The end of neoliberalism?

A while ago I promised to return to this topic and discuss Mirowski's reply in the INET debate to my comment on his paper. And yes it's been quite a while since that debate. At any rate, I was at the Political Economy of World Systems (PEWS) conference last weekend, and we had some time to discuss Wallerstein (with him, I'm glad to say), his views on the structural crisis of capitalism. And someone (can recall who did) said something to the effect that the collapse of the economy in 2008 and the events after that (particularly the European situation with Brexit and the rise of right wing populism) suggest that the Neoliberal era is over (that was the title of a subsection of a chapter in David Harvey now classic book on Neoliberalism).

So let me tackle that issue, captured beautifully in Blyth's tweet above (mind you mark might have been talking just about Neoliberalism in the US, as Cornel West did here), and in the process make the two brief comments I wanted to add on Mirowski. And to make sure, I don't think the era of Neoliberalism is over, in the US or globally. In fact, in many places Neoliberalism is resurgent (certainly in Latin America; I'll have something to say on Argentina soon).

The first issue, before one can discuss whether it ended or not, is what it was. Mirowski says that neoliberals are not just or fundamentally neoclassical, libertarian, classical liberals, or conservatives, and that they have, to some extent, created the confusion. That is in a sense the negative definition of Neoliberalism.

On a more positive sense, he argues that the role of the market is clearly central for Neoliberalism. Mirowski says:

"... neoliberal doctrine instead set out actively to dismantle those aspects of society which might resist the purported inexorable logic of the catallaxy, and to reshape it in the market’s image. For neoliberals, freedom and the market would be treated as identical. Their rallying cry was to remove the foundation of liberty from natural rights or tradition, and reposition it upon an entirely novel theory concerning what a market was, or should be."

In his view, Neoliberalism is a movement, and not simply a set of ideas (like for example, Keynesian macroeconomics or classical political economics). And again, I must emphasize that I do agree with him, that it is a movement that revolves around the Mont Pèlerin Society (MPS). He refers to the group as the Neoliberal Thought Collective (NTC). A scientific community in the same mold of Thomas Kuhn's normal scientists. Harvey, in the above mentioned book, argues that it is a movement whose goal is to reestablish the power of capital, and disembed capital from the welfare costs imposed during the Keynesian consensus era. And certainly that seems to be the glue of the group.

However, in his response to my comment, Mirowski suggests that I commit a mistake in suggesting that Neoliberalism is subsumed in (a subset of neoclassical economics). And of course, in a certain way, if you think of a movement, it would seem that I had it indeed incorrectly and that neoclassical might be part of the Neoliberal group, but many Neoliberals are not.

However, while it is true that in that sense Neoliberalism is broader than neoclassical economics, since its scope is wider, and less of school of thought than an ideological movement, it is also true that as a movement Neoliberalism must substantiate its arguments on the basis of a set of ideas (as Keynes dixit, ideas govern the world, not vested interests).

Neoliberalism could be seen as an ideological movement to promote the vested interested of capital, after the significant reforms of the Keynesian consensus, a Polanyian counter veiling movement created by the success of the expansion of the welfare state in advanced western economies. But it was an ideology built on the notion that markets provide the only organizing principle in society, an idea that is probably associated to Hayek and his Austrian School. Note that while Hayek, in particular after the intellectual defeat in the 1930s in his debates with the Cambridge Keynesians, turned to political philosophy as his main preoccupation, his economic views remained essentially unreconstructed.

Even though there are methodological differences between the Austrian version of marginalism and the Chicago School, to suggest as Mirowski does, that Hayek, and other Austrian scholars were not neoclassical is difficult since both are founded on the idea that relative prices depend on supply and demand.  All Neoliberals fall back into some form the mainstream marginalist story in which equilibrium prices are determined by supply and demand, including the prices of labor and capital, and that includes Hayek and Austrians. The market is the totemic myth that provides overall coherence to the movement, and an aura of scientific rigor to the policy proposals. Each clan would have their own version of the myth, so to speak, with the more common being the Arrow-Debreu General Equilibrium (GE) model, and the Austrians emphasizing the self-organizing principles of the market. In that sense, neoclassical economics is the theoretical foundation for all versions of Neoliberalism, whether Neoliberals understand it or not (some Austrians believe they are not neoclassical, but their confusion should not cloud our understanding of facts).

