policies of the New Deal and similar efforts around the world. Such efforts were seen by some as the early steps on the road to serfdom.  They would lead, in the eyes of the founders of neoliberalism, to the doom of all that modernity had wrought.  It was inevitable, so the thinking went, that the extension of democracy was a dangerous and flawed process.  In particular it gave the average person a voice in what was perceived to be the complicated activity we call governance.  How was such a normal person to have the skills necessary to judge good from bad policy?  Besides, looming in the background was the shadow of Soviet style authoritarianism that appeared to have survived the deprivations of the Great Depression reasonably well when compared withy the utter collapse of western style capitalism.  And then there was the horror of the years after World War One when various experiments of more socially inclusive governance created chaos and opened the door to the rise in fascism.  This latter pathology was not, in the eyes of the early neoliberals a consequence of error within capitalism.  It was a consequence of the overreaction by more socially spirited innovators to those errors.  What was needed was a gentle nudge to re-center capitalism, not a more vigorous overhaul.

Or so the thinking went amongst those gathered in Paris in 1938 to discuss Walter Lippmann’s book “The Great Society”.
They intended to deliver that nudge.  Laissez-faire would be replaced by a more palatable and socially sensitive version of capitalism.  One that protected the virtues of individualism from the intrusions of socialism, and one that inoculated society against the populism of fascism.

What has power got to do with this?


The entire project became one of re-establishing the power of those who had felt it ebbing away under the pressures of democratization.  Rich people do not like sharing.  They had been coerced into sharing.  They needed an intellectual platform for their recovery.  Neoliberalism was it.

That this is true is easy to establish.

World War Two intervened.  The principles discussed in Paris were set aside by the crisis of war.  When the founders of the movement emerged after 1945 the landscape had changed once more.  America was now the epicenter of economic power and, by association, economic thought.  The Old World had betrayed itself and was thus a laggard in ideological leadership.  The world was seen through a sharply bifurcated lens.  Gone was the threat of far-right populism — at least for now.  Instead there was a pressing need to justify the superiority of the values of capitalism as opposed to those of what was seen as authoritarian Marxism.

The pressures of war and the lingering effects of the Great Depression left no space for the immediate reversal of the rise of democracy.  So the founders of neoliberalism had to exist along the edges of the intellectual discussion.  They were, however, not ignored.

The neoliberal message, when appropriately dressed, fitted perfectly with the new ideological need to counter that of the Soviets.  Its insistence on the individual and its adamant opposition to all things “state” resonated with the times.  That Old Europe was going through a rise in social democracy was simply seen as a sign of social decay there.  America needed to resist.  It needed to undo, or at least stop, its drift in that same direction.

It takes time and effort to build a counter-revolution.  Intellectuals need to be established and earn respect.  They need vigorous support within elite society so that their ideas can take root.  They need to be nurtured in their various schools.  They need to write, speak, and perform in all the correct locations so that their influence swells towards a Gramsci-like hegemony.  Their ideas have to be accepted as commonplace and common sense.  The groundwork for the ultimate breakthrough takes patience and money.  Coalitions have to be built.  Preparations need to be made so that any opportunity to seize power can be exploited when it appears.  The pump needs careful priming.

So it was with neoliberalism.

It might have had a scientific basis in 1938, but post-war it became a political process.  Support flooded into its centers of thought from interested people and organizations — those who would find more space to flourish under a regime built upon neoliberal ideas.  Professors were funded to produce the right sort of thinking.  They were given opportunities to tour and proselytize.  They were given preferred promotions and prestige.  As they prospered, the political movement they provided the cover for gathered momentum.  Business interests and wealthy backers made it clear what was, and what was not, acceptable thinking.

Then geopolitical reality opened the door.  The crisis of the 1970s provided the long sought opportunity, and all that preparation, all that monetary support, all that organization paid off.  The neoliberals burst upon the scene to vent their ideology.  Policy would elevate the individual and denigrate the state.  Government was the enemy of the people.  Society did not exist.  The protection of the state afforded to those individuals was to be withdrawn.  They were to be set free to flourish in the evermore deregulated vitality of an economy that would reward their effort, and private enterprise and would flood them with an array of choice unattainable within the confines or constraints of a more socially oriented option.

