Neoliberalism was always nonsense

Neither Prime Minister Kevin Ruddís recent debunking of neoliberalism in The Monthly nor various commentaries (e.g. here, here, and here) have identified the core of the problem with neoliberalism.The core problem is that there is no justification, in theory or in evidence, for the claim that free markets produce desirable results, let alone optimal results.This claim arises from the neoclassical theory of free markets, and is the foundation of the neoliberal ideology.Very few seem to be aware of this foundational weakness of the radical right.

Viewed from my perspective as a scientist, the assumptions on which the neoclassical theory is built are blatantly and hopelessly unrealistic.For example, we are all supposed to be able to predict the future, to have complete information, to have timely information, to sensibly digest vast amounts of such information, and to be coldly rational, never responding to fashions or the insecurities that marketers constantly cultivate and milk.There should be no economies of scale, beyond an ill-specified point of diminishing returns, so Henry Ford and Bill Gates should never have become rich.Furthermore the central neoclassical conclusion, that free markets tend to an optimal equilibrium state, is a prescription for stasis that bears no resemblance to the behaviour of modern economies.

Nor is the neoclassical theory even remotely a useful first approximation.If one changes any of the above assumptions to be more realistic, one predicts a system full of instabilities, which is a more reasonable description of a modern economy.Systems theorists will appreciate the difference.Rather than being a near-equilibrium system, an economy is a far-from-equilibrium system.This means it is a nonlinear, self-organising system that might be in a state of deterministic chaos or, short of that, a state called complexity.Complex systems have very many possible states, not just one optimal state.Optimality cannot even be sensibly defined.The central neoclassical conclusion is lost:there is no assurance at all that free markets will deliver optimal results.Neoclassical economics is pseudo-science.

This implies there is no single best way to organise an economy.We can and should organise our economy the way we want.Markets are clearly powerful, and they do have the considerable merit of distributing the processing of economic information, as Hayek pointed out.However markets will go where the profit is.If itís profitable to exploit people and trash the planet, then people will be exploited and the planet will be trashed.

If we want markets to benefit people and nurture the Earth, we need to ensure that benefiting people and nurturing the Earth are profitable.Markets might then become powerful allies in saving us from our imminent peril, rather than the engines of our destruction.To bring this about we must manage markets.This is nothing new, most markets are managed, for good or ill.In fact many markets are managed to produce perverse results, for the temporary benefit of minorities, so if we just eliminated perverse incentives we would be well on the way to a better world.We could also actively counter many of the mechanisms that at present promote wild instabilities, which include recessions and unrestrained growth.We would find, as well, that we could live very much more efficiently and lightly on the Earth, if we made that our goal, rather than the short-term enrichment of minorities.We could then cease to foul our nest, and the living world could thrive around us.

So much for theory, what about evidence?Stephen Bell1 pointed out a decade ago that Australiaís economic performance since 1980 (marking the start of neoliberal dominance) has never equalled the post-war performance up to 1974 (GDP growth 5.2%, inflation 3.3%, unemployment 1.3% (!), current account deficit 2.4% of GDP).Paul Keating never had such a beautiful set of numbers.Figures for the whole OECD tell a similar story.That was the era of Keynesian intervention.Where is the evidence that neoliberalism is superior?

The problems of the late 1970s were not just due to oil shocks.Steve Keen2 has pointed out there was also a debt bubble.What was needed was better management of credit and efforts to reduce oil dependence, not the simplistic neoliberal deregulation that has given us a series of financial crises and disastrously greater oil dependence.

Neither is there any evidence to support the current near-universal and reflexive worship of free trade.Free trade has enriched the wealthy in rich and poor countries, and given modest or no benefit to ordinary people in those countries.A study by the US Center for Economic and Policy Research3 shows that from 1980 to 2005 the GDPs of 175 countries increased by an average of 1.09% per annum, compared with 2.47% for 109 countries 1960-1980.In Latin America the latter period was worse even than the Great Depression.Little wonder they are leading the world in rejecting neoliberalism.Even such increase in GDP as there has been in the latter period has involved not just wealth creation, but wealth extraction, from peopleís working conditions, public assets and the natural environment.

Ricardoís nineteenth-century theory of comparative advantage, which still seems to be the touchstone of simplistic thinking about trade, applies to a world where capital is not internationally mobile, there are no trade imbalances, wages are similar in trading partners and there is no unemployment.You donít need a fancy theory to tell you that jobs follow the money.Thatís why the rich economies have been hollowed out by offshoring.

