Neoliberalism, Mirowski and me

Philip Mirowski is a historian who has written a great deal about both the history of economics as a discipline and about neoliberalism. He knows much more about the history of both subjects than I do. I was therefore somewhat dismayed that, in responding to some comments on his 2014 paper “The Political Movement that Dared not Speak its own Name: The Neoliberal Thought Collective Under Erasure” (pdf), he chose to start by making some comments on my recent blog post discussing neoliberalism.

He didn’t like it, for two main reasons. First, he disagrees with my definition. I have no problem with that, because I would never have the nerve to try and offer a definitive summary of the term. As I wrote in that post, I was just saying what I mean by the term when I use it. I’ll come to why he thinks that it was - to use his own words - ‘untutored’ later.

The second “more glaring error is to counterpose the beliefs of orthodox economists, who judiciously accept or reject various doctrines on the basis of their empirical relevance without bias, to those of the Neoliberals, grounded as they are in an impetuous ‘ideology.” In particular, he takes objection to my suggestion that economics can be used to critique neoliberal ideology. Here unfortunately there seems to be little correlation between his criticism and what I actually wrote.

He suggests that what he calls the ‘Neoliberal Thought Collective’ (NTC) has many more representatives in the economics profession than I could imagine. But how does he know what I imagine? At no point do I say that all economists are free of neoliberal ideology, and in the past I have argued exactly the opposite. But the fact that some economists might be neoliberal in outlook does not mean that economics cannot be used to critique neoliberalism. It is a category error that anyone who understood economics should not make. More on this below.

He also rather oddly says that I provide no example of how economics can be used in such a critique. It is odd because I give an example in the post. What he might be suggesting is that this actual/potential critique has not been effective politically, but that is something very different. It may just reflect that economists tend to be ignored when what they say is inconvenient, which is something I have talked about elsewhere.

Having said all that, in a tit for tat style, let me revert to Daniel Dennett’s rules, and say that I actually agree with some key points from Mirowski’s paper referenced above. First, we both agree that neoliberalism exists! Second, one of the key points I wanted to make in my post was that neoliberalism was not the same as mainstream economics. On page 8 of the paper he writes: “First, and this cannot be stressed enough, however much they sound alike, Neoliberalism and neoclassical economics are two completely different schools of thought.”

The way he sometimes describes it the NTC can sound like a great conspiracy, but another way of putting it would be to say that many neoliberal thinkers see themselves as part of a very political project. That is a third area of agreement: in my post I described it as a political movement or ideology. Fourth, I also agree that the lack of any self-identified group calling themselves neoliberal is not an issue.

What about definitions. In the paper (page 22) he outlines 11 ideas that the NTC believes in. I suspect one problem he had with my short definition (“hates ‘big’ government, dislikes any form of market interference by the state, favours business interests and opposes organised labour.”) is that it sounds libertarian. But I put ‘big’ in inverted commas for precisely that reason: neoliberals can be quite happy to use state power to achieve their objectives. They are not libertarian, which is a fifth point we agree on.

I have no wish to argue with his 11 statements, partly because I do not see neoliberalism as being particularly “coherent and consistent”. If there is a difference of emphasis between us, it is that he stresses support for the market and I stress dislike of the state interfering in (or undertaking what could be) market activities. One reason I would give for this difference is the corporation itself. It is possible (although not desirable, for reasons outlined many years ago by Ronald Coase) to set up ‘internal markets’ within corporations, or even break up corporations into a set of markets activities. This is not part of the neoliberal agenda: item (9) of his list of neoliberal beliefs is “Corporations can do no wrong—by definition.”

Another reason may be more personal, and that is austerity. Once you use basic macroeconomic theory (theory which Mirowski describes in his response as “just a sequence of faddish enthusiasms”) to see why the various reasons used to justify austerity make no sense, you are left with two explanations for why neoliberals would want to champion it. One is a dislike of the idea that state action might be needed to ‘mend’ the market, and the other is what I call ‘deficit deceit’: using austerity to shrink the state. At least a majority of academic macroeconomists, and possibly a clear majority, now view 2010 austerity outside the Eurozone periphery as a mistake, which does not fit well with the idea that economists are part of the heartland of the NTC?