As a piece of marketing this message was historically compelling.  Setting individuals free is part of the bedrock of modernity.  Undoing the leaden hand of authority and tradition is an essential part of the modern toolkit.  It is where capitalism comes from.  Remember that the classical economists built their original thinking on top of the struggle to release commerce from the ancient ideas embedded in aristocratic and religious institutions.  New institutions were created as the commercial class grew in power.  And at each step along the way the new discipline of economics provided the intellectual backdrop needed to give intellectual heft to justify the new distribution of wealth and power that accompanied progress.

Wealth and power.

Inextricably linked from the beginning of time.  As the new elite garnered the one it gathered the other.  The old elite either withered and disappeared or, more often, it simply found ways to accommodate and merge with the new.  And at each step new ideas were developed to resolve problems and to provide moral cover for the new accumulation.

Wealth and power.  There is nothing new, at all, in noting the convergence of the two.  There is no novelty in associating the desire to protect privilege from the intrusions of others insisting on a different distribution with the parallel development of ideas that do just that.

As I just mentioned, in the formative years of modernity, certain intellectuals — who began to call themselves economists — were intimately involved in the provision of ideas to justify the great shifts in social structure and power that industrialization and commercialization brought.  The original “greats” of the discipline all contributed to the social acceptance of the new ways of life that supplanted the traditions being uprooted by modernity.  From its very inception economics has been politically motivated.  It arose to explain and justify what was happening.  But happening where?  Within society.  Economics is social and political precisely because its subject for study is both social and political.  And so economics is about power.  It cannot avoid it.

But, the neoliberal project required that the topic of power recede into the background.  It was, recall, a project to re-assert the pre-eminence of an elite that had suffered at the hands of the rise of democracy.  That recapture of power needed to be addressed within the context of postwar politics.  Usurping power nakedly would be improper.  It had to be done through the backdoor.

One of the great consequences of the industrial social upheaval, as we all know well, was the rise of a counter-movement amongst the regular folk who sought to protect themselves against its depredations.  This movement became modern democracy and was designed to counter capitalism.

And this creates a great conundrum.

Regular folk quite like democracy.  It provides a method of distribution of wealth where the voices of regular people have a significant, if not always equal, say.   Which, naturally, makes it unpopular amongst those who might have to share on such a stage.  In other words regular folk quite like, indeed often prefer, distribution based upon the overt politics of governance rather than covert politics of the economy.  After all, the covert is hard to see, explain, or counteract.

Which is where we return to neoliberalism.  Making the overt into the covert is something of a speciality of a certain type of economics.

The challenge for the economists hired to create the platform for the neoliberal attack on democracy was to build a set of ideas that appeared to remove the subject of power from the distributive impact of capitalism.  The solution was to move the discipline as far away from society as possible.  Economics, in contrast to its origins, became a stark and highly reduced discussion of the allocation of resources, with a view towards making the preferred such allocation appear totally independent of outside influence.  The notion, ultimately, was to demonstrate — to “prove” — that such outside influences would inevitably lead to a less than optimal outcome for “society” even though said society was removed from the discussion.  This required a great deal of effort over several decades.  It reached fruition in the late twentieth century in the form of the economics that we now call “mainstream”.

The only way for economists to eliminate distribution, and to justify the social and political status quo, was to segregate the economy from society, ignore the fact that economic agents and political voters are one and the same, elevate human faculties to godlike rationality, eliminate all aspects of interconnected friction or complexity, assume perfection and symmetries of information, and imbue their agents with a foresight that even the economists themselves appear not to have — based upon their evident and frequent failures of prediction.

This willingness to deny reality was never accepted as the obvious embarrassment that it is.  It was given the name of science.  It was duly formalized and teased into excruciating detail.  And whenever reality intruded to highlight the embarrassment it was deflected by the use of intellectual ruses.  The reality of industrial organization was hidden away under the rubric of transaction costs.  The reality of the impact of continuous learning was hidden under the rock of total factor productivity.  The accumulation of power was simply ignored because all agents were assumed to be equal.  And, most embarrassing of all, the distribution problem was kicked to one side by the employment of a “representative agent”, in the singular, which was a device that, by definition, eliminated the question and had the additional virtue of making the math work better.

