Scientists and media training

Suppose a scientist finds that a product being used by some industry to help enhance their products is in fact dangerous. Their research is peer reviewed by other scientists, who find no fault. Imagine there are no regulatory bodies that the scientist can pass this information to. She contacts politicians and civil servants, but the government is too close to the industry and the opposition are too busy on other things.

She contacts the media. Most journalists do not have time to understand what she has done, check that other scientists agree with the results and write it up, while others know that because the industry advertises with their paper any story will be spiked. She gets invited on to one TV programme, where she finds herself pitted against an industry representative practiced at PR who dismisses what she has done. Nothing happens as a result.

How do we stop this kind of thing happening? Do we suggest that the scientist gets some media training so she can debate better on TV, or hires a PR company so that more journalists take notice of what she has done? Or do we lambaste journalists for not doing their job properly, imagining we are still in a bygone era where journalists had time to investigate?

In this particular example most countries have chosen a better model, where they set up regulatory bodies staffed with other scientists that have the job of assessing research of this kind, bodies which governments find it difficult to ignore. But what happens if, for whatever reason, these institutions do not exist?

In the space of two years the UK has had three referendums/elections in which economic issues have been key. In the Scottish independence referendum and Brexit the view of the overwhelming majority of economists have been clear [1], but in the media this view was/is typically ‘balanced’ by an opposing view. In the UK election the views of macroeconomists on austerity were more diffuse, but a clear majority did not think austerity had a positive effect on the economy. The media largely ignored this view.

I naturally think there is something wrong here, and I also doubt that the answer is to give macroeconomists more media training. We need a debate about what the right answer is. [2]

[1] In the Scottish referendum the clear view was that there would be large short term fiscal costs arising from independence.

[2] My thanks to the organisers of this event for starting this debate, and in particular to members of the audience whose questions this post is a better answer to!  

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.

The anti-Corbyn militants have failed

It was a day of contrasts. Labour MP Sadiq Khan was elected mayor of London, overcoming an openly Islamophobic campaign against him. The person who played a major part in putting together that Islamophobic campaign, Lynton Crosby, was knighted on the same day for services to the Conservative Party politics.

It was also the day after many council elections across the UK. As anyone familiar with mid-term elections will know, expectations are critical in how a result is received. In this case the agenda was set (because of their media access) by those within Labour who openly attack the new leadership. In this post I called them Labour’s new militant tendency, but anti-Corbynistas is simpler. The constant anti-Corbynista refrain is that this leadership is an electoral disaster. So when the council elections were not a disaster, they looked stupid and Labour ended up feeling better about the results than they should have done. (Despite open Conservative divisions over Europe and a clearly regressive budget, Labour only had a slight national lead over the Conservatives.)

You can of course be neither a Corbynista nor an anti-Corbynista, which is where I am, where Sadiq Khan is and I suspect the majority of Labour party members are. Khan nominated Corbyn for the leadership because he thought the left should have a voice, but he did not vote for him in the actual contest. Giving people a choice, and being prepared to accept when that choice goes against you, are part of democratic politics.

Returning to the council elections, this own goal by the anti-Corbyn militants is an illustration of how their strategy is flawed. As I explained here, constant high profile attacks on the Labour leadership from within just make it difficult for Labour party members to read the polls: are bad results because the leadership is poor or because it is under constant attack from within? That in turn just delays the very thing the anti-Corbynistas want, because it is only the party membership that can vote for a new leader.

At one point when I was writing that earlier post, I suddenly thought I was being stupid. The goal of many anti-Corbynistas is not to unseat the leadership as soon as possible, but to provide the momentum for a new centre-left party. You can see that very clearly in this article by Tim Bale. Those making that call know that time is not on their side, so there is a constant refrain of urgency. To quote Bale, MPs “are fast running out of options”, they are about to be deselected, the new leadership is tightening its grip on the party, and so on. I think in reality time has run out for those that want (one way or another) to override the views of Labour party members.

