Neoliberalism

What critics of ‘Neoliberalism’ get wrong about markets

Jonathan Church

Jonathan Church

Jonathan is a government economist, CFA charter holder and writer whose work has appeared in Quillette, Areo, Arc Digital, Merion, Agonist Journal, Good Men Project and other outlets. Follow him on Twitter at @jondavidchurch.

In a recent article for Areo Magazine, Queens University PhD candidate Galen Watts attempts to get “clear on what neoliberalism actually means” as a way of arriving at “a proper understanding of the world we inhabit”. Unfortunately, Watts makes the common mistake of critics of “neoliberalism” typically understood as a dual commitment to individual freedom and capitalism, by seeing markets as a mentality or cultural artifact of the era in which we live. But markets are an unavoidable reality no matter the era. It’s not that markets solve all our problems. Rather, markets refer to the idea that demand and supply are core features of human societies, and we can choose only how to adapt to them.
 

The history and “culture” of Neoliberalism

Watts begins with a brief history of neoliberalism. He relies on David Harvey’s A Brief History of Neoliberalism (1) to trace “the term back to the 1940s Mont Pelerin Society, a group of economists and thinkers united by shared antipathy toward the Keynesian welfare state” (which refers to the idea that government intervention can have beneficial effects on economic activity). Unfortunately, Harvey’s account adds to the confusion surrounding neoliberalism, as it differs from an account by economic historian Phillip Magness, who claims neoliberalism goes back to “the intellectual scene of 1920s Vienna” (2). Magness also traces the recent popularity of neoliberalism to lectures by French philosopher Michel Foucault in the late 1970s, noting that Foucault “did not adopt the overwhelmingly pejorative (3) connotation of its modern uses”

The exact history, however, is less important for Watts than the cultural impact of neoliberalism. As he writes, we cannot “make sense of neoliberalism at a policy level, without first coming to grips with neoliberalism at the level of culture.”

Watts runs through familiar terrain in describing neoliberalism as a creed that prioritizes personal freedom and neoclassical economics, the latter referring to a broad conception of economic activity being guided by the forces of supply and demand. Quoting David Harvey, Watts describes neoliberalism as a creed espoused by “libertarian neoconservatives” for whom “human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterized by strong private property rights, free markets, and free trade.

This policy creed translates into “tax cuts for corporations, disestablishment of unions, deregulation and the dissolution of barriers to trade, increased privatization and cuts to social spending.” While classical liberal principles took hold in the nineteenth century, neoliberalism took some time to get off the ground politically, but in the 1980s, “the administrations of Ronald Reagan in the US and Margaret Thatcher in the UK wholeheartedly embraced neoliberal thought.” As a result, “since the 80s, we have witnessed a systematic dismantling of the welfare state across liberal democracies, in favor of increased deregulation and privatization.

This is all well and good except for just one thing. Watts’ account unfortunately yields a left-leaning, Marxist narrative that modern economics is dominated by a right-of-center neoliberal ideology for which “the sole purpose of the state is to protect private property rights and create conditions conducive to global trade and the flow of capital.” The basic idea is that “capitalism is not simply an economic system: it is a form of cultural logic” defined by “the market mentality.

In so writing, Watts makes a fundamental mistake of many left-leaning intellectuals who would benefit from a deeper study of economics. “Market institutions,” he writes, “assume the existence of rational maximizers, motivated by the desire for profit; markets couldn’t exist without them.

But this is not quite right.
 

How Markets work

Markets do not require profit-seeking “rational maximizers” for their existence. The only thing markets need for their existence is people. As social creatures who depend on each other for wants and needs, people seek each other out in what Watts calls “multiple social spheres” to obtain the benefits of human interaction. Economists call this activity “gains from trade,” economic-speak for the idea that human beings depend on each other to make society work, for their own benefit and for the benefit of others. These benefits, however, do not come without costs.