Austerity is an example of where economics is really important to any critique of neoliberalism. It is here where I fundamentally disagree with Mirowski. Indeed, it is difficult for me to see how any effective critique of neoliberalism could not be based at least in part on economics. Take Mirowski’s second neoliberal belief: " “The market” is an information processor, and the most efficient one possible—more efficient than any government or any single human ever could be." Any economist should distinguish between an ideal market and any actual market. An important part of economics involves outlining the conditions under which markets are ideal in organising exchange, and the consequences of any departures from that ideal. That distinction is something an ordoliberal would recognise (at least in the case of the degree of competition/monopoly), but is generally ignored by neoliberals.

So if you want to analyse, for example, why setting up internal markets in the NHS, or privatising NHS activities, might or might not work, you need economics to understand when markets work well and when they do not. They might not work well, for example, if information about quality is difficult to obtain. (Economics is not the only discipline you would require: you would want to talk about motivations, and how a market ethos can damage shared goals, for example.) More generally the idea that you can critique an ideology which puts such faith in all markets without using the discipline that studies market efficiency seems strange to me.

Another example concerns the minimum wage. The neoliberal view would be that this a bad policy which will only reduce employment. It is economists who have both gathered the evidence and developed the theory to show otherwise. If economists were hopelessly embroiled in the NTC, why would this happen? I’m not arguing that it is not possible for economists to be influenced by neoliberal or ordoliberal ideology (the apparent opposition of most economists to the introduction of the minimum wage in Germany might be a case in point), but just that it has not happened to the extent Mirowski imagines, and it certainly has not become embedded in economic theory. When he says at the end of his response here that “it seems likely that opposition to neoliberalism will not arise from within modern economics, either” he almost has to be wrong.

Let me end with the example I gave in my original post and he appeared to ignore: capital requirements for banks. A substantial increase in capital requirements is a simple way of avoiding another financial crisis, and furthermore, because of its simplicity, a way that can hope to survive against relentless political pressure from banks. That the idea makes sense in terms of basic theory means that even economists like John Cochrane support it. In his time at All Souls in Oxford he would certainly have talked to the economist who has recently been pretty vocal in his calls for higher capital requirements in the UK. Mirowski overestimates the extent to which neoliberal ideas have become “embedded in economic theory”, and underestimates the power that economic theory and evidence can have over even those academic economists who might have a neoliberal disposition. If the tide of neoliberal thought is going to be turned back, economics is going to be important in making that happen.    

Economists versus bankers

Nearly a year and a half ago I wrote a post about encouraging dialogue between economists and other social scientists. I concluded with the following three paragraphs:

“Let me take a real world economic problem: the response to the financial crisis. Some have suggested that banks have become too large and need to be broken up, or that the activities of high street banking need to be separated from the activities of the casino. Your economic analysis tells you that networks of many small entities can be as subject to crises as networks involving a few large banks. You are also able to devise a system of Chinese walls that mean that the activities of the casino can be separated from those of the high street even within the same company, and your political masters seem to prefer this approach. You recognise that different assets differ in their liquidity, and so you devise complex weighting algorithms for computing capital ratios. Your suggestions form the basis of negotiations between officials and bankers, and a set of rules and regulations are agreed.

Over the next few years you watch in dismay as your complex system begins to unravel. The CEOs of the large banks seem to constantly have the ear of politicians, who in turn gradually compromise your elaborate controls to render them less and less effective. Those in charge of administering the rules find it much more lucrative to work for the banks, and so regulators gradually lose expertise and resolve.

And you realise that right from the start you made the wrong choice. You decided to focus on what you knew, which was how to design systems that worked well as long as those systems remained unchanged, but which were not robust to intervention by self-interested parties. In short, they were too open to rent-seeking. You realise that actually the best thing to have done was to break up the banks so that their political power was forever diminished. And you recall a conversation with your social science colleague when this all started, who might have been trying to tell you this if only you had understood the words he was using.”

