Collision Course: Endless Growth on a Finite Planet (16 page)

Neoclassical efficiency is defined in “bottom-line” terms; here, considerations based on social, moral, or environmental criteria will only be counted if they can be monetized, an inexact science when applied to phenomena that have no obvious monetary value. The neoliberal era has seen the ascendancy of what is termed cost–benefit analysis as the main instrument for assessing policy outcomes and a concomitant emphasis on monetary values. However “optimal” the allocation of resources (even if optimality could be demonstrated), this is only one aspect of benefit to society.

It might be argued, for example, that the purpose of human economic activity is the care of—or advancement of—all people across a society, a belief commonly found in indigenous societies and somewhat approached during the interregnum between the “gilded age” of the 1920s and that of the late twentieth century. Similar values were, for example, reflected in President Roosevelt’s annual address to Congress in January 1941 (the “Four Freedoms” speech), which stressed equality of opportunity and a “better system” designed to ensure reliable access to employment. Roosevelt’s freedoms, like those of the UN’s Declaration of Human Rights, included “freedom from want—which, translated into world terms, means economic understandings which will secure to every nation a healthy peacetime life for its inhabitants—everywhere in the world.”
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Resilience theorists
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have cautioned that the ability of natural systems to recover from random shock or normal disturbance relies not on efficiency but on redundancy or duplication.
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The pursuit of efficiency routinely reduces or eliminates anything not immediately essential, in the pursuit of the most profitable way of doing things. The globalized market of the past few decades, for example, has increasingly mediated the food production of the entire world, producing “efficiencies” in such areas as the elimination of national or regional food banks. The steep escalation of commodity prices in 2007–2008 was estimated by the UN to be pushing up to 100 million people “back into poverty.”
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The causes of the price rises are multiple, but the event affords an example of the unintended consequences of swapping a multifaceted system for one with fewer redundancies.

Even if efficiency
were
shown to be the most appropriate criterion for decisions about human affairs and the natural world in which they are grounded, it seems likely that the market’s putative efficiency at resource allocation and correct pricing is itself a myth, as suggested not only by the collapse of the financial system in 2007–2008 but also by the financialization of the entire economy over the previous forty years.
Financialization
refers to the dominance of the finance sector in the global economy, the switch from productive to speculative investment, and the ongoing translation of social and environmental processes into tradable entities. Both in the United States and globally, the finance sector’s share of corporate profits grew from about 10 percent in the 1950s to between 30 and 40 percent by 2004.
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What kind of efficiency could possibly be served by displacing capital from the production of food, shelter, and other human necessities and channeling it into speculative derivatives like collateralized debt obligations and credit default swaps?
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The economist and veteran investment banker Paul Woolley challenges the efficient market hypothesis, which holds that equity markets “deliver efficient pricing leading to the most productive allocation of resources,” even though it was an article of faith throughout the 1980s and continues to be regarded as the bedrock of finance theory up to the present day. Woolley’s experience showed him that speculative momentum, rather than actual value, controlled market prices; and that the neoclassical idea that the market provides the only reliable matrix for rational individuals acting on the best information is manifestly misplaced.
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The Construction of “Free Markets”

The concept of the “free market economy,” a pervasive expression in recent decades (Google yielded nearly 29 million hits in May 2013), implies that the capitalist economic system is a natural phenomenon that is jeopardized by government regulation and will always operate best when liberated from such interference. Yet this idea obscures the fact that the notional free market rests squarely on a multiplicity of institutions created by human agency; the state played an indispensable role over centuries in providing a suitable legislative framework for the operation of capitalism. There was nothing spontaneous or natural, for example, about the early stages of primitive accumulation in Europe, when peasants were progressively separated from their common resources as sheep farming took hold. Enclosure was carried out with the participation of the state, both before and after the transition from absolute monarchy to elected legislatures; further legal curtailment of rights to hunt and gather stripped peasants of residual options for sustenance and drove them into wage labor; governments defined private property and legal contract; the British poor laws of the nineteenth century ensured that landless laborers “freed” by enclosure and artisans displaced by industrial manufacture were confined in Dickensian conditions if they failed to find work in the new factories. In short: none of this developed spontaneously.

The corporation itself is a legal fiction, again created by the state, originally in Amsterdam, and sequentially throughout the world. Limited liability protects the individual shareholder from personal financial responsibility for corporate activities, thus encouraging risk beyond that which most people would take if their personal assets were on the line. The whole edifice of business ownership hinges on privileges bestowed by governments elected, in the main, by propertied males. Governments, especially active in the neoliberal era, have regulated, confined, and neutralized workers’ organizations while presenting these measures as essential to freedom. Laws that seek to regulate corporations, on the other hand, even in the interests of the common good, are depicted by free market advocates as pernicious infringements of liberty.

Origins of the Modern Neoliberals

Though rooted in neoclassical economics, neoliberalism is not just a set of theories about how the world works but embraces a very specific program to modify the world, a program that is political in nature and varies accordingly in the settings where it operates.

