Markets in the Name of Socialism: The Left-Wing Origins of Neoliberalism

Johanna Bockman (2011). Markets in the Name of Socialism: The Left-Wing Origins of Neoliberalism. Sanford University Press.

When it comes to economics, market anarchism has done a pretty good job at punching above its weight. While Austrians and Marxists tend to ignore us, when they do respond it’s with strawmen or lazy assertions of dogma that are easily dispatched. In serious debates in these realms, we hold our own, only falling short in areas well outside our domain.

However market anarchism has a massive blindspot when it comes to neoclassical economics. Given our radical aims, we tend to traffic in radical ideas and neoclassical economics just doesn’t cover that. Plus, there’s the fact that neoclassical economics appears from a distance to be the ideology that has justified modern capitalism in all its horror — who wants to try and unearth gems under all crap?

Thankfully Johanna Bockman Markets in the Name of Socialism: The Left-Wing Origins of Neoliberalism has unintentionally written the market anarchism history of neoclassical economics. As with Austrian economics, there’s a lot of good stuff in the neoclassical tradition once you get past first impressions and undergraduate textbooks. But even more delicious is Bockman showing how economics as a whole was violently distorted by elites in both Eastern Europe and the West.

One obvious example of this mass epistemic violence is that in the early decades of the 20th century, socialism was considered to be a normal part of neoclassical economics. Neoclassical economics at the time was seen to be indifferent to how economies worked and instead looked to describe how value might be arrived at by those partaking in the economy. This conceptual promiscuity was due to economists central to neoclassical economics being either self-described socialists or influenced by socialism. The most obvious being Leon Walras, one of the key figures of the marginalist revolution, who was both “a great supporter of both socialism and free competition” [21] and obviously saw no contradiction between neoclassical economics and socialism. But even the anti-socialist economists still found value in socialism as a theoretical tool. They made great use of a theoretical centrally planned socialist state as a way to articulate how prices are arrived at in all economies. Bockman cites Wiesman, Pareto, Barone, Böhm-Bawerk, and Hayek as all articulating the theoretical process of price formation using a central state or institution despite all being opposed to socialism.

As such neoclassical economics had a significant degree of freedom when it came to what it could articulate. Capitalism and socialism became indistinguishable in the theoretical mathematical neoclassical models used by economists.

Cassel, like other neoclassical economists, found the socialist model “useful and profitable” for economics more generally because the model was so simple and provided insight into the universal, essential elements of all exchange economies (ibid.: 129–130). Cassel’s work contributed to the new innovations in neoclassical price theory and many other areas. Market socialists found that neoclassical economics helped socialism and socialism helped neoclassical economics. [28] Neoclassical economists understood markets and planning as formally identical. [46]

Such convergences arguably reached their peak in the 30s when market socialism was seen by many economists as a means of reaching neoclassical equilibrium. Bockman writes:

During the 1930s, many neoclassical economists came to the conclusion that socialism in fact provided the necessary institutions for the realization of perfect market competition as envisioned by neoclassical Economists. British socialist and economist H. D. Dickinson wrote, “The beautiful systems of economic equilibrium described by Böhm-Bawerk, Wieser, Marshall, and Cassel are not descriptions of society as it is, but prophetic visions of a socialist economy of the future.” [Likewise] in his “A Cautious Case for Socialism,” Kenneth Arrow, future Nobel Laureate and American neoclassical economist, remembered his time at Columbia University in the early 1940s, “Socialism was the way in which the ideal market was to be achieved. This doctrine was held by many.” Socialist economists in Austria, England, Germany, and the United States at this time agreed that socialist institutions could make economic reality approximate neoclassical models. [33]

However economic planning still held significant sway over many socialists at this time. Marxists were the most stringent about policing these divisions as they saw neoclassical economics and socialism as incompatible. But these distinctions were also made by those who were anti-socialist. Ludwig von Mises’ opinion of socialism mirrored that of the Marxists, to the point where he saw market socialists as allies against Marxism.

Indeed it was this distinction between capitalism and socialism and not his argument for the impossibility of central planning that was his most controversial claim in Economic Calculation in the Socialist Commonwealth. The notion that neoclassical economics did not apply to socialism was what went against orthodoxy, not his arguments against planning.