I was afterwards asked whether I had one particular UK economist, John Vickers, in mind when I wrote this. He chaired, at the government’s request, a commission on banking reform. He has become increasingly vocal about how his original commission’s proposals (pdf) are being watered down and how the Bank of England appears to be putting public money at risk once again. (For his detailed assessment, see this paper. And here is what another commission member, Martin Wolf, thinks about the financial sector. Adam Barber details how the attitude of the UK government has changed. In the US this very issue became an important point of difference between Clinton and Sanders.)

The honest answer is that I did not have him in mind. It was a fictional account designed to make a point, and so I took elements from different debates which together apply to no one country or individual. The point is that in finance good reforms are those that can best resist political or economic manipulation by banks, and perhaps economists in general have been slower to see that than some of their colleagues in other social sciences..

It would probably be fair to say that before the financial crisis economists got on pretty well with the financial sector. There was a common interest in monetary policy (although the motivation for that interest might have been different) and the sector was a useful source of funds for conferences and (for a few) consultancy. Most economists did not look too hard at what the financial sector was actually doing, although those that did often raised serious questions. Behind this nice piece by Ben Chu is an army of academic research which suggests that fees paid to manage funds are a waste of money.

The situation changed after the financial crisis, for obvious reasons. Since then economists have increasingly questioned whether the whole business model behind banking is sound. In particular they have questioned why banks should be so different from other companies in terms of the amount of equity capital they hold in relation to their assets. These economists include the previous governor of the Bank of England, Mervyn King. They have also questioned whether one of the side effects of current regulation is to maintain the monopoly power of big banks.

If all that was not bad enough, we have the influence that the financial sector has on monetary policy. Mainstream macro has put a lot of emphasis on the importance of day to day monetary policy being independent of politicians, and far too little on it being independent of the influence of finance and bankers. Paul Krugman has talked about the links between interest rates and bank profits and how that might ‘guide’ the views of bankers. If you want to see a clear case of that, read this FT op-ed by David Folkerts-Landau, chief economist at Deutsche Bank.

The article could not be more wrong. The reason the Eurozone has performed so badly compared to the US, Japan and even the UK is not because of lack of structural reform, but because of the relative reluctance of the ECB to stimulate the economy. Rates were raised in 2011, and Quantitative Easing delayed until 2015. The article is full of hopeless lapses in logic. If there is any sense here at all, it is that high unemployment is required as a political incentive to undertake structural reform. So the ECB “has become the number one threat to the eurozone” because it has allowed politicians to put that reform off.

Here I can do no better than quote Adair Turner. “Vague references to “structural reform” should ideally be banned, with everyone forced to specify which particular reforms they are talking about and the timetable for any benefits that are achieved. If the core problem is inadequate global demand, only monetary or fiscal policy can solve it.” In the Eurozone the core problem is lack of aggregate demand, as below target inflation shows.

Why this hostility from German bankers to low or negative rates? What the author does not tell you is that the profits of German banks, and the viability of other parts of the German financial system, are particularly (IMF pdf, box 1.3) vulnerable to low rates. (For those that can access it, Wolfgang Münchau in the FT provides an excellent summary.) And also that the profitability of Deutsche Bank is not great right now, as Frances Coppola notes. In the UK or US if this kind of nonsense from bankers appears in the press it gets a lot of kick back from economists - in Germany perhaps less so.

So who cares if economists have crossed swords with bankers? It matters because finance gets away with so much partly through a process of mystification. Mystification is how banks can perpetrate widespread fraud on consumers and businesses. When bankers say that being forced to ‘put aside’ more capital keeps money out of the economy it sounds plausible to many, even though it is completely false. (Admati and Hellwig (pdf) list 30 other similar false claims.) There is also a belief that because bankers are involved in financial markets, they must know something about how the macroeconomy works, a belief which the FT op-ed shows is clearly false. In all these cases, economists can provide demystification.

If we are ever to cut finance down to size (metaphorically, and perhaps also literally), economists are going to be vital in the battle to do so.