Modern political neoliberalism is not without precedent. A very similar program was pursued before the Great Depression by corporations threatened by democratic processes that were giving a voice to the interests and values of working people. As Bernays’s work suggests, the property-owning elites of Europe and North America were deeply worried about maintaining control over social structures and priorities; contemporary market fundamentalism echoes these concerns. Along with intellectual and academic traditions, neoliberalism has inherited practices of corporate propaganda dating at least as far back as the 1920s,
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when, for example, the journalist Ernest Hofer ran a business distributing model articles and editorials celebrating free enterprise. He was the largest disseminator of such material at the time. Underwritten by numerous corporations, largely utilities, Hofer sent, free of charge, suitable “news” items and slanted articles to thousands of newspapers across the United States. He explained his purpose (which would sit well with any free market think tank of the current era) as follows:

First, to reduce the volume of legislation that interferes with business and industry; second, to minimize and counteract political regulation of business that is hurtful; third, to discourage radicalism by labor organizations; … fourth, a constant fight for reasonable taxation by state, city and county government; fifth, a scientific educational campaign against all socialistic and radical propaganda of whatever nature.
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These priorities were displaced by the Great Depression, which demonstrated an urgent need for regulation of business, as well as for adequate taxation and assistance to the poor and unemployed. US citizens voted Franklin Roosevelt into the presidency and embraced his New Deal, which favored a more humane approach to the victims of economic collapse and, it has been argued, “saved capitalism from itself.”
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Yet the policies pursued by FDR are the very ones that have been dismantled by the free market resurgence of the past three or four decades.

Hayek was a prime mover in this demolition project. Though he diverged from orthodox neoclassical economics in some respects,
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Hayek nonetheless advanced the invisible hand concept of the market as a miraculous mechanism and the bedrock of the society he favored. He was deeply opposed to any system that would “replace the impersonal and anonymous mechanism of the market by collective and ‘conscious’ direction of all social forces to deliberately chosen goals”; he rejected notions of “common purpose,” “common good,” or “general interest.” For Hayek, economic freedom was the essential foundational freedom that had brought about the increase in European wealth. Though neoliberalism has since masqueraded as a staunch friend of democracy, Hayek was not much interested in electoral democracy; his was a passionate plea for individual economic freedom in a market-based regime. He played a seminal role in the campaign to revive the popularity of the free market after Keynes and to reinstate it as the central influence in economic thinking and social policies. He aimed to construct a liberalism capable of supplanting not only socialism but social democratic forms of capitalism as well.
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To that end, he convened a conference in 1947, largely of economists wedded to market economics, plus a few libertarian philosophers and journalists. The attendees included Milton Friedman, who had just begun what would be a very long and influential career in the Economics Department at the University of Chicago. Hayek’s meeting marked the founding of the Mont Pèlerin Society (MPS), which aimed, according to long-term member Ralph Harris, 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.” Overall, they would “launch an intellectual crusade aimed at reversing the rising tide of post-war collectivism.”
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The MPS and its growing membership spawned many of the influential free market think tanks that came to dominate policy in the developed world, especially in the Anglophone countries. The first of these offshoots was London’s Institute for Economic Affairs (IEA), launched in 1955 by Antony Fisher, one of the business members of MPS and a dedicated popularizer of Hayek’s ideas. Fisher assisted in the establishment of further think tanks in the subsequent twenty years, including the Heritage Foundation in Washington, DC, in 1973 and the Manhattan Institute for Public Policy Research in New York, in 1977. An avalanche of such organizations followed after 1981, when Fisher founded his Atlas Economic Research Foundation, aiming “to litter the world with free-market think-tanks.”
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Although they had a lot to say about what they called freedom, the MPS neoliberals had a much more ambivalent attitude toward the state than orthodox neoclassical economists did. Such a state could be entirely authoritarian, as was Pinochet’s Chile, where neoliberals played key roles. Electoral democracy is desirable when it supports the economic system neoliberals require. The political scientist Dag Thorsen argues, however, that if democracy gets in the way of neoliberal restructuring, “slows down neoliberal reforms, or threatens individual and commercial liberty, which it sometimes does, then democracy should be sidestepped and replaced by the rule of experts or legal instruments designed for that purpose.”
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America’s leading neoliberal theorist and evangelist was Milton Friedman, a key figure in what became known as the Chicago school. He was a founding member of MPS and held views on economic freedom that followed and amplified those of Hayek. He opposed government influence in the economy and government provision of services, which, he thought, the private sector would perform better. In line with his participation in Hayek’s club, Friedman was not merely an academic and an adviser to conservative governments but a publicist for “economic freedom.” He wrote weekly opinion pieces for newspapers and magazines, gave many public lectures, and, in 1980, with the American Public Broadcasting Service (PBS), he produced a ten-part television series,
Free to Choose,
setting out these views in a slick, persuasive format. A book based on the series was funded by the Scaife and Olin Family Foundations.
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Friedman’s Department of Economics at the University of Chicago teamed up with the US State Department in the late 1950s. Funded by US taxpayers and US foundations, the Chicago School trained hundreds of economists, inserted Chicago-style teachers into Chile’s Catholic University, and unleashed a stream of free marketeers into Chilean society. Friedman himself met with Pinochet when he flew to Santiago six months after the military coup to consult with business on the neoliberal makeover of Chile’s economy.
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The ideas of Hayek and Friedman had little influence on policy before the 1970s growth crisis. When Hayek debated Keynes through the 1930s and 1940s, Keynes tended to win the debate. In the aftermath of the economic calamity of the Great Depression, the alleged miracles of the free market could not command sycophantic approval. Furthermore, it was the policies Keynes championed that facilitated the extraordinary mushrooming of economic growth after the war—an economic triumph that blunted both public and professional memory of the free market disaster of 1929. It was not until the protracted economic crisis of the 1970s, with repeated oil shortages and intractable stagflation, that neoliberalism found its entry point.