Neoliberalism 2.

The origins

When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time, a legal system that authorizes it and a moral code that glorifies it. Frederic Bastiat - (1801-1850) in Economic Sophisms.

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In a nutshell, neoliberalism means small government, sound money and free markets. Neoliberals want to shrink government by reducing regulation to the minimum and privatising all services, so that companies and agencies can regulate themselves. The justification is that since government functionaries cannot know what individuals need or where to invest for maximum benefit, socialised services are inherently inefficient. A socialist economy must eventually grind to a halt. By taking responsibility away from the government and handing it to the individual, private capitalism has the technical means to satisfy the needs of each and every member of the community. People know what they need far better than any committee of bureaucrats ever could. As the actor, Ronald Reagan, said 45 years ago, government is not the solution, government is the problem.

A smaller government means a lesser tax burden on the community so people can spend their money how they feel they need to, rather than being told by faceless bureaucrats far removed from the real economy. Small government also allows reduced taxes for corporations and the wealthy who will then invest it and the benefits will “trickle down” to the rest of the community. This way, people gain a far greater level of personal responsibility for their lives so the economy will grow much faster and more effectively than could ever be the case under a socialist system, as failures will quickly be eliminated. In practice, personal responsibility means freedom, which is the greatest benefit that any social system can confer on its members, and therefore the highest civic virtue. That, at least, is the theory.

For an example of neoliberalism in action, we just need to look at what’s happening in the US right now. The declared policy of the present administration is to shrink government. By that, they don’t mean throwing out every second member of Congress or reducing their allowances, they mean decimating the bureaucracy. Some smaller departments have been closed while bigger ones, such as the Internal Revenue Service, are losing staff in the order of tens of thousands. In particular, research functions are being targeted, while the US military budget is likely to exceed $1trillion for the first time. There is no coherent policy behind this, as in “Which sections of this department could we comfortably close?” Rather, it is about as organised as dismissing every person born in the first week of the month.

Welfare services such as Medicaid, Social Security, public health, public education and so on are specifically targeted for drastic shrinkage because, the theory says, people using such services are failing to exert their personal responsibility. Since personal responsibility is the supreme virtue in the neoliberal system, people “sucking on the pubic teat” are choosing to do so and are thereby morally defunct and need to be pushed to take up their civic duties, aka “tough love.” If this requires them to go through a period of deprivation and even hardship while they work out which way is best for them, so be it. The neoliberal government is ipso facto virtuous; any distress is entirely the responsibility of the individual because governments are not nannies.

In fact, this is classic liberal economic policy from the 19^th Century: make the workhouses so unpleasant that people will take any jobs to keep out of them, which meant factory owners could keep screwing wages down and down. While this may seem like a hard and even heartless way for societies to act, this is only because people have been fed the line that the role of government is to provide an easy path through life for them whereas, as former Australian prime minister, Malcolm Fraser, once said, “Life wasn’t meant to be easy” (Fraser came from a singularly privileged background. Rachel Ball, at the Human Rights Law Centre, commented: “It is easy to stand atop a mountain of privilege, and tell those at the bottom of the mountain that privilege is irrelevant”).

It must never be forgotten that the whole of this is an ideology of government, not, as neoliberals like to spread around, a rational science of economics. An ideology is a set of ideas and beliefs, either conscious or unconscious, which imposes a pattern or structure of interpretation on the facts and events that we observe around us. Specifically, it shapes how we see the world by allowing us to distinguish between relevant facts and irrelevant, between truth and falsity, sense and nonsense, and guiding us to respond accordingly. Thus, a person educated in the neoliberal system will see a beggar as a person who has chosen to avoid work, who would benefit from a good kick to straighten his ideas, while a person brainwashed by a socialist system will feel a misplaced pity and experience an urge to help even though, as Reagan said: “The scariest eight words in the English language are: I’m from the government, I’m here to help.”

Today, approaching half a century of the experiment of neoliberal economies, and with the upheaval in the US unfolding in real time such that only the deluded know how it will turn out, it’s a good time to ask whether the experiment has succeeded or whether it should be abandoned. A lot hangs on the question of whether a science of economics can dictate the form of government, or whether economics is simply part of the system to be ordered and managed within the larger, values-based system of government.

