Lambert here: I’m hoisting this one paragraph:

But this leads to the main paradox of neoliberalism. Its economic system needs a strong state, even at the expense of constraining democracy, to guarantee property rights and the working of the free market, while actively maintaining the rule of neoliberal social philosophy. At the same time some of its proponents tend to dismiss strong states (Mirowski, 2013). In fact, laissez faire was the last thing neoliberals wanted to achieve. This paradoxical stance towards the state led Milton Friedman, the policy entrepreneur to become an advisor of the Chilean dictator, Augusto Pinochet to transform Chile into a policy playground.

If there should be “markets in everything,” it follows there should be markets in selling off bits of the state. That works until it doesn’t, as (I would argue) the Tory heirs of Maggie Thatcher are discovering.

By Dániel Oláh, a macroeconomic analyst at Hungary’s Ministry for National Economy, Forecasting and Modeling Unit. He received his master’s degree in economics from Central European University. Originally published at Evonomics.

Social classes have always embraced ideas and social philosophies. Not only to understand and interpret the real world, but most importantly to change it to their benefit. These theories (primarily in social science) have become beweaponed ideas called ideologies, as they are used to influence rather than to understand the human universe. Of course the two are related: the nature of our understanding, i.e. what we consider important and what we leave out from our theoretical framework, is called modelling.

But what if modeling is just an euphemism for modern ideologies? Think of the efforts of neoclassical macroeconomics – for instance, DSGE models – to find the philosophical notion of equilibrium, irrespective of the non-equilibrium nature of the real world, let alone income inequalities. (But also think of Mannheim’s paradox that the critique of an ideology – like this article – is also ideological.)

The great Austrian economist Friedrich Hayek didn’t favor mathematical modeling, but he had clear philosophical models in his head. One of his most famous statements is related to the slippery road to dictatorships: if you introduce a little bit of state involvement in the economy, you have already stepped on this messy road to serfdom. The main intention of this model was to call for action and to raise awareness against the increasing governments in an era when the battle between the West and the East hadn’t yet been decided.

Hayek’s model was working as an ideology in real life, not at all different from that of the Soviet side. At least we get this impression if we take a look at the cartoon version of Hayek’s Road to Serfdom. This was his main work on social philosophy and economics, arguing for individualism and liberalism. Hayek’s argumentation in defense of a minimal state was so powerful that General Motors decided to sponsor the production of the comic version.

So, Hayek’s well-written piece of social philosophy was turned into a black-and-white, stylized world, where keeping the wartime planning roles of the government deterministically leads to the planning of thinking, recreation and disciplining of all individuals.

The support for neoliberal policies by one of the largest companies presents how economic theory is embraced – and transformed – by the big business in the 20th century.

Theoretical Innovations as Part of an Anti-State Ideology

The Keynesian era lasted for a long time, providing stability and increasing real wages for workers. In the seventies, a seismic paradigm shift happened with the returning of pre-Keynesian neoclassical ideas. Roger E. Backhouse (2005) took the numerous reasons for this change into account. The period of full employment lasted for so long that it was easy to forget that it wasn’t a natural order, but the result of conscious policies. In this world, the disadvantages of the market was hidden by active governments, which opened the possibility to turn the critical attention towards the state. Especially in the wake of the new economic crisis that brought stagflation. Keynesian economics wasn’t prepared for such new economic environment just like its neoclassical counterpart was shocked by the 1929 crisis.

The intellectual revolution against the state was building on several new theories, arguing for the ineffectiveness of economic policies. These theories were needed to convince academicians of the intellectual merits of neoclassical economics, allowing them to sympathesize with the neoliberal framework. Milton Friedman argued that active discretionary fiscal and monetary policies are harmful or ineffective because of timing problems among others. As for fiscal policy, the permanent income hypothesis also tried to argue that short-term demand management is ineffective because if they think it to be temporary people save their additional income from the government instead of spending it. New classical macroeconomics was building on the Ricardian equivalence theory to show the same – that a temporary tax cut won’t boost consumption, since people know that they have to cover the costs of that policy later. Friedman also explained the new phenomena of stagflation, stating that people adjust their expectations so that an increasing money supply results in only higher inflation, but unemployment remains the same.

These theories traced the stagflation phenomena back to policy errors of the government. The rational expectations hypothesis argued that economic policy can’t fool people for long since citizens use all new available information rationally when they react to activist government policies. The time inconsistency of governments also meant that discretionary policies may lead to economic harm, so long-term, rule-based policies and commitment to these will be credible and efficient.