Hayek’s had similar assumptions in his attacks on socialism. His publication of Collectivist Economic Planning in 1935 was in response to arriving at the London School of Economics and being “blindsided” by the Fabian socialist students there who favored both free markets and socialism. Much like Mises, Hayek focused largely on attacking Marxist solutions to economic problems, completely ignoring the diversity of socialist thought around him at the time. Similar to Mises his writings assumed a binary between planning and market that simply did not exist.

Unfortunately this view of what constituted socialism became dominant as the USSR rose to prominence. Stalinist dogma and isolationism destroyed the diversity of socialist thought for several decades. Likewise in the West, the Red Scare and McCarthyism forced many economists to disassociate their field from the any relation to socialism, despite the proximity that mainstream economics had with it. The economist H. Smith describes the damage done:

Some twenty-five years ago I suspect that nearly every young economist had a pricing system for factors and products in a socialist state tucked away in his desk. Analytical fragments were torn bleeding from the carcase [sic] of the economic systems they were contrived to explain, and sewn together with great skill. [58]

An entire field of inquiry was essentially overturned not by any new insights, but instead through state law. To give one example of how quickly things changed, Paul Samuelson, one of the key economists of the 20th century had socialism as a central chapter in his Foundations of Economic Analysis reflecting the assumptions of the 30s when it was written. However, when it was published in the 40s, he was attacked as a subversive for spreading “collectivist” ideas. Such backlash was enough for him to place socialism as merely an “alternative system,” outside of neoclassical economics in his bestselling Economics: An Introductory Analysis published a few years later.

The increasing complexity of society demanded neoclassical economics become a technocratic engineering discipline which further distorted inquiry. Both industrial capitalism and industrial warfare necessitated close management, large-scale information gathering and processing, and also the direction of complex supply chains. These demands resulted in a stripped down version of neoclassical economics was pushed by the business elite and state not just to train a managerial elite, but also to justify the existence of large hierarchical organizations. In such a paradigm, questions concerning institutional design and power relations in society were pushed to the side. Bockman cites the Arrow-Debreu model which “presented markets free of political intervention and other institutions but could by default assume the existing hierarchical institutions of American society” [47] as being the exemplar of the ideas pushed at the time.

Nevertheless radical analysis on questions of political economy continued on both sides of the Iron Curtain, but largely in the form of highly abstract mathematics to escape censor. Again, some choice quotes:

The influence of state interests, the demands of the military, and the fear of making political mistakes encouraged a narrow neoclassical economics that focused on just one part of the core of neoclassical economics—the centrally planned socialist state—and did not mention any institutions that might improve planning. According to one of his pupils, [Leonid] Kantorovich “thought much and intensively” about these institutions, though he did not publish his ideas. As a result of fear and many different pressures, only a small number of economists practiced neoclassical economics and did so in a narrow sense. [40] At the same time as the development of the Arrow-Debreu model, Arrow published his equally famous Social Choice and Individual Values (1951), in which in very abstract and obscure language he rejected authoritarian planning and argued for institutions that might allow voting and markets to function optimally and democratically. This was not the time to discuss institutions, such as worker control or economic democracy, potentially necessary for competitive markets and central planning. In both the West and the East, more authoritarian political and military elites supported a narrow form of neoclassical economics that assumed existing hierarchical institutions and bolstered their own power. [57] [Hungarian economists after 1956 decided] to go into mathematical economics rather than political economy because “you had more room” in mathematical economics since censors and politicians did not understand it. Economists could hide their ideas within the formulas and difficult language of mathematics. [120]

Radical intellectuals were also able to operate on the margins of society in what Bockman describes as “liminal spaces” outside of East and West. One example Bockman gives is that of The Center for the Study of Economics and Social Problems (CESES). CESES was a right-wing think tank funded by the Italian business class that was called by Milton Friedman “the Mont Pelerin Society of the East” [134] and was supposed to spread free-market ideas and show the problems of socialism in Europe. However CESES was filled with political outsiders who transcended the dichotomy of Cold War capitalist and state socialist:

CESES brought together people with politics outside the usual Cold War dichotomies—including former Communists, anti-Soviet socialists, libertarians, anarchists, Eastern European reformers, and Eastern European émigrés—to discuss the nature of socialism, both actually existing and possible future socialisms. [137]