Neoliberalism originated in Vienna, just over a hundred years ago, but it had very little impact until the Keynesian economic model was falling apart in the mid-1970s. Since then, it has been imposed in various forms in many of the world’s major economies. Needless to say, a proper history would take a thousand pages and bore the reader to death so I will just pick out a few points I see as important. First questions: Why did it originate in Vienna? Was this of any significance? It started in Vienna because that’s where the primary author, Ludwig von Mises (1881-1973), lived. He came from a wealthy family with interests in finance and railways, for which his grandfather had been ennobled just before Ludwig was born (hence the von in his name). He had a first class education, graduating from the University of Vienna with a doctorate in law, after which he worked in government and academia until the outbreak of the Great War. Even though he was opposed to fighting, he was conscripted and served as an officer in artillery for two years before transferring to the economics division of the defence department for the rest of his service. Postwar, he returned to teaching and other government appointments in Vienna until 1934 when he moved to Geneva, and thence to the US in 1940. We should also ask why his work took this form.

In 1920, as a highly qualified economist from a privileged background, and with extensive high level connections, there were two paths he could take. He could either settle down to make money in the family tradition, or throw his prodigious talents behind the drive to improve society. He chose the latter. Again, there were two paths: he could work to benefit the poor by implementing some form of social welfare, or he could try to improve capitalism. At the time he was starting his academic career, in the chaos of the break-up of the Austro-Hungarian empire, the economy had almost collapsed. There were huge numbers of desperately poor people so he would have had plenty to do but socialism was a dirty word. At the time, the world was transfixed by the bloody transition to socialism in Russia that had started with the revolutions in 1917. For most of the influential people of his era, and even to this day, socialism meant Bolshevism. It meant the wholesale destruction of the old civil society by the very worst sort of people; the vengeful murder or exile of the propertied classes; the expropriation of all private property; forced collectivisation; abolition of religion; destruction of education and its replacement with mass indoctrination; and a brutal levelling down of all the standards, principles and morality that had marked polite society. Add to that the widespread fear and mistrust of all things Russian, and the decision for this gifted member of a deeply-cultured, very traditional albeit collapsing society was foregone. The fact that, for workers and peasants in Tsarist Russia, conditions were such as to breed these levels of violence was overlooked.

One of his first postwar publications, Economic Calculation in the Socialist Commonwealth (1920) [1], set his course: a lofty, abstruse and tedious argument that socialism must always fail because it can’t set prices for production and consumption. This was not like a modern academic economics paper, stuffed full of arcane mathematical formulae, dense statistics and impenetrable jargon. Instead, it was a long argument based on what he thought the practice of Bolshevism entailed in that distant country he had never visited, when the only information available was hostile propaganda. For the rest of his long life, nothing much changed. His view of economics was that it should be approached from first principles and advanced in the form of a philosophical debate, exploring all intellectual options so that anybody reading it would see the sense of his case and fall into line. He expanded his case massively in his major work, Socialism: An economic and sociological analysis [2] published 2 years later.

The first principle was freedom for the individual and how this alone could guarantee economic efficiency sufficient to satisfy all. He did not start with, for example, the Christian ethic that all members of society have a duty toward each other. In the toss-up between being helpful to the less fortunate and giving the talented the freedom to race ahead, thereby building a better economy which would help the less fortunate, freedom won. Forcing people, via taxation, to help others was an infringement on freedom and therefore inefficient because it encouraged the poor to be lazy. In the section titled Christian Socialism, he is quite clear: “Simple faith and economic rationalism cannot dwell together. It is unthinkable that priests should govern entrepreneurs” [2, p252]. He then makes a series of criticisms about the idea of a Christian socialism which, since they are not argued, he apparently sees as self-evident:

Agriculture and handicraft, with perhaps small shopkeeping, are the only admissible occupations. Trade and speculation are superfluous, injurious, and evil. Factories and large scale industries are a wicked invention of the 'Jewish spirit'; they produce only bad goods which are foisted on buyers by the large stores and by other monstrosities of modern trade to the detriment of purchasers [2, p253].