Human relationships are multifaceted and can be analyzed from many angles. For economists, it’s all about demand and supply. It might not be the vocabulary one ordinarily uses to talk about civic virtues, family, intimacy, love, integrity, and religion. But that doesn’t mean that the concepts of demand and supply are irrelevant or should be discouraged. In fact, they are crucial.

Watts thinks otherwise, distinguishing, for example, between the marketplace, in which “we tend to operate as rational maximizers, espousing a market mentality,” and the political sphere, in which “we have operated primarily as citizens with a civic mentality, venerating the values of democratic deliberation, moral equality before the law and social solidarity.

Let’s run with this. Presumably, Watts agrees we should celebrate the right to vote as part of our collective commitment to what Watts’s calls “democratic deliberation, moral equality before the law and social solidarity.” There is no reason for an economist to disagree. People “demand” elected officials, and politicians then campaign for positions in which they can “supply” leadership. The economist, however, might observe that, for many people caught up in the daily grind, the marginal cost of voting outweighs the marginal benefit of voting. For example, stressed parents trying to get their kids to school on time before rushing to work may not find it worthwhile to stand in line at the voting booth to cast their ballots, perhaps because they think one vote is meaningless.

Of course, if everyone thinks like that, then people collectively undermine the system of democracy. Economists recognize this problem as a market failure, in this case having to do with a public good. There is a “positive externality” associated with voting. You may be only one vote, but your vote nonetheless benefits others because the elected leader makes policies that affect everyone else. Unfortunately, many “rational maximizing” people only consider the personal costs they incur to vote and then weigh these costs against the personal benefits of policies developed by elected leaders. These benefits may have only a minimal impact on their private lives. Hence, they don’t vote.

The upshot is low voter turnout, resulting in election of the “wrong” leader. The economist then asks, how can we create incentives to motivate more people to vote? This question reveals the distinction between what markets need to exist and what markets need to work at an optimal level. Watts is wrong to say that “markets couldn’t exist” without “rational maximizers, motivated by the desire for profit.” Markets have always been with us, and they always will be. Rationality and profit maximization are not conditions of market existence. They are conditions of market optimization.

They don’t have to be though, and in many situations, they aren’t. In the case of voting, rational “profit” maximization (in this case, the “profit” of avoiding the “net loss” from voting) leads to suboptimal outcomes. This dilemma motivates economists to think about ways to convince potential voters that they have a stake in the outcome. Typically, this involves an effort to learn about what people are willing to pay to obtain the benefits from voting. In the case of voting, it may be as simple as a campaign to inform people of what they stand to lose if they elect the “wrong” leader. People only vote if they see that they have a stake in the outcome.

Economics is the study of how markets work. There is no assumption that markets solve all our problems. There is simply a recognition that a great deal, if not all, of human behavior can be examined fruitfully by recognizing that supply and demand are inherent features of human societies. The “market” is not a choice, it is a fact of life. People seek gains from trade. Property rights enforced by contracts merely facilitate the pursuit of gains from trade by incentivizing people to make optimal use of resources obtained from their trading (or cooperating, if you will) with other people.
 

Neoliberalism
Neoliberalism and markets. Cartoon @ Simon Kneebone for Culturico (copyright)

Self-Interest is not the same as selfishness

Watts laments how “[n]eoliberal thinkers believe that the market mentality ­– which receives its most sophisticated treatment in the language of economicsshould reign supreme,” talking “of a political market, a marriage market and a religious market, for, in their view, these sites of social life are fundamentally identical, insofar as they all feature individuals operating as rational maximizers and espousing the market mentality.” He then urges us to “aspire to a world where the market mentality is restricted to the limited and relatively narrow area of life where it is appropriate (the marketplace) and where efficiency, productivity, personal profit and economic growth are not the sole criteria by which we deal with either public issues like poverty, social justice and climate change, or private issues like romantic relationships, familial obligations and religious commitments.