Left wing individuals throughout the organization ended up occupying important roles — Bockman claims socialists were in charge of the culture, history, and sociology sections of CESES. Part of why socialists reached such positions was that they could grasp what socialist countries put out because they were well read in this theory and understood the state socialist “code.” Furthermore, many were fluent in the local languages of eastern bloc states, which allowed them to communicate with a variety of people, not just intellectuals. Finally, these individuals were intrinsically motivated as they wanted to bring about a more libertarian version of socialism and thus leapt at the chance to professionally critique authoritarian Eastern European states. Likewise left-wingers inside CESES saw it as an opportunity to further their own project of antistate, pro-market socialism.

The contradiction between its stated purpose and the day to day experience within CESES was most comically demonstrated in their youth training seminars, which aimed to educate the young about the dangers of socialism and train the next generation of managerial elite. Those of the anti-Soviet left were more than happy to teach the Italian youth about how bad Marxist-Leninism was, while also explaining to them a variety of ideas including anti-Soviet socialism, Sovietology, and even the philosophy of science. Indeed the left-wing influence was so deep that, in the 1970s, right-wing groups gave up funding it decrying it as a lost cause.

There were also socialist states during the Cold War that were somewhat more intellectually open then the USSR. Yugoslavia, which was outside the Warsaw pact and declared itself non-aligned after 1956, attempted to pursue a form of neoclassical market socialism that was designed to get to worker ownership of enterprises. Of course, given that Yugoslavia at the time was a one-party state and such reforms were imposed from above, the results were not nearly as liberatory as envisioned. Nevertheless Bockman calls it “the first nationwide experiment in worker self-management and market socialism.” [80]

Both Yugoslav party elites and economists saw the potential for neoclassical economics to help them bring about their vision of market socialism — a decentralist, pro-market, pro-worker autonomy vision. Likewise, Hungary also saw liberalization. Imre Nagy, an economist who became prime minister in 1953, sought to update economic understanding from Marxist-Leninist assumptions. Hungary saw both the implementation of market socialist reforms, as well as the establishment of institutions for research into “reform economics” that would help Hungary move towards a form of market socialism.

But the Hungarian experiment ended in 1956 when the Soviets invaded, deposing Nagy.

The liberalization Hungary saw under Nagy was brought to a halt. The new ruling class emphasized a technocratic approach to economics instead of systemic analysis. Nevertheless, Hungarian economists still had some freedom to do actual research in the highly abstract realm of mathematics.

The discourse focused largely on what institutions would be required for market socialism to achieve the desired ends. They began to focus on what institutions would deliver the desired ends. To give two examples which appear to be precursors to market anarchist thought:

Neoclassical economists in the West and in the East realized that competitive markets required institutions, in particular to deal with the problems of incentives and asymmetric information. The literature on principal–agent relations blossomed during this time. In this literature, principals, such as owners or social planners, seek to delegate tasks to agents, such as managers, which require effective incentives and adequate information. These economists questioned the very dichotomy between socialism and capitalism, as well as that between centralization and decentralization. They even questioned the distinction between the national economy and the firm because both national economies and firms could have central planning. By the early 1960s, neoclassical economists had begun to ask whether economic systems were in fact converging. They saw every organization (whether a firm or a national economy, whether socialist or capitalist) as potentially optimally organized and thus as structurally similar. Marschak and others no longer focused on the ownership of the means of production or on the ideology of a system but rather on information flows and decision making in organizations. [124]

Likewise during this period there was a convergence of economists in both ostensibly socialist and capitalist countries when it came to promoting centralized hierarchical organizations as the optimal approach to economics. Bockman cites Milton Friedman and Oskar Lange who both argued for state planning/giant corporations respectively as the optimal approach to economics, completely ignoring questions of political economy and institutional makeup. Many political elites on both sides of the Iron Curtain utilized a simplistic version of neoclassical economics to argue for hierarchy: Bockman cites the campaigns of Richard Nixon and Barry Goldwater as both articulating an economic vision based on a contradictory mix of Austrian and Chicago school economics, despite the fact both had diametrically opposed views on the validity of neoclassical economics.

Over the coming decades, Hungary and Yugoslavia both saw cycles of reform in which attempts to move towards market socialism were stymied by corrupt elites and inevitably reinforced state power over enterprise.

