On Neoliberalism

Henry Farrell reviews what sounds like a very interesting book, Colin Crouch's The Strange Non-Death of Neoliberalism. Farrell's discussion of the book prompted me to add it to my Amazon wish list. I do, however, have a conceptual quibble. According to Farrell, Crouch defines neoliberalism as the belief that "optimal outcomes will be achieved if the demand and supply for goods and services are allowed to adjust to each other through the price mechanism, without interference by government or other forces". In other words, it's a technical argument that markets allocate resources more efficiently when not interfered with by governments, in general. But then Crouch claims that neoliberalism is really "devoted to the dominance of public life by the giant corporation."

These two are obviously mutually exclusive. The first definition is apolitical, or perhaps anti-political, and is ultimately dedicated to using the tools of technocracy for utilitarian ends. The second is a statement of politics that prefers a statist-corporatist organization of power in society, and there's nothing utilitarian about it. And what I can't get from Farrell's review is whether Crouch is arguing that this is cognitive dissonance -- that neoliberals don't really understand what they're advocating -- or whether the anti-political neoliberal rhetoric is an intentional deceit. Or whether Crouch is confused about this himself.

So here's my quibble: I don't think either of those is the best explanation of the actual intellectual disposition of actual neoliberals. "Neoliberalism" is itself a pretty nebulous concept, which may be part of what Crouch is driving at here. The neoliberals that I have in mind exist on a continuum roughly from Brad DeLong to Greg Mankiw, or essentially the entire discipline of American economics and wonkery, who may disagree on some particulars of which technocratic policy may bring the best outcome but more or less agree on what the best outcome is (within fairly narrow bounds) and the fact that technocratic means are the best way of achieving it. Put another way, I see neoliberals as believing that politics messes up socially optimal policymaking rather than those who believe there is no such thing. As one example, see this recent piece by Peter Orszag.

So I see neoliberals as generally in agreement that markets are good, and therefore that market actors (including corporations) are good, but that under certain conditions markets can generate outcomes that are suboptimal relative to some social ideal. It is in these areas that government is useful. Neoliberals tend to agree that there should be a social safety net (even Hayek and Friedman admitted that much), and that externalities exist and can be quite powerful. They tend to think that in a first-best world markets and governments are two complementary tools that together can enhance utilitarian social outcomes.

In other words, I don't think that neoliberals are actually "devoted to the dominance of public life by the giant corporation". I do think that neoliberals generally believe that corporations produce important social goods so long as they operate in competitive markets, and when they do not -- or when structural factors tend to lead them to generate negative externalities -- they should be regulated. So neoliberals often advocate things like cap-and-trade auctions, oppose industrial policy (which is pro-corporation), and favor laxer restrictions on trade and immigration. To the extent that these policies negatively impact some groups in society, neoliberals generally advocate some sort of social insurance paid for by some sort of progressive taxation scheme.

This is completely distinct from a preference for distributive politics that favors protecting large corporations, or capital in general. In fact, corporatists are often mercantilist and pro-regulation (at least those that provide rents by creating barriers to entry). The only overlap I see is that corporatists and neoliberals both make use of, and attempt to legitimize, markets. But they do so in very different ways, because they think of the "market" differently. Both groups tend to think that markets are often distorted by political processes, but they vary in the normative value they place on that: it's exactly what corporatists want, and it's exactly what neoliberals decry. Corporatists love market failure; neoliberals hate it. In short, corporatists view politics in the same way as socialists, not neoliberals. Corporatists and socialists are on the opposite sides of the distributional battleground, while neoliberals are trying to avoid the combat entirely.

There are times when the neoliberals and corporatists can overlap politically well enough to be on the same side, and this is I think where the confusion sets in. Farrell recounts Crouch's discussion of Thatcher's reforms, with which I'm not familiar enough to discuss. But during the same period in the US we heard a lot about "trickle down" economics, where policies that benefited corporations would in turn benefit the rest of us. Neoliberals and corporatists were generally on the same side in that debate, but for different reasons: neoliberals believed it was true, while corporatists did not (or at least hoped not). And the experience of the US from 1980-2000 provided ammunition for both sides: the American economic experience was pretty good during that period, although it was much, much better for the wealthy than for the rest.

But neoliberals can just as easily oppose corporatists, and quite often do. I think a lot of this gets at what Farrell and Matt Yglesias were arguing about recently, so I was kind of surprised that Farrell didn't link his review to that discussion. Yglesias was arguing for a certain kind of neoliberalism that emphasizes growth plus greater redistribution (relative to the status quo) as being the utilitarian ideal, while Farrell was arguing that that doesn't accurately describe the political landscape so it should be discarded in favor of a more radical politics. Neither was adapting a corporatist line, but they nevertheless disagreed.

Is the Subprime Crisis a Transformative Event?

The new issue of International Affairs is out, and is titled "Global economic governance in transition". That is obviously a topic that interests me, so I was happy to find it, and a contributors list including Paola Subbachi, Andrew Cooper, Alexander Payne, and others is more than enough to attract my attention.