If free trade were such a great thing, then the benefits should jump out of compilations like those quoted.Instead the economic record is one of mediocrity and/or failure.At the same time quality jobs have been exported, manufacturing has dwindled, our rural areas have suffered decades of outright depression, most people work longer hours in less secure jobs, the current account deficit continues to grow and the private debt to GDP ratio is twice what it was before the great depression2.The benefits of the mining boom have been squandered.Peter Costello will come to be seen as Australiaís most deluded and irresponsible treasurer (closely followed by that worldís-greatest, Paul Keating).

On top of all that, the planet is under major assault, thanks to the mania for unlimited material growth.Itís not just global warming:fresh water is polluted and scarce, forests and biodiversity are dwindling, soils are degrading and being lost, pollinators are dying rapidly in many areas, and pollution extends from pole to pole and up the food chain in an ever-more exotic cocktail of noxious chemicals.Thatís our life-support system Iím talking about.Our childrenís development is adversely affected by growth hormones from meat and hormone mimics from the chemical industry.Our processed diet is monotonous and unbalanced, and we are increasingly fat and unhealthy.

The problems with neoliberalism thus run far deeper even than the global financial crisis, which is already the worst economic event since the great depression, and we donít yet know where the bottom is.And neoliberalism is only the latest manifestation of laissez-faire, rich-people-know-best, blind, greedy and polluting industrialism and parasitic financialism that have been messing up the world and peopleís lives for well over a century.Yes there have been great benefits, but there has also been great excess and the costs have not been properly counted, and they are now catching up with us with a vengeance.

We can do much better.The idea of managing markets to improve the quality of life of everyone transcends both old-fashioned capitalism and old-fashioned socialism.If we free ourselves from the nonsense about free markets, we can harness markets to accomplish the goals of social democracy without the clumsiness and inefficiency of big government redistribution programs.The economy can work directly to enhance social welfare and the environment instead of assaulting them and then grudgingly offering some inadequate bandaids.

1††Bell, S., Ungoverning the Economy. 1997, Melbourne: Oxford University Press.

2††Keen, S., A tale of two parties – and one bubble. D!ssent (Australia), 2007 (Summer): p. 8-10; Keen, S., Deeper in Debt. 2007, Centre for Policy Development, http://www.cpd.org.au.

3††Weisbrot, M., D. Baker, and D. Rosnick, The Scorecard on Development:††25 Years of Diminished Progress. 2005, Center for Economic and Policy Research: Washington D. C. http://www.cepr.net/index.html

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2 thoughts on “Neoliberalism was always nonsense

  1. Andrew Glikson

    Free market fundamentalism is nothing more than one of the expressions of the “dog-eat-dog” mentality, actually closer to Darwinian survival-of-the-fittest type natural selction and the “food chain”.

    On the other hand human communities have, albeit only in some instances, progressed further along the lines of communal justice and love, with the ultimate expressions in prophets such as Christ (“love your enemies”).

    History has shown again and again that capitalism, once in trouble, recruits fascism, giving rise to polarized movements: (1) socialism/communism – repeatedly betrayed by its leaders, and (2) 1933 type geonocidal regimes.

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  2. Kevin Cox

    Market economists have all the trappings of a religious sect. They have a set of fundamental beliefs that in the face of evidence that undermine their beliefs they find some way of rationalising the observed outcomes. Most economists believe in the idea of markets as being an efficient way of allocating resources. The reason they believe this is that it works on paper and when it does not work in practice they believe it must be that the market has failed either because it was too highly regulated or it was too little regulated.

    The fact is that markets can be good ways of allocating resources for a particular purpose. Viewed as an algorithm (or set of rules) a free, open transparent market with variable supply, demand and prices will produce a good allocation of resources for a limited range of products.

    The difficulty as Geoff points out is that markets are not free, open, transparent and they have external constraints on supply demand and prices. However, this is not a reason to abandon them all together because if they work well then they are beneficial.

    The trick is to get them to work as they are supposed to work and that actually is simpler than we think.

    Here is how we do it. We look for markets that are unpredictable and that even on reflection we have no way of predicting and explaining the outcomes. Examples are share markets where time after time people have shown that prices are random walks.

    Why is the price of shares unpredictable? One reason is that they cannot be anything but unpredictable because when demand increases supply decreases and prices cannot control this positive feedback loop in the underlying market. To make a share market work the first thing you have to do is that when demand increases so supply can increase to meet the demand while being dampened by the price increase.

    If anyone has a company where they want the price to reflect true value then let me know and I would like to experiment to see if I can make at least one share price predictable.

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