Another direction of theories focused directly on the sins of politicians and the government. Public choice theories applied the standard economic theories to politicians and politics, desanctualizing the sphere of politics and transforming it to the area of market forces, emphasizing that decision makers are also just as rational self-interested actors as everyone else. The conclusion was that we can’t expect politicians to determine and follow the public interest. It’s better to restrict them as much as we can – argues James M. Buchanan, Gordon Tullock and George Stigler, who were committed members of the Hayekian, neoliberal Mont Pelerin Society, the cradle of neoliberalism founded in 1947. Tullock developed another theory as well: the concept of rent-seeking to call the attention to the capture of the state by interest groups.

In parallel, new macroeconomic models, like most versions of the real-business cycle theory, visioned an economy where the government has no role to play any more: economic fluctuations don’t mean that there is a problem with the economy. No government, no cry (and always equilibrium) – sings the RBC model of the time.

Neoclassical theorists offered an alternative: the introduction of market forces and property rights in all walks of life. Eugene Fama developed the efficient market hypothesis in Chicago, meaning that prices on the financial market always reflect all relevant, available information. The implication is that the market should be left to itself, allowing company managers to maximize shareholder value for the sake of the whole economy. The impossibility theorem of Kenneth Arrow also proved that the perfect, general economic equilibrium exists, which implies the efficiency of competitive markets.

Arrow developed his theories at RAND Corporation, the Cold War think tank established by the US government, which was a main actor on the theoretical battlefield between the US and the Soviet Union. As Sonja Amadae (2003) argues, several of the theories mentioned above – the rational choice framework – provided the theoretical empowerment of Western liberal democracy with a limited state. She shows that there was considerable governmental efforts in the US after World War II to create new ideas, proving the validity and superiority of liberal democracy in a world where socialist planning was admired also by Western intellectuals and societies.

It’s not surprising that Francis Fukuyama, who was also a member of RAND Corporation, made the political statement in 1989 that the liberal democracy with its neoliberal economic system is the best and final one in our history.

Empowered Ideas in Action

The Keynesian era was ended by an economic crisis, but also by political factors. The big business wanted to achieve a policy change because labor gained strong political positions between 1950 and 1970 (Harvey, 2007). Keynesian employment policies provided strong power to labor unions, which were primary allies in determining economic policies. But this led to the decrease of profit rates. A new globalization, based on the neoliberal thought collective was the reaction of business to its relatively marginalized position in governance to increase its bargaining power (Backhouse, 2005; Skidelsky, 2010). And business groups strongly supported the intellectual revolution (Mirowski & Plehwe 2009), which created the attracting utopia of the market, where the government is a needless actor. In this world, the entrepreneur is the value-creating hero, a completely perfect economic actor, and needs to be strongly supported – by a passive and small state, and also by the rest of the society.

But this leads to the main paradox of neoliberalism. Its economic system needs a strong state, even at the expense of constraining democracy, to guarantee property rights and the working of the free market, while actively maintaining the rule of neoliberal social philosophy. At the same time some of its proponents tend to dismiss strong states (Mirowski, 2013). In fact, laissez faire was the last thing neoliberals wanted to achieve. This paradoxical stance towards the state led Milton Friedman, the policy entrepreneur to become an advisor of the Chilean dictator, Augusto Pinochet to transform Chile into a policy playground.

The paradox appears when Hayek accepts sponsorship of General Motors. This is so, because he was the main opposition to any kind of planning in the economy. These issues were known by the core intelligentsia of the Mont Pelerin Society – as Mirowski (2013) argues –, but weren’t communicated through the media. The communication that the society is a theoretical descendant of the classical school was clearly false.

This paradox didn’t prevent the Hayekian thought collective to become an ideology. They declared that the main objective was to change the way people think: the main goal of the society wasn’t to develop scientific theories – many different schools of thought were represented in the society – but to save and promote values they believe in. The conscious strategy to become the mainstream was a distinctive feature of the neoliberals.

The appearance of the successful businessmen Antony Fisher symbolized how the big business embraced neoliberal ideas. He was amazed by The Road to Serfdom, so much that he approached Hayek in 1945 at the London School of Economics. Just like David Ricardo more than hundred years before, Fisher wanted to go into politics to influence policy.

Fisher commented to Hayek:

“I share all your worries and concerns as expressed in The Road to Serfdom and I’m going to go into politics and put it all right.”

The response of Hayek was:

“No you’re not! Society’s course will be changed only by a change in ideas. First you must reach the intellectuals, the teachers and writers, with reasoned argument. It will be their influence on society which will prevail, and the politicians will follow” (Hayek, 2001: p. 19).