In a word, this is nonsense, but it’s presented with a gravity that doesn’t invite questions. The remaining 600 pages of this work are much the same. If he mentions in this work the particular needs of injured war veterans and society’s debt to them, I haven’t found it. I presume that’s because he doesn’t believe societies owe anybody anything other than the freedom to get ahead by their own efforts. However, I think there’s more. At the time, there would have been many people scattered throughout Europe with similar backgrounds and educations, why didn’t one of them come up with the same idea? Was there any significance in his living and working in Vienna? He gives clues to this in an historical essay published in 1969 when he was aged 88, possibly the last significant work he completed.

In The Historical Setting of the Austrian School of Economics, he spent most of his time giving his account of how all other economists got it wrong. The British were too concerned with wealth, the German had aligned themselves with the goals and objectives of the nationalist Prussian state, early Austrians were a lost cause, the lot… In passing, he delivers a well-aimed boot at modern statistical economics, especially the American version, which gives the clue as to why Vienna was significant:

We do not have to deal here with the state of affairs as it developed in the age of the neopositivism or hyperpositivism of the twentieth century. Today, all over the world, but first of all in the United States, hosts of statisticians are busy in institutes devoted to what people believe is "economic research." They collect figures provided by governments and various business units, rearrange, readjust, and reprint them, compute averages and draw charts. They surmise that they are thereby "measuring" mankind's "behaviour" and that there is no difference worth mentioning between their methods of investigation and those applied in the laboratories of physical, chemical, and biological research. They look with pity and contempt upon those economists who, as they say, like the botanists of "antiquity," rely upon "much speculative thinking" instead of upon "experiments." And they are fully convinced that out of their restless exertion there will one day emerge final and complete knowledge that will enable the planning authority of the future to make all people perfectly happy [3, p7].

What von Mises is attacking in this philippic is the central element of the philosophical doctrine of positivism, developed by a group of physicists, mathematicians and logicians at Vienna University in the 1920s, where he was working. Positivism was primarily concerned with the philosophy of science at a time when he was working on a science of economics. If we can put an entire philosophical movement in one sentence, it would be this: “If we can’t measure it, forget it.” Their goal was to remove all sentiment and unobservables, leaving a narrow but totally reliable base on which to build all sciences, including economics and psychology.

Von Mises would have known most of the people in what is now called the Vienna Circle and probably went to their lectures, because that’s what people did in those days. He would have been aware of what they were doing and why, and it seems almost impossible that he would not have come across their manifesto on positivist science, The Scientific Conception of the World: The Vienna Circle, published in 1929 [4]. Yet he despised measurement in economics and pressed on with his project of writing economics in the form of a reasoned philosophical treatise. His students, including Hayek and Friedman, followed directly in his path, producing a mountain of turgid, over-inclusive, unfocussed and generally mangled prose that only devout neoliberals would bother reading, and then none-too-carefully.

The point is this: Neoliberals walked away from the idea of a society with a conscience (Hayek said “Social justice is an empty phrase with no determinable content” and “Personally, I prefer a liberal dictatorship to democratic government devoid of liberalism”). They wanted an unemotional science of economics but didn’t bother measuring anything as they believed their “rational process of enquiry” would yield truths where measurement gave only empty figures. However, they started with a value judgement, that freedom is everything, and couldn’t see that their perception of socialism was irredeemably contaminated by their view of Bolshevism/Stalinism.

Finally, crucially, they had no theory of psychology. For them, the human element in economics is Homo economicus, the rational producer/purchaser who is motivated only by the desire to get ahead. Therefore, he never does anything irrational and, from that, doesn’t need regulation or supervision by a nanny state. It seems not to have occurred to them that humans are sometimes irrational, as, for example, in starting huge wars that destroy lives, property and wealth without yielding any benefit, or stealing and corruption, or using their wealth to repress the poor, and so on. Thus, businessmen and politicians who knew nothing about statistics and less about positivism, who wanted to profit from wars but didn’t want to pay taxes to benefit the poor, pounced on neoliberalism because it was telling them what they wanted to hear.