This dynamic of frustrated reforms, and the emergence of a vulgar neoclassical economics, helped set the stage for the transition into capitalism in 1989. The feeling among market socialist economists in Hungary and Yugoslavia at this time was not one of defeat, but one of possibility in which market socialism could finally be realized. However, at the same time, technocratic economists and political elites aligned to help make the transition occur and international finance happily gave support to anyone with power who would support the reductionist view of neoclassical economics that undergirds neoliberalism. Workers and more radical economists who championed decentralization and self-management opposed this move.

The failure to make the transition to market socialism was due to a variety of reasons. First of all, there was nothing for the working class in those countries to defend. There was little history of worker self-management, no commons, no cooperative banks, or similar institution that would have given workers both something material to fight for, and also resources to call on to win a conflict with political elites and managers. Furthermore the failures of previous reforms had led economists favoring autonomy and decentralization to call for sweeping reforms to happen all at once so as to avoid elite corruption and inevitable worker backlash. Such calls however where decontextualized and pointed to as evidence that the imposition of authoritarian top-down capitalism was necessary to avoid backlash. The writings promoting liberty were instead taken up by those looking to justify an authoritarianism order backed by imperial

Finally, it should be no surprise that the economists who found the transition easiest where those involved in state planning.

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While these events are relatively easy to gloss over when compared to the grand scope of the Cold War, they are a fitting endnote to a half-century that was supposedly defined by a clash between economic visions that, in reality, was between two centers of power that were more similar than most like to admit. And while it’s reasonable to be cynical about how far market socialism could have gotten in tiny European countries with histories of authoritarianism in an age of globalization, the fact that that we never got to see a remotely functional market socialism has done significant damage to how the left has approached politics going forward.

The result has been that neoliberalism, a jumbled doctrine, caught between the radicalism of key insights about complexity and decentralization and a desire for control and management became hegemonic to the point where they can declare that “there is no alternative” and the left can painfully agree because they can’t propose a coherent answer of how a complex, dynamic society would operate.

Because when it takes a global nuclear standoff, massive investments by the powerful, and deliberate suppression of individuals pursuing alternative ideas on both sides of the Iron Curtain to convince us of a falsehood and then paper over the contradictions involved, such a line of thought is worth pursuing if only to see what those with power are so terrified of. This knot at the heart of economics is certainly not the cause of the political upheaval we’ve experienced since the end of the Cold War, but it’s a massive contributing factor that’s gone ignored by basically everyone. And the so-called radical left’s complete failure to pick up on it, despite the massive vulnerabilities it would reveal in our current social order, shows the damage done by an uncritical acceptance of Marxist critiques of economics.

Thankfully the momentum of the information age is making such blindness difficult to maintain because the contradictions are so obvious. And it’s not just the left scrambling to adjust itself. Everyone it seems is trying to find their way in this chaotic new world. Early attempts like the rise of an awkward tech-positive Marxism, the emergence and then splintering of neoreaction into pro and anti tech tendencies, libertarians who flipped to fascism out of fear of the egalitarian and leveling effects of even something so compromised as corporatist neoliberalism are all the result of ideologies trying to find their feet. Even mainstream politics is affected: see the convergence of a populist right and left on a return to New Deal style economic arrangement with the only difference being the particulars of how society should be ordered (which, to be fair those do matter quite a bit) or bromides from left/right-liberal technocrats about education and basic income in response to the “problem” of automation. Such confusion is the result of self-induced ideological debt building up around just how the economy functions (and the broader implications of calculation/knowledge/principal agent problems) and what it’s good for (and the broader implications of investigation into values and desires).

In such a vortex market anarchism is has proven to be remarkably stable. While obviously not perfect, it has grasped the roots better then everyone else and as such contains unparalleled insight when it comes to acting in this strange new world. The chaos of the information age is due to a massive explosion of complexity within the last few decades on nearly every fronts (social, economic, ecological, intellectual, technological, etc) that will only compound as they feedback off each other. In such an environment, the question of overcoming collective action problems is paramount, a meta-concern that every other concern we face as a species touches on. If such organizational efficiency were to be unleashed it could prove more powerful than all the guns, dollars and bodies that have maintained our current hegemony.