The cost to economics of becoming the handmaiden of the neoliberal power grab has been enormous.  It has shrunk into a small but intense study of the logic of allocation.  It is proud of its method and yet resists — perhaps it is fearful of — importing more modern ideas from other disciplines.  Most of its method relies on techniques developed back in the middle of the 1800’s.  It has missed the revolutions in other sciences.  Its attachment to general equilibrium comes at the cost of exploring truly open and dynamic systems.  It avoids evolution.  It detests statistical dynamics — apparently Maxwell and Boltzmann never lived.  Complexity and self-organization hover only on the fringes.  It accepts that its description of behavior is other worldly and yet fails to embrace real world behavioral ideas fully.  And its rejection of power, and thus anything political and social, make it irrelevant as a social science.  After all how can it be a social science when it is devised to support the absence of society?

Now none of this is new.  Nor particularly controversial.  It has all been said before.  Many times over and by people far more erudite than me.  I am being simple.  I am being blunt. Economics needs a reboot, but inertia and the need to protect the guild from external examination prevent it from getting such a reboot.  It is stuck.

That this is the case is suggested by the flurry of attempts to launch a critique.  From within the guild voices sometimes cry out about how worthy its methods are and how they have social value.  Value, that is, as method, not as explanations of economies.  Other voices point to the steady re-emergence in new clothes of old ideas.  The ending of free trade and globalization, even the creation of industrial policy and other heresies are now openly discussed.   Yet these signs of life are insufficient.  Is economics simply a method?  Is it simply a re-do of the 1800s?  Why can it not adopt novel techniques from outside the guild? And what is its aversion to recognizing  power as a pre-eminent cause of economic activity?

The neoliberal project undermined the legitimacy of economics as a social science.  It is a shadow of what it could be.  Perhaps the collapse of the neoliberal project in the disaster of the 2008/2009 turmoil will lead to a recovery of economics.  That appears to be going on.  But insufficiently.  Academics are averse to calling out their peers for overt politically motivated thought.  Economics, in particular, resists naming names.  It resists looking back at bodies of work to re-appraise how much was the consequence of genuine enquiry and how much was induced by an ideological, or worse, a financial motivation.  How much of the core work undertaken mid-twentieth century was genuine enquiry and how much appeared under the influence of corporate or wealthy individual subsidy?  That’s an awkward question.  One that needs an answer.

Or, perhaps, to save face, we kick the can down the proverbial road.  Perhaps we simply and steadily discard the work from that tainted period.  Perhaps we retreat from the intrusion into other disciplines such as politics and sociology.  Perhaps we toss aside the agenda that allowed economic method to infect sister social studies.  Perhaps we undo the impact of that period on industry and finance — the real world impact of neoliberal economics was manifest in 2008/2009.  And perhaps we allow the famous names associated with all that to fade into history where they belong.

Perhaps, more to the point, we must remember and prioritize, that economics is first and foremost a social science.  It cannot deny the existence of society.  It cannot, consequently, deny the existence of power and politics.  Both the allocation of resources and the distribution of wealth are inherently the expression and culmination of power relationships.  To study such phenomena, economics needs to reacquaint itself with its own path and history.  Its was always about power and politics.  Politics cannot be studied through the lens of economics because economics is already a statement of politics.  Nor can social relationships be studied with an economic method without acknowledging that they exist within a setting mediated by power.

The economics created to support neoliberalism, then, fits within this narrative.  It was designed to justify a certain distribution of wealth and power.  To do that it had to dispense with distribution as a subject of study and to assert that whatever the outcome of economic processes that it deemed “efficient” was both natural and irresistible.

It had to deny power in order to justify a particular sort of power.  And it is this contradiction that has led to its downfall.  The irony, of course, being that back in 1938 the neoliberal project feared far-right populism as much as centrally planned economic activity.  By developing a body of work designed to explain and justify the ascendancy of capitalism and its associated elite, the economists enlisted to the project paved the way for the re-emergence of just that far-right populism.  By advocating the fragmentation of society and ignoring the consequences of distribution they nurtured a social pathology antithetical to their avowed values.   It wasn’t the failure of capitalism they needed to fix.  It was its runaway success.  But that’s why we have democracy and the voice of the people in distribution through politics.  Hopefully our economists have taken note.

The future of economics would then be bright.  Its recent past not so much.

Peter Radford
Peter Radford is publisher of The Radford Free Press, worked as an analyst for banks over fifteen years and has degrees from the London School of Economics and Harvard Business School.

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