Although eight society members won Nobel prize in economics, the society hadn’t set high academic standards for its members in order to attract representatives of the big business and other influencers.

To change the ideas of the public, neoliberals created a theoretical building of several floors. The basis is the methodology of positive economics, upon which the economic theories rest. And the final floor is the neoliberal ideology – as Claude Hillinger (2006) argues (this is what Mirowski (2013) calls a Russian doll).

Milton Friedman and George Stigler – with the help of corporate and political support – found the adequate tool to empower their ideas, which was the network of think-tanks, the use of scholarships provide by them, and the intensive use of media. This think-tank network wasn’t for creating new ideas, but for being a gatekeeper and disseminating the existing set of ideas, and the „philosophy of freedom”. Not only Backhouse (2005), but also Adam Curtis (2011), the British documentary film-maker also researched how Fisher created his global think-tank network, spreading the libertarian values of individual and economic – but never social and political – freedom, and also the freedom for capital owners from the state.

According to Curtis (2011), the „ideologically motivated PR organisations” intended to achieve a technocratic, elitist system, which preserves actual power structures. As he notes, the successful businessmen created The Atlas Economic Research Foundation in 1981, which established 150 think-tanks around the globe. These institutions were set up based on the model of Institute for Economic Affairs (IEA), a think tank founded in 1955 by Fisher, which is a good example how the marginalized group of neoliberal thinkers got into intellectual and political power. Today, “more than 450 free-market organizations in over 90 countries” serve the “cause of liberty” through the network. The network of Fisher was largely directed by the members of Mont Pelerin Society (Djelic, 2014).

So we could add an imaginary upper floor to the neoliberal building, through which the commentators of seemingly independent think tanks represented very similar ideas – without informing the public that in terms of ideologies, it’s not free to choose. At the same time, as Mirowski (2013) shows, the network promoted itself towards investors arguing that companies should invest in the production of transformative ideas, becoming policy products for final consumption in the end. (These investors are called edupreneurs by Rob Johnson (2017), who gives a revealing account of how philantrophists recreated the new parton-client model of the Renaissance in modern science.)

The second-hand dealers of ideas could indeed make a political difference. As Oliver Letwin British MP argued: “Without Fisher, no IEA; without the IEA and its clones, no Thatcher and quite possibly no Reagan; without Reagan, no Star Wars; without Star Wars, no economic collapse of the Soviet Union. Quite a chain of consequences for a chicken farmer!”.

Achieving a Successful Upward Redistribution

The neoliberal ideology was successful from the perspective of the big business. The eighties is marked by the start of declining wage shares all over the world, as the distribution of produced added value reflected the strenghtening of global capital. These years also meant the start of opening of the real wage-productivity gap, resulting in a previously unseen phenomena, the stagnating incomes of the middle class. At the same time, as a result of tax decreases inspired by the neoliberal political program the income of the top 10 percent started to increase dramatically in Great Britain and in the US, which were the homeland of the neoliberal counterrevolution (Alvaredo et al., 2013; Piketty-Saez, 2014).

Source: Haldane (2015)

The policy mistakes, arising from the philosophical and ideological nature of the neoliberal economics to achieve deregulation, were reflected in the increasing number of financial and economic crises. Margaret Thatcher, who once contributed to the development of libertarian think-tanks personally, having seen the soaring unemployment rates despite the implementation of neoliberal set of policies, argued in 1985 that she never believed in monetarist theories. The Washington Consensus, based on static neoclassical economics, turned a blind eye to the dynamic phenomena of institutions, thus contributed to the deep recessions in post-socialist countries in Central Europe. “The point for neoliberalism is not to make a model that is more adequate to the real world, but to make the real world more adequate to its model” – argues Simon Clarke (2005). Meanwhile, according to David Colander (2004), neoliberal economics reversed the attitude of classical thinkers, concluding that markets are the best, while their predecessors in the 18-19th centuries were stating that markets are the least of all evils.

Neoliberalism created the (econo)mist of scientism and economism, decreasing pluralism in economics. These mechanisms to indoctrinate young scholars into the simplistic but often irrelevant models are needed to stabilize the scientific paradigm and the social-economic system built on it (Earle et. al, 2016; Kwak, 2016). This distinctive feature of this system – as Dean Baker (2016) shows – is the protectionism of the capital owners and the maintenance of upward redistribution towards them, at the expense of wage growth of the labor force – this is why neoliberalism needs to capture the state.

But what is behind the neoliberal (econo)mist? Let’s hope that it’s not the road to serfdom.

Sources in the original.