Naivety among anti-Corbynistas is only matched by the traditional left. Those who dismissed the antisemitism issue as just a ruse by anti-Corbynistas showed no awareness of the structural problem that Labour has, as both the party that is most critical of the current government of Israel and the party that many Muslims have taken a leading part in. Contrast Naz Shah’s genuine apology to Ken Livingstone’s incendiary remarks. Getting Shami Chakrabarti to lead an inquiry is an excellent start in dealing with that issue.

I think Nick Cohen is right that this is an example of a general tendency on the traditional left to divide the world into heroes and villains, and choose which side particular people or leaders are on by a dubious process of association. Within that framework any leader that opposes US imperialism gets most of the way into the good guys camp, whatever the nature of their regime. It is an approach to international relations worthy of a neocon.

This Labour leadership is generally as hopeless as the last in combating a generally hostile media. I have not heard a single Labour shadow minister or MP, in response to yet another question on antisemitism, counter attack with the nature of the Conservative campaign for London mayor. (As in ‘at least we are dealing with this issue. The Conservatives are continuing to run an Islamophobic campaign’.) It has to be prepared to learn the dark arts of political spin.

There is a great deal of progress that needs to be made before the Labour party is able to unseat what is one of the most incompetent, divisive and ideological UK governments. Good leadership is part of how that will be done, but it is not everything. The 2015 election was lost for Labour partly because Ed Miliband was not popular, but also because the party decided not to oppose the myth about the previous Labour government’s economic record. To help win in 2020 or 2025 the party needs to completely rethink how it appeals to the electorate while facing a hostile environment. How it deals with widespread antagonism towards immigration. How it takes on the SNP. How it handles the financial sector. How it shifts the economic debate away from deficits to the issues that really matter. With so much to do, fixating about a leadership when there is currently little you can do about it and there is no proven alternative is just a waste of time that only benefits the current government.

The Eurozone recovery

Which posted the strongest growth at the beginning of 2016: the US, UK or the Eurozone? The answer is the Eurozone. Growth at 0.6% for the quarter (about 2.5% at an annual rate) is nothing to write home about, but it is not the stuff of doom and gloom either. Reasonable growth like that should come as no surprise. The economy is receiving as much monetary stimulus as the ECB can currently muster, and fiscal contraction has come to a halt.

Inflation is still well below target, but the reason for that is straightforward enough (as Martin Sandbu points out): there is still a lot of spare capacity. Inflation will only stabilise at around the 2% target when that spare capacity has disappeared. Policy should be doing everything (more public investment!) to ensure that happens through strong growth rather than, as seems to have happened in the UK, a gradual contraction in supply. On inflation the ECB should make their target 2%, rather than the current ‘below but close to’ 2%, to avoid the Japan problem that Narayana Kocherlakota discusses here.

I went further when I wrote two weeks ago (the GDP figures came out a week ago) that “I also think we may see rapid Eurozone growth before [2020]”. By rapid growth I mean something in excess of 2.5%. I said that because I was adding one other factor into the mix of fiscal neutrality and monetary expansion, which is that the Euro has been pretty competitive for well over a year. As Martin points out, that has so far not contributed anything to recent Eurozone growth.

I have read in a few places recently people saying that the impact of international competitiveness is not what it was. I agree with Paul Krugman that this pessimism is unlikely to be warranted. I have spent a significant part of my working life estimating and applying trade elasticities (the impact of international competitiveness on trade and hence demand), and this experience has taught me that this effect is a bit like Milton Friedman’s description of how monetary policy works: there can be long and variable lags. So I expect that the Eurozone’s competitiveness gain over the last year and a half will begin to impact on Eurozone GDP at some point in the next year or two, and that might just provide more rapid growth than we saw at the beginning of 2016.

Can governments offset helicopter money

Nick Rowe makes a couple of simple points around my post yesterday. Let me start with the issue of whether helicopter money (HM) is ‘permanent’ or not. (Alas I cannot match Nick’s admirable brevity.)

Permanent or temporary?

Think about a really simple world, where the ratio of money to prices is always the same in the long run. In this world we have a short run recession accompanied by deflation, and nominal interest rates have hit the buffer of zero (or wherever). The inflation target is 2%, and the central bank will never let inflation go above 2%. However because interest rates have hit zero, it cannot do the reverse and prevent deflation by conventional means.