The second issue has to do with Mirowski's argument that “the real key to understanding modern economics is the absorption of the central tenet of markets as superior information processors within the heartland of cutting-edge microeconomics.” In fact, neither Hayek’s argument for the spontaneous, self-organizing nature of the market, nor the retreat to the validity and generality of the Arrow-Debreu GE model, both providing a flimsy response to the internal critiques of the marginalist model, were able to provide a simple policy relevant model. It was only the policy relevance of the Friedmanite simple macroeconomic model that created the conditions for the NTC to promote the economic policies that reversed the Keynesian consensus, not just theoretically, but in the real world of economic policy. That is, the return of the idea of the natural rate, even after being discredited by the capital debates (something I referred to as the return of vulgar economics).

Back to the end of Neoliberalism, now that one may understand my argument of why neoclassical economics is at the core of the movement. Almost a year and a half into the Trump experiment, what we got is a lot of rhetoric on protection, immigration and so on, but the only concrete thing is a tax cut for the wealthy. That Trump would not really be a populist was evident by his choice of Pence, a Koch financed career politician, as vice-president. Neoliberalism has survived the greatest financial crisis since the Depression, and is doing fine in both the GOP and the Democratic Party. The notion that it is dying because there is some push back and it is contested in some quarters is wishful thinking. Trump just provides a different flavor of the same.

Note that there is no serious change in the profession about the way we think, and neoclassical economics is doing just fine. I have been skeptical about the notion of changes in the profession after the crisis (and of the IMF policies too). The reason, the underlying theoretical reason, for the persistence of Neoliberalism in economic policy can be seen in the reluctance to abandon Milton Friedman's natural rate of unemployment concept by self-depicted (New) Keynesian authors.

Who is afraid of Neoliberalism? A comment on Mirowski

Way less scary than Neoliberalism

Debate with Mirowski, as promised. From the INET website:

While the Neoliberal movement’s concerns extend into a broad political reorganization of society, it remains intimately connected with neoclassical economic thought.

The idea of a Neoliberal Thought Collective (NTC) being a “completely different school of thought” from neoclassical economics is not quite correct. It is true that Neoliberalism transcends the more limited scope of neoclassical economics with a much broader preoccupation with the political reorganization of society. On the other hand, it is hard to think of any Neoliberal author cited by Mirowski that does not fall within the neoclassical school.

Read my full reply to his paper here.

PS: There is also a response to Mirowski by Kari Polanyi Levitt and Mario Seccareccia here, and one by Alessandro Vercelli here.

Philip Mirowski on Neoliberalism

Neoliberalism is resurgent in Latin America, and quite never left in the US anyway. And everything indicates that, either with Trump (yes, he does have a right-wing populist discourse, but I wouldn't take it too seriously; see his tax plan) or Clinton, it will continue to do well here, even if there is clearly a desire for change. This paper by Mirowski discusses the main points of Neoliberalism. A short reply by yours truly will be published soon in the INET website.

Why the crisis didn't discredit mainstream (neoclassical) economics?

There are probably many answers to the question. I suggested before that the best way to look at it is from a sociological standpoint. The same people hold the same positions at the key 'respectable' universities, go to the same 'relevant' meetings, and award the same 'important' prizes. And research does build on previous research. Let alone that the economics profession, like the others, is there to protect and reproduce the status quo.

At any rate, in his new book Philip Mirowski, from Notre Dame, and a member of Institute for New Economic Thinking (INET; which has funded I should say several heterodox authors) dedicates, in part, his first chapter to the topic. He says about the INET meetings, which were supposed to display some of the changes in the profession after the crisis:

"[...] the first INET meeting at Cambridge University in 2010 bore some small promise—for instance, when protestors disrupted the IMF platitudes of Dominique Strauss-Kahn in Kings great hall, or when Lord Adair Turner bravely suggested we needed a much smaller financial sector. But the sequel turned out to be a profoundly more unnerving and chilly affair, and not just due to the caliginous climate. The nightmare scenario began with a parade of figures whom one could not in good conscience admit to anyone’s definition of “New Economic Thinking”: Ken Rogoff, Larry Summers, Barry Eichengreen, Niall Ferguson and Gordon Brown ... The range of economic positions proved much less varied than at the first meeting, and couldn't help notice that the agenda seemed more pitched toward capturing the attention of journalists and bloggers [oh my, I'm included in this one], and those more interested in getting to see more star power up close than sampling complex thinking outside the box. It bespoke an unhealthy obsession with Guaranteed Legitimacy and Righteous Sound Thinking."

I always thought naïve to think that the crisis would lead to the demise of neoclassical economics. In fact, in the US it was the Great Depression and the development of a certain type of Keynesianism (the Neoclassical Synthesis one) that led to the domination of neoclassical economics (before that the profession was more eclectic and if anything dominated, in the US, by institutionalists). But I had some hopes for INET to open dialogue with less crazy (sold out?) within the mainstream. The fact that Mirowski calls the second meeting a nightmare scenario does not bode well for the future of the profession.