Like many left-leaning intellectuals I encounter, Watts simply misunderstands what economics is about. He implicitly assumes that markets are a unique feature of “capitalism” (which itself is an unhelpful term, as I have argued elsewhere). This view of markets as a historical novelty leads to the misleading vision of a “nightmare” in which “the sole language we have to describe our relationships, our dreams and the world around us is that of economics.” This is only a nightmare, however, for someone who has not sufficiently grasped what economics is about.

Watts couches his concerns in terms of wanting to live in a world “where I can publicly appeal to values such as social solidarity, fairness, compassion, sustainability and love, without being interpreted as veiling self-interested motives.” But while perhaps there are extreme libertarians and “neoliberal shills” who openly eschew solidarity, fairness, compassion, sustainability and love, I think he can rest assured that economists as a group are far less likely to do so.

Watts makes the honest mistake of conflating selfishness and self-interest. Economists do not really assume that people can be reduced to egoistic automatons called “rational maximizers.” Instead, economics is the study of constrained optimization. Economists assume that people have goals they want to pursue, and face constraints on the extent to which they are capable of pursuing them. People pursue these goals because they have an interest in their realization. But these goals do not have to be purely selfish goals like cash profit or conspicuous consumption.
 

Cargo ship
Freight Containers on a Ship, Seattle, WA, USA. Photo @ Andi Li for Unsplash.

Economics is the study of Constrained Optimization

The starting point for economic analysis is indeed an assumption of rationality. But this is only a starting point. First, it presumes an understanding of what rationality is. For example, economists say that consumers are “rational” if their preferences are consistent. Given any two goods available in the marketplace, you prefer one to the other, or are indifferent. Throw in a third good, and the previous preference relation should remain consistent. Let’s say you prefer an orange to a banana. If you’re then given the choice of an apple, and you prefer an apple to an orange, you are assumed to also prefer an apple to a banana.

Second, there is no assumption that people will always act rationally, which is why “behavioral economics” is a thriving field. Nor is there an assumption that individual optimization guarantees collective optimization, as the Condorcet paradox or the tragedy of the commons illustrate.

Third, there is no assumption that rationality necessarily means maximization. The idea of maximization is a subset of a wider set of concerns more accurately called rational optimization. For example, profit maximization requires both revenue maximization and cost minimization. On the demand side, the consumer pursues an objective (it could be finding an ideal partner, or buying a new flat screen TV) given a set of constraints (finding an ideal partner depends on one’s location, age, tastes, availability of dating sites, etc.). The collective interaction between supply and demand, all else equal, should give rise to a market equilibrium. The equilibrium is the point at which social interactions optimize social value by equating supply and demand.

Of course, voting and any number of other social problems demonstrate that the mere existence of demand and supply does not guarantee a socially optimal market equilibrium. The reasons are many, such as transaction costs (it is costly to drive to the voting booth and wait in line), lack of information (not knowing how to register to vote), and externalities (disregarding the social benefits of voting).

In sum, economics is the study of human behavior with a focus on human decision-making in response to the forces of demand and supply. “Rationality” is a starting point from which a vast literature has emerged to study how markets work, and how they can be made to work better. There is no optimistic, Panglossian faith in the impeccable magic of markets. There is simply a reasonable presumption that people do the things they do because they have an interest in doing them.

They seek out romantic partners. They participate in community activities and philanthropic enterprises. They attend church. They join social groups. These activities are perfectly compatible with the “market mentality.” They are, in fact, markets in action. When people go to church, the church is supplying services that people demand. People desire marital partners, so dating services, bars, friend and family networks, meetup groups, and other venues make potential partners available. People demand that politicians tackle climate change, so policymakers attempt to provide solutions. In short, there is no escaping markets. We only choose how we accommodate market realities.
 