If in this world the monetary authority gives away some new money (helicopter money, or HM) to stimulate the economy, is that new money permanent or temporary? Let’s think about what happens without HM. Prices fall or stall for a while, and only when the recession ends does inflation go back to 2%. Now compare this to what would happen if the central bank does HM, and this was successful at raising inflation much more quickly to 2%. That means that the price level will in the long run be permanently higher than if the central bank had done nothing. As a result, at least some of the additional money created to end the recession quickly will be created permanently relative to the no money creation case.

So to the extent HM works, and stops deflation, it involves permanently creating some money. That permanent money creation does not mean that inflation has to be above target, but rather it stops inflation being below target.

But there is absolutely no reason to limit HM to the amount by which money will be permanently higher, because that will almost certainly be insufficient to end deflation. Money will need to overshoot its permanent long run level in the short term. [1] There is nothing wrong in temporarily creating additional money to get us out of a recession. The only issue of any interest in all this is whether unwinding any temporary money creation requires the central bank or the fiscal authorities to do anything unusual (see below)

Will the temporary money be spent?

But if you just give people additional money temporarily, will that mean it is just saved? This is a variant of the Ricardian Equivalence issue, and the real world answer is the same: all the evidence is that quite a lot of it will be spent. I would argue there are two main reasons for this: some people are credit constrained (and HM is like a bank manager that says yes), and others do not know how the money will be payed back (it could be through lower public spending).

What about governments: will they try to offset conventional (cheque in the post) HM by raising taxes, or not increase spending as a result of ‘democratic helicopter money’ (see my last post)? We need to go back to why we need HM in the first place. We need HM because governments are not undertaking the fiscal expansion through borrowing that they should do in a recession where interest rates hit their lower bound. To know how governments will respond to HM, we need to know why they will not undertake this fiscal expansion.

The real fear of too much government debt

Suppose governments have convinced themselves that any additional spending paid for by borrowing is ruled out by worries over the amount of government borrowing. Their fears about borrowing are genuine, and this fear is acting like a constraint stopping them from doing what they otherwise would like to do. So what happens if the central bank does conventional HM, or says to the government you can spend more (or cut taxes) without having to borrow in the short term. Central banks are removing the constraint that governments have (almost certainly) imagined. There is therefore no reason why governments should either try and offset conventional HM, or not spend the democratic variety.

But if HM is temporary, borrowing will have to increase at some point. It is easy to get lost in the institutional detail of the many ways this can happen, so let’s just pick one. Once the recession is over, the central bank worries that there is too much money in the system, and they do not have enough financial assets to mop it all up. They ask the government to recapitalise the central bank, which just means that the government gives the central bank some financial assets in the form of government debt. That means more government borrowing.

Will the government worry about this, and therefore try to reduce its borrowing to offset HM? I would suggest the government will almost certainly not do this. The reason is that governments have convinced themselves that the problem is not the long run position of the government’s finances, but the level of debt and the deficit right now. How do I know this? Because if the problem was the long run position of the government’s finances, they would spend now to end the recession quickly, and then cut the deficit once we were away from the interest rate lower bound. That is the obvious optimal intertemporal policy mix. The fact that they do not do this suggests some imagined short run constraint.

You can also look at what governments undertaking austerity do. They are quite happy to cut deficits through privatisation, which almost surely increases future deficits. They embark on all kinds of fiscal tricks that simply shift revenues into the short term, or shifts spending into the long term. In other words, fiscal plans operate under a short term deficit constraint, and democratic HM relaxes that constraint.

Using a fear of debt as a cover for shrinking the state

Suppose governments do not really believe that their own borrowing has to be reduced right now, but are using public anxiety over public debt (with phrases like the government has maxed out its credit card) as a pretext to cut public spending. Short term borrowing is not really a constraint, but governments just pretend it is to achieve the goal of a smaller state. Such a government would almost certainly use any democratic HM to cut taxes, so the distinction between conventional and democratic HM is not central. Would this government use HM as an excuse to cut spending by yet more, thereby offsetting the benefits of HM?

