Neoclassical Economics has failed Society.
Can Free Market Societies change?

Anti-heroes. UK Finance Minister pretends Austerity is working.

There are rumblings in the economics profession which indicate that the certainties of Neo-classical economics are coming under threat. But it seems still to be the case that the Neo-classical virus is so deeply entrenched in the academic sphere, the media, and particularly in right wing politics, that it will take a veritable revolution to remove its malign effects.

And whilst some economists are mounting coherent attacks on the fundamentals of Rational Man, Perfect Markets and “Freedom”, there are few signs that they are daring to spell out the fundamentals of a new economics. But one think tank that is setting out to challenge the dogmas of Neo-classicism is the UK based New Economics Foundation.

Its Guiding Principles are clear:

“We believe change begins when people recognise that the spiralling chaos and insecurity of daily life is caused by concentrations of power and ownership – whether old or new – operating increasingly beyond their control.

We believe change happens when people are able to seize opportunities to take control over what matters most, not wait for it to be done to or for them.

We believe change succeeds when people take control over their own future in everyone’s interests to improve the place in which they live and shape even the most powerful institutions.

In short, ours is an agenda for people to take more control today, so that we can change the whole system tomorrow”.

Underpinnings of Neoclassical Economics

This website has reviewed the effects of the Free Market on Societies, especially those of the United States and the UK. Underpinning Free Market dogma is Neoclassical Economics. This body of theory has been around for many decades. Free Market theory became established in the early 1980’s, when the theories of the Chicago School were espoused with enthusiasm by Margaret Thatcher and Ronald Regan in Britain and America. Neoclassical Economics, as it became named, postulated that the Market was a superior mechanism to ensure a healthy economy – that markets could ensure stability through Perfect Competition, in which all players would seek to maximise their advantage, so that a state of equilibrium could be reached, as each would act assuming the responses of others, thus modifying the behaviour of all. The market could provide perfect information that would enable Rational players to act in the knowledge that others would be seeking to do likewise. A key dictum was indeed that of rational man, acting freely in pursuit of their own interests. If the state sought to interfere with the workings of the market, it would detract from “Freedom” a favourite word of neoclassical economists. Another dictum was that all of this could be understood through mathematical models which would enable economists to understand and project how the Market would behave.

Unbelievable as it may seem, these postulations, based upon a theory about the behaviour of individuals and organisations in the market, have become the foundations of a World Theory. The market, if left alone, would ensure a state of General Equilibrium, thus benefiting all in Society.

Politicians who spout ideas about “Choice” and the power of the Market are simply, (probably without understanding of what they are doing), parroting the dictums of neo-classical economics. Here is a quote from the UK Finance Minister from a recent speech:

"But we can only do so by harnessing the power of the market economy to deliver a brighter future. And that means re-fighting a battle we thought we had won against an opposition determined to put Britain’s prosperity at risk.”

So, the basic dictums of neo-classical economics are solidly entrenched in every corner of society, and seem immune to rational challenge, despite the disasters of recent years, including collapse of the financial system, followed by Austerity and the collapse of public services. In other words, in the real world there was an almost total collapse of everything that mainstream economics stood for. The fact that it took massive state and quasi-state intervention (a classical Keynesian act) to save the world economy from total collapse seems not to have touched the perfect world of most economists, and the beliefs and behaviour of most in big corporations, banks and right wing politics.

What are the institutional underpinnings of such a widespread system of beliefs?

One reference leads to the Mont Pelerin Society, after the place of its first meeting. It emphasised that it did not intend to create an orthodoxy, to form or align itself with any political party or parties, or to conduct propaganda. Its sole objective was to facilitate an exchange of ideas between like-minded scholars in the hope of strengthening the principles and practice of a free society and to study the workings, virtues, and defects of market-oriented economic systems.

Members who include high government officials, Nobel prize recipients, journalists, economic and financial experts, and legal scholars from all over the world, come regularly together to present the most current analysis of ideas, trends and events.

All of this sounds very respectable - but the list of past members seemed to be dominated by free-marketeers such as Milton Friedman and James Buchanan. (An initiator of the notion that humans were essentially self-serving individuals, who if they were left alone would angle their pursuit of self-interest for the good of all).

Then there is von Mises and the Austrian School. Google turns up the Mises Institute. It's based in Alabama, not Vienna and here's its Mission:

“In this cause, the Mises Institute works to advance the Austrian School of economics and the Misesian tradition, and, in application, defends the market economy, private property, sound money, and peaceful international relations, while opposing government intervention as economically and socially destructive”.

The Mises Institute has 250 faculty members working with it on one or more academic projects. With their help, and thousands of donors in 50 states and 64 foreign countries, the Institute has held more than 500 teaching conferences

What of von Mise's views? Here's a snippet from admirer Murray Rothbard:

“Mises concluded that the only viable economic policy for the human race was a policy of unrestricted laissez-faire, of free markets and the unhampered exercise of the right of private property, with government strictly limited to the defense of person and property within its territorial area”.

Neoclassical economics lacks firm empirical evidence…

This massive network of “research” organisations pumps out torrents of propaganda aimed at fixing the free market as the true faith. In fact, most neoclassical economics is based on conviction and lacks any secure basis of empirical research.

….And is hugely destructive

The destruction caused by the Free Market in Britain and America includes massive inequality, widespread poverty, poor education for all but the wealthy, massive neglect of social care for the poor and elderly – and to cap it all, huge economic instability and individual indebtedness.

A New Economics – fundamental underpinnings

First: The certainties about the behaviour of “rational man”, the nonsense about markets being served with perfect information – and the outrageous assertion that only free markets will assure freedom need to be stuffed in the sewer of history.

Economics is fundamentally about Cultures, not Markets, rational man and mathematical models. And it is also about the possession and use of Power.