I'm still working my way through the articles, but I did want to highlight Eric Helleiner's contribution, "A Bretton Woods moment? The 2007-2008 crisis and the future of global finance." (Ungated pdf here.) Helleiner argues that those expecting the 2007-2008 crisis (which did not end in 2008 and still has not) to be a transformative moment spawning a new global order to be disappointed. But this is not because the system is irredeemably controlled by bank lobbyists, or obstructionists in Congress, or Chinese planners, or recalcitrant Greeks. Rather, it's because Bretton Woods itself was not a moment, but a process:

The success of the Bretton Woods conference was a product of a remarkable combination of concentrated power in the state system, a transnational expert consensus and wartime conditions. The absence of a similar political environment today makes its accomplishments very difficult to replicate. Even more important, the significance of the Bretton Woods conference itself should not be overstated. Not only did the innovative aspects of the conference agreements have long historical roots, but the implementation of the agreements after the conference was a troubled and painstaking process. The creation of a new international financial system, in other words, was not a product of that single meeting but rather the outcome of a much more extended historical process. The importance of this analytical point is brought out even more clearly when we examine the successor to the Bretton Woods financial system—what I call the ‘neo-liberal globalized’ financial regime—which emerged through a process with no clear foundational moment.

Helleiner identifies four phases in the process of change of governance structures: a legitimacy crisis, an interregnum, a constitutive phase, and an implementation phase. He claims that the global economy is currently in the interregnum, and a new global order could yet emerge. Helleiner argues that the subprime meltdown and ensuing policy responses have destroyed the legitimacy of the 'neo-liberal globalized' financial regime based on the Anglo-American model. Interestingly, he argues that the legitimacy crisis did not arise because of the crisis itself, but rather the responses of governments to it:

The fact that US and British policy-makers have responded to the crisis in a much more interventionist way than they recommended to East Asian countries during the 1997–8 crisis has undermined their credibility abroad. Since this crisis originated in their own markets, US and British policy-makers can no longer offer up their own regulatory practices as a model. As one Chinese official recently put it, ‘We used to see the US as our teacher but now we realise that our teacher keeps making mistakes and we’ve decided to quit the class.’

I have heard this claim quite -- that the Anglo-American economies were more interventionist in 2008 than the Washington Consensus proscribed for East Asia in 1997 -- a lot in the past few years. (I recall Emmanuel making it, for example, tho I'm too lazy to dig up posts right now.) It's always struck me as completely wrong-headed in two ways: first, it assumes that the Anglo-American economies were anti-interventionist; second, it assumes that the East Asian crisis and the subprime crisis are similar events.

It doesn't more than two seconds of thought to realize how absurd these claims are. On the first point, as Joshua Green's recent profile of Timothy Geithner (discussed here) emphasizes, large intervention in financial crises has be the modus operandi of the U.S. for quite some time. Green emphasizes the experiences of Geithner and Summers in the Mexican crisis in 1994 and the Asian crisis in 1997 in formulating this instinct, but the pattern is more entrenched than that: the U.S. has not hesitated to intervene in financial markets during panics since the Great Depression.

Which brings us to the second point, which is that the Asian financial crisis and the subprime crisis are not remotely similar. The former was a currency/balance of payments crisis, while the latter was a banking crisis*. Asian countries in the late-1990s had very different economies than Atlantic countries in the late-2000s. Why in the world should we expect the same reaction to different types of crisis in different countries? And why in the world does divergent responses to these crises represent a loss of legitimacy? Wasn't the big criticism of the Washington Consensus its "one-size-fits-all" ideology? If the Asian crisis had been a banking crisis, and if Asian governments had responded by bailing out their banks, does anyone think the US/UK/IMF would have been critical of that policy?

In fact, the Atlantic economies have been very consistent in their policies: they intervene when necessary to support their financial firms, boost their economies, or protect their investments. The conditionality attached to IMF loans given to Asian countries didn't exist because the Atlantic economies wanted to be mean to Asian upstarts, but because they wanted their money back. And here's why this was necessary: because unlike the US and the UK, Asian economies could not borrow in their own currencies, nor could they borrow from private markets at less than pecuniary rates. More developed economies can do those things, and when they can't they face fairly significant austerity as well. Witness Greece.

So no, I don't think the subprime crisis represents the beginning of a transformative process, according to Helleiner's own typology: if there is no crisis of legitimacy, there can be no interregnum. Whether the EU crisis eventually does remains to be seen, and in my opinion it represents a much greater chance**. What the Atlantic economies have done in this crisis is combine the monetary lessons from Friedman with the fiscal lessons from Keynes in pretty much textbook fashion. I'd hardly call that a paradigm shift.

*The Asian crisis eventually led to the collapse of LTCM... which caused the U.S. government to intervene in financial markets. I.e., the US reacted the same then as it did now: it protected its firms when their collapse would have broad systemic consequences.

**I don't necessarily consider the subprime crisis and the EU sovereign debt crisis to be two separate events, but I do think they have very different implications for global governance.