The great advantage a central bank has is speed. It takes time to put new fiscal plans into effect, but money can be created overnight. So if the government plans to cut spending by more as a result of HM, the central bank can just offset the demand impact of those additional spending cuts with yet more HM. If you think such a game cannot go on forever you are right, but it does not have to. Once the recession is over, monetary policy can offset the impact of spending cuts on demand using interest rates in the normal way.

In this situation, both the central bank and government are happy. The central bank, by using HM in potentially unlimited amounts, can end the recession quickly. The government that wants to use the deficit as a cover for cutting public spending has succeeded in doing so, perhaps by more than they had thought possible. That might upset you because you do not want a smaller state and resent voters being tricked into allowing it to happen, but I personally would prefer that to a prolonged recession every time. [2]

[1] Macroeconomists sometimes say that in a recession the public’s demand for money increases, or there is an excess demand for money. To a non-economist, of course, that just sounds silly.

[2] Remember that HM does not stop a benevolent government doing the right thing and enacting a fiscal stimulus. It is a fall back to stop a malevolent government crashing the economy in pursuit of an ideological goal.  

Ben Bernanke and Democratic Helicopter Money

“The fact that no responsible government would ever literally drop money from the sky should not prevent us from exploring the logic of Friedman’s thought experiment, which was designed to show—in admittedly extreme terms—why governments should never have to give in to deflation.”

The quote above is from a post by Ben Bernanke (who, in case anyone does not know, used to be in charge of US monetary policy). I put it up front because it expresses a macroeconomic truth that no one should ever forget: persistent recessions and deflation are never inevitable, and always represent the failure of policy makers to do the right thing.

There are many useful points in his post, but I just want to talk about one: Bernanke is in fact not talking about helicopter money in its traditional sense, but what I have called elsewhere ‘democratic helicopter money’.

When most people talk about HM, they imagine some scheme whereby the central bank sends ‘everyone’ a cheque in the post, or transmits some money to each individual some other way. It is what economists would call a reverse lump sum tax, or reverse poll tax: the amount you get is independent of your income. That makes it different from a normal tax cut.

In practice the central bank could only really do this with the cooperation of governments. It would not want to take the decision about what everyone means on its own. (Do we include children or not. How do we find everyone?) But once those details had been sorted out, a system would be in place that the central bank could operate whenever it needed to.

Bernanke suggests an alternative. The central bank sets aside a sum of newly created money, and the fiscal authorities then spend it as they wish. They could decide to use all the money to build bridges or schools rather than give it to individuals. There might be two reasons for doing HM this way. First, for some reason the fiscal authorities are reluctant to spend if they have to fund it by creating more debt, so it may allow them to get around this (normally self-imposed) ‘constraint’. Second, a money financed fiscal expansion could be more expansionary than a bond financed fiscal expansion. Lets leave the second advantage to one side, as the first is sufficient in a world obsessed by government debt.

I have talked about something similar in the past (first here, but later here and here), which I have called democratic helicopter money. This label also seems appropriate for Bernanke’s scheme, because the elected government decides on the form of fiscal expansion. The difference between what I had discussed earlier under this label and Bernanke’s suggestion is that in my scheme the fiscal authorities and the central bank talk to each other before deciding on how much money to create and what it will be spent on (although the initiative always comes from the central bank, and would only happen in a recession where interest rates were at their lower bound). The reason I think talking would be preferable is simply that it helps the central bank decide how much money it needs to create. [1]

Imagine, for example, you had a fiscal authority in one country that wanted to spend the money on ‘shovel ready’ public investment projects, and an authority in another country that wanted to spend it on some temporary tax cuts for the rich. The impact of the two different stimulus policies on demand and output are very different. If the two economies were in similar conjunctural positions, then the central bank with the tax cutting fiscal authorities would want to create a lot more money than would be required in the other economy.