Quickly and uncritically skimming the prolix tracts (as Thatcher and everybody else did, because studying them is physically painful), they found, set out in vast and apparently irrebuttable detail, a doctrine that says economics must take priority in determining the form of government, not the other way around. Greed is good and the poor can go to hell. People must be set free to get as rich as they like because only free enterprise can generate lasting wealth that will trickle down (as in “The rising tide lifts all boats”). Government is a wasteful obstruction, the poor are undeserving, socialism in any form is Godless impoverished slavery, and hard work will always generate rewards. That is, the wealthy are obviously virtuously industrious while the poor are even more obviously lazy, good-for-nothing drunks and layabouts who need to suffer to bring them to their senses. This is all that the rich have ever wanted to hear: the licence to dominate everybody within sight and squeeze them until their pips squeak, not because they need to but because they want more and can get away with it. Or the poor die, whichever comes first but remember, people who starve to death have chosen to do so.

From this flows the Christian heresy of “prosperity gospel,” which says that God rewards the virtuous in this world with riches; conversely, the poor lack faith and virtue and therefore deserve their misery. And from it also flows the spectacle of the richest private individual in history, then worth about $350billion, suing his company for an extra $55billion that he decided he was owed. Fortunately for the other shareholders, the courts disagreed but how is life improved by an extra $55billion? Perhaps he could have gone to etiquette school.

Neoliberalism is responsible for the explosive growth in inequality in the last half century. Since the 1970s, the median worker’s wage in the US, adjusted for inflation, has grown about 15%. In the same time, the median CEO’s take has grown by about 40,000%. If neoliberalism had distributed profits evenly, the wealthy would have ignored it. The US spends about 18% of its GDP on health, compared with 8% in Sweden, but has lower health outcomes than all the G20 countries, and many others. The private health insurance industry makes about $30billion a year profit, which sounds terrible but total health expenditure is about $4.3trillion. Meantime, 30million Americans have no health insurance. The most telling statistics are the relentless rises in “deaths of despair,” meaning drugs and alcohol, suicide, homicide, etc, which are causing the life span in the US to fall. The US also has the world’s largest prison population, which keeps the private prison operators in clover. These trends and many others are entirely the result of neoliberal policies enacted by successive US governments.

To summarise so far: Neoliberalism is a doctrine based firmly in value judgements, with no empirical basis at all. It sets freedom as the primary virtue and charity an option, so society must be shaped to serve the free market rather than the market serving people. It has no basis in psychology and therefore is unable to take into account the irrational human drive to dominate, by fair means or, as it permits in commerce, by foul. In order to further enrich the 1%, it justifies a dramatic reduction in those government services created to assist the 99% but it does nothing to limit profiteers working the greatest socialist scheme of all, the military.

On the assumption that all are equal in opportunity, neoliberalism orders society to worship at the alter of free enterprise yet, in practice, it functions to reward established or inherited wealth, to reinforce inequality, especially for those, such as land owners, bankers and financiers, who control essential assets as rentiers:

Freedom without socialism is privilege and injustice; socialism without freedom is slavery and brutality. Mikhail Bakunin (1814-1876).

Next week, we will look at some critics of neoliberalism.

References:

1. Von Mises L (1920). Economic Calculation in the Socialist Commonwealth. Various editions, available at Ludwig von Mises Institute, Auburn, Alabama.

2. Von Mises L (1922). Socialism: An economic and sociological analysis. Republished 1951, Yale University Press: New Haven CT.

3. Von Mises L (1969). The Historical Setting of the Austrian School of Economics. Various editions, available at Ludwig von Mises Institute, Auburn, Alabama.

4. Hahn H, Neurath O, Carnap R (1929). The Scientific Conception of the World: The Vienna Circle. Ernst Mach Society, University of Vienna. http://rreece.github.io/philosophy-reading-list/docs/the-scientific-conception-of-the-world-the-vienna-circle.pdf