So, the first building block in any economic structure has to be an understanding of the Cultural setting encompassing an economy. In other words, Economics is the servant of Society.

Two examples will suffice to make this crucial point:

• Sweden has a strongly collaborative Culture, with relatively small class divisions. The State is understood by most to be “Us” (really!) rather than “Them”. In Sweden national politics tends to be formed by consultation between the major stakeholders in Society, and enactment of policy and the provision of services is strongly decentralised to local government.

  Banks and other financial institutions tend to be regulated by Societal norms as much as by statute and rules. Until recently, Sweden was a relatively equal society, with taxation aimed at evening out large inequalities. So, in Sweden, “Freedom” is construed as the ability to participate in community and to contribute to the general well-being. It should be said that immigration is somewhat threatening to this way of life, despite strenuous efforts to integrate immigrants into the Swedish way.

  Despite these societal norms, Sweden is a very successful economy, providing wealth and a generally high quality of life far beyond the reach of the majority in Free Market countries.

• Britain has been riven by its class system. Historically, the “lower” classes have been economically and socially oppressed. The upper classes enjoy a separate education system, are imbued with a strong sense of class connection and entitlement. Until recently, conflict between unionised workers and “Bosses” has undermined economic progress. Since the inception of Free Market primacy, ideas of “freedom” have centered around the ability of a small number of powerful players to extract as much as possible from the economy, shelter their wealth and “Game” the political and governmental system to maintain privileges. It is now clearly emerging how powerful players in the economy; corporations, financial institutions, lawyers and wealthy individuals have corrupted the whole of society, to the detriment of most of its members. Meanwhile, the performance of the British economy has lagged behind most developed countries. The idea of the Free Market has been deeply embedded as a result of self-interest on the part of the rich and powerful. It is fairly clear to all but the most misguided or venal that Britain will not become a wholesome society without deep and fundamental changes in the Socio/economic system.

Three Building Blocks for Change

Shifting Power to the periphery and towards individuals

Currently massive power lies in the hands of a network of powerful institutions. In Britain, it lies with a network of big corporations, financial institutions, law practices, accountants, all serving the interests of the rich and powerful. In addition, powerful advertising companies are using increasingly powerful psychological tools to control the minds of consumers.

Globally, The growth of huge social media companies are producing the means to influence the minds of a mass of people, working in conjunction with advertisers.

A team of researchers at the Swiss Federal Institute of Technology in Zurich studied the relationships between 37 million companies and investors worldwide, and what they found was absolutely stunning. They discovered that there is a “super-entity” of just 147 very tightly knit organisations that control 40 percent of the entire world economic network… This New Scientist article is hugely revealing.

Radically Change the Concept of the Individual

Down through history, the very idea of the individual has undergone big changes:

• “Players” in a market, computing perfectly available data to pursue their interests
• Military units. A moment watching North Korean, Russian, Chinese and many other parades will convey the strong impression that individuals are but clockwork toys. Likewise, whole auditoriums with serried rows of people clapping in unison does not convey the impression of individualism. Kaiser Wilhelm 1 of Prussia is thought to have invented the idea of real toy soldiers.
• A unit of Production. This idea has been named “Fordism”. Individuals (except the elites) were regarded as units, the outputs of which could be precisely measured and controlled. Punishments and incentives could be designed to control behaviour. Just in case readers should imagine this is past history, it would appear that the treatment of staff by giant company Amazon seems to reek of old-fashioned Fordism.
• Units in a Group. Trades Unions derived their strength from the strength of mass membership. Powerful leaders sought to control the actions of the masses – it was called “solidarity”
• Units of Consumption. Social media and powerful advertising is being increasingly used to influence, if not control, the behaviour of the mass of consumers. Fashion is but one device to create and control herd behaviour.

The concept of “People” needs to change –and the needs of all manner of people, of all classes, sexes, colours and creeds needs to be ranked above those of large institutions in considering policy. A new economic order should consider the wellbeing of people in Society. “People” are not simply rational players in a perfect market, nor can they simply considered as individuals. They are members of families, small, medium and large communities. Nor are they simply rational – they are subject to a wide range of emotional and economic pressures. The antics of national politicians and big corporations seem a million miles from most people living normal lives.

Focus on younger people.

See the extracts from a report by Gurnek Bains, which offers hope for the longer term:

• Politics is changing. The growing Open/Closed divide splits the generations and increasingly trumps the old Left/Right divide in defining voting behaviour. The political axis is rotating. This analysis not only helps to explain the 2017 General Election result but points strategists towards a battle for the growing Open ground where elections will be won.
• Open versus Closed There is a growing divide in British politics. Open voters are positive about multiculturalism and diversity, comfortable with immigration, and in favour of Britain taking an internationalist, outward-looking approach to the world. Their views contrast with those of Closed voters, who are more likely to be sceptical of these things.
• Younger voters are more likely to be Open On a range of issues our polling identified a stark divide between those aged 18-44 and those aged over 45 in attitudes to touchstone issues such as multiculturalism, anti-discrimination measures and nationalism.
• This divide is generational, and Open is growing. As those who have grown up comfortable with a diverse, multicultural Britain get older, we can expect to see Open voters becoming the majority in older and older age groups.
• The political axis is rotating Crucially, in the UK and across the world this divide increasingly predicts voting behaviour. Over the last 20 years the political axis has been rotating: from one which is based on economic interests to one increasingly based on values.

Agendas for managing constructive change

These will be considered in another article. Suffice it to say, the campaigns that led to Brexit, and probably that of Trumps election, are unlikely to result in the wondrous changes postulated by their proponents. The main reason is that the motivations and the emotions behind both campaigns were almost entirely negative – and far too susceptible to fear and loathing of “The Other”, be they immigrants or foreigners in general.