In some countries it is easier for central banks to talk to the fiscal authorities than in others. When it is difficult, Bernanke’s scheme may appear attractive, but it leaves the central bank somewhat in the dark about how much money it needs to create. The big advantage of the more popular conception of HM (a cheque in the post) is that the impact of any money creation is much clearer. (As it is important to end recessions quickly, waiting to see what happens is not helpful advice.)

When central banks and governments do happily talk to each other (as in the UK, for example) then my version of democratic HM becomes an option. Arguments that this makes the central bank less independent are spurious in my view. The central bank initiates the discussion, in clearly defined circumstances. They simply ask what the government would spend any newly created money on. This question should be accompanied by the central bank’s current view on what the multipliers for various fiscal options are. The government then makes a choice, and the central bank then decides how much money to create.

While democratic HM is not talked about much among economists (Bernanke excepted), I think there are good political economy reasons why it may be the form of HM that is eventually tried. As I have said, conventional HM of the cheque in the post kind almost certainly requires the involvement of government. Once governments realise what is going on, they may naturally think why set up something new when they could decide how the money is spent themselves in a more traditional manner. Democratic HM is essentially a method of doing a money financed fiscal expansion in a world of independent central banks.

Which brings me back to the quote at the head of this post. The straight macroeconomics of most versions of HM is clear: all the discussion is about institutional and distributional details. If it is beyond us to manage to set in place any of them before the next recession that would be a huge indictment of our collective imagination, and is probably a testament to the power of imaginary fears and taboos created in very different circumstances.

[1] A sequential set-up of the kind Bernanke suggests is also more vulnerable to cheating: the government uses the money to finance something they were going to do anyway, and in effect largely offsets the money creation by reducing its own borrowing. 

Neoliberalism

The term ‘neoliberalism’ has become so ubiquitous that some might think that it has lost all meaning, beyond a useful catch-all for everything some people on the left dislike about current social and economic trends, or more specifically for those on the left to be rude about those on the centre-left. That is in my view far too dismissive, but the reasons for both the use of the term and confusion over its meaning have real historic and cultural roots.

I know what I mean when I (occasionally) use the term neoliberal. Neoliberalism is a political movement or ideology that hates ‘big’ government, dislikes any form of market interference by the state, favours business interests and opposes organised labour. The obvious response to this is why ‘neo’. In the European tradition we could perhaps define that collection as being the beliefs of a (market) liberal (although that would be misleading for reasons I give below). The main problem here is that in US discourse in particular the word ‘liberal’ has a very different meaning. As Corey Robin writes, neoliberals

would recoil in horror at the policies and programs of mid-century liberals like Walter Reuther or John Kenneth Galbraith or even Arthur Schlesinger, who claimed that “class conflict is essential if freedom is to be preserved, because it is the only barrier against class domination.”

So in this US line of thought, neoliberalism is an adaptation of a position on the left towards the ideas of the right.

Contrary to some perceptions, the term neoliberal was not a US invention, but was first used by Rüstow, as this excellent account by Hartwich and Sally sets out. It was designed to be a ‘third way’ between socialism and a German version of capitalism. It was adopted by a group that later became the Mont Pèlerin Society, which included Mises and Hayek and Milton Friedman, but it would be a great error to view that group as some kind of united intellectual conspiracy. As Hartwich and Sally remark, it is “named after the location as the participants could not agree on anything else”. The group was sufficiently diverse that the idea of what we now call a social market economy can also trace some of its roots to this group.

One of the disagreements in the group was over the problem of what we might call ‘corporatism’: the domination of markets by a small number of large firms or cartels that is a long way from the ideal of a perfectly competitive market. Rüstow saw that as a problem that was inherent to capitalism and required a strong state to prevent it (an idea that is central of what we now call ordoliberalism), whereas Mises thought corporatism is the result of state intervention. (Economists would just say that both are potentially true and it all depends, which is one reason why many economists find it hard to talk about ideologies that involve their own discipline.)

From this group we have the term neoliberal being adopted as a modification of European liberalism and (for some at least) it involved a move from the right to the left. I think the clearest way of thinking about the Mont Pèlerin group is that it was a group that had in common a dislike of communism, but out of which different ideologies emerged, including ordoliberalism and neoliberalism as we understand these terms today. I am tempted to argue that what we now call the neoliberal element of the Mont Pèlerin discussions placed such an emphasis on their dislike of the state that they were prepared to ignore the market imperfections that a state could correct.