Conclusion

Watts sees the “market mentality” as a unique and historically contingent feature of capitalism. He follows the famed author and socialist Robert Heilbroner, who “observes that capitalism requires a certain kind of social order and cultural logic to get off the ground.” Watts argues that “those of us who live in capitalist societies” should not mistake our experience as being universal. As Heilbroner claimed, “markets would not fare well in a traditional social order, where all social behaviour is regulated by the whims of a shaman king, or by centuries-old kinship structures ­– because the social order of capitalism both depends upon and promises constant change.” Watts writes that, “[t]his unending novelty emerges from what Heilbroner calls, ‘the activity that lies at the heart of the [capitalist] social order – the drive to get ahead, to make money, to accumulate capital’.

Indeed, in The Worldly Philosophers, Heilbroner identified three main ways of organizing societies that he takes to be distinct: command, tradition, and markets (4). In The Nature and Logic of Capitalism, Heilbroner identified the drive for wealth as the inner logic of capitalistic societies (5). But like Heilbroner, Watts conflates capitalism and markets, implying that markets are a recent historical development that we embrace to the extent we can tolerate it. As Watts writes, “left-liberals like myself don’t believe that pursuing one’s rational self-interest when in the marketplace is inappropriate.” Instead, “[w]e think that markets can, and indeed have, done great good: producing life-saving medicines, life-enhancing technologies and many material goods.” However, “we also recognize that the market mentality is deeply myopic, often morally questionable and potentially socially deleterious. Thus, we advocate counterbalancing social spheres that limit its scope.

Heilbroner and Watts are wrong, however, to believe that markets are delimited domains that have only recently emerged. Societies that organize their economies around command or tradition are not devoid of markets. They are instead choosing different ways of dealing with the realities that markets present to us. Demand and supply are always with us. The question is not whether or not we have markets, but how markets are designed. In a command economy, central authorities attempt to direct activities in ways that equate demand and supply, at great risk of distorting market realities while encouraging black market activity. In “tradition” economies, demand and supply reflect the objectives of people whose preferences are influenced or otherwise guided by the dictates of tradition.

Markets are indeed about “competition between self-interested producers [which] leads to increased innovation and the production of novel material goods.” They are also about “self-interested consumers [who] engage in cost-benefit calculations in order to obtain the best deal.” They are also about “the drive to get ahead, to make (and save) money and to accumulate capital.” They are indeed “fueled by the profit motive” and the “values of efficiency, productivity, and economic growth.”

These are all vital aspects of markets, and they do reflect core economic assumptions about human behavior. But markets do not end there. These “features” of markets are better understood as broad principles by which we can go about studying and learning about human behavior and human decision-making. We do this by analyzing the costs and benefits people incur in their personal activities and social interactions. The nature of those costs and benefits vary in their conception. But they are as true for “socialism” as they are for “capitalism,” as true for black markets as they are for legally sanctified economic activity. If you seek out a romantic partner, you cannot avoid the “search costs” of finding an available and desirable partner, or the “transaction costs” of courtship, or perhaps even the “opportunity costs” of having not chosen a potentially better partner.

It may seem perverse to think about such intimate features of human life in terms of costs and benefits. But that does not mean that costs and benefits are irrelevant. Being aware of them might even help us make better decisions and improve our lives. The market, I submit, is not a mentality. It is an unavoidable reality.

 

Jonathan Church

 

References:

  1. Harvey, D., “A Brief History of Neoliberalism, Oxford University Press, 2005.
  2. Magness, P.W., “The Pejorative Origins of the Term ‘Neoliberalism’,” American Institute for Economic Research, 2018.
  3. Boas, T. C. and Gans-Morse, J., “Neoliberalism: From New Liberal Philosophy to Anti-Liberal Slogan,” Studies in Comparative International Development, 2009.
  4. Heilbroner, R., “The Worldly Philosophers, Simon & Schuster, 1953.
  5. Heilbroner, R., “The Nature and Logic of Capitalism, W.W. Norton & Company, 1985.
Received: 22.03.20, Ready: 30.03.20, Editors: Federico Germani, Robert Ganley.

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