I think this alone would be a good reason for the use of the term neoliberal rather than, say, market liberal. Neoliberalism as most people use the term seems quite relaxed about departures from the ideal of a market as seen by economists. A clear example, as Chris Dillow points out, is CEO pay. When people argue that CEO pay ‘should be left to the market’ they mean something very different from ‘be determined by the market’. The role of any market in determining CEO pay is marginal compared to most ordinary workers: pay is set by remuneration committees who reference to the pay of other CEOs.[1] What ‘left to the market’ actually means here is ‘no state or union interference’.

Yet this example also tells us that dismissing neoliberalism as a non-existent ideology is wrong. How often have you heard people arguing that CEO pay should be left to the market, and this assertion has gone unchallenged? This common acceptance of ‘left to the market’ really meaning ‘no state or union interference’ suggests something like an ideology at work. Other commonly used language, like taxpayers money (by which is normally meant income taxpayers) rather than public money, or wealth creators for the 1%, does the same.

Attitudes to the state, both on the right and centre of politics, are very different to those I (distantly!) remember from the 1960s. The ability of the state to achieve economic goals is today routinely denigrated. Part of the reason for the success of Mazzucato’s The Entrepreneurial State (apart from it being a very good book) is that it points out how creative and wealth creating the state can be. What would have seemed obvious in the days when we put a man on the moon today needs to be argued case by case.

This is why I do not think it is a problem that few today would describe themselves as neoliberal. Indeed that may be part of the greater problem as perceived on the left: neoliberal ideas have become so commonplace, not just on the right but also the centre of politics, that no self-identification by label is required. But there may be another reason why few call themselves neoliberal, and that is because if we try and regard it as a coherent and consistent set of beliefs it can very quickly be shown to be inadequate and confused. Commonly held beliefs do not have to be coherent and consistent.

This is where many accounts on the left go wrong. Rather than seeing ‘left to the market’ as a deliberately misleading shorthand for no state or union interference, they think neoliberalism involves a devotion to free markets, or worse still (see this piece by George Monbiot for example) they equate neoliberalism with unbridled competition. While that might have been true for some of those at Mont Pèlerin, it is no longer true of neoliberalism today.

The reason is obvious enough. Neoliberalism has been adopted and promoted by monied interests on the right, and that money often resulted from what we might call today crony capitalism. So, for example, there is a big difference between promoting competition within the NHS (which some research suggests works if done in the right context, such as fixed prices), and the privatisation of health contracts. Privatisation is neither necessary nor sufficient for competition. To describe the promotion of competition within the NHS as neoliberalism is confusing and alienating.

More generally, it is a huge error to think that because neoliberalism invokes a highly selective and distorted view of basic economics, the left must therefore oppose mainstream economics. It is a huge error because using mainstream economics is an excellent way of challenging neoliberal ideas. Take the example of banking. At first sight the financial crisis was simply a failure to regulate a free market. But it was a market which included what is to all intents and purposes a huge state subsidy, which is that if the market goes wrong the state (either directly or through its central bank) will come to the rescue. Here state interference in the market encourages lack of competition: only those too big to fail could be sure of support.

For this and other reasons (natural monopolies and other forms of rent seeking), the financial sector embodies many of the things that those who first used the term neoliberalism were opposed to. It is important that those who use the term neoliberalism today recognise this contradiction. It does not mean that using the term neoliberalism to describe the dominant ideology is wrong, but it is a mistake to assume the ideology has not be moulded/adapted/distorted by those in whose interest it works. These changes have made it intellectually weak at the same time as making it politically strong.

[1] This is very similar to how pay was determined under UK ‘incomes policies’ in the 1960s and 1970s. Here the state would set up a committee that would fix the pay of some group of workers with reference to the pay of comparable occupations. At least in that case, however, some of the reference occupations may have had pay that was actually market determined!