Neo-liberalism and morality

Two items in the SMH this morning on different topics both point to the failings of neo-liberalism.

Paul Sheehan lays the blame for our economic crisis on the privileged and profligate generation known as the baby boomers . Alexander McCall Smith elsewhere blames the bad behaviour witnessed in the London riots on moral pluralism - the idea that there is no such thing as a general right or wrong.

The blame for both can be attributed to the faith of neo-liberalism, an excessive belief in individual choice and freedom from regulation. Even Sheehan noted the failure of regulation in curbing the excesses of derivative trading.

Neo-liberalism deviates from classical liberalism in its rejection of the principle known as the Golden Rule, “Do to others as you would have them do to you.” That rule is necessary to both develop and maintain an organised society.

It was this set of neo-liberal beliefs that led Margaret Thatcher to assert “There is no such thing as society”. That was not true when she said it, but the unguarded embrace of neo-liberalism will certainly make it so. (As is their aim given the equating of society with "collectivism"

On a slightly different note but related to the values that really underpin Christianity, Kristina Kenneally has outlined why she supports gay marriage. She does so mostly by invoking the simple Gospel message of 'love one another as I have loved you'.

Novae Meridianae Demetae Dexter delenda est

What have we learned from the GFC?

Had the pleasure to listen to John Quiggin at yesterday's Australian Economics Society seminar on "What have we learned from the Global Financial Crisis?"

By we he meant the economics profession and policy makers.

The core of the talk was basically a quick - and very good - summary of his book Zombie Economics The thesis is that there is a group of economic ideas that emerged from the failure of Keynesian economics to deal with the crisis of the 1970s (oil shock stagflation) that refuse to die. Instead, despite evidence that should kill them once and for all, they continue to roam the planet like zombies.

He collectively refers to the set of ideas as "market liberalism". There are five core ideas that he dissects;

1. The idea that the period starting with the 1980s was a "great moderation" that would see the end of the business cycle.
2. The efficient market hypothesis, that you can't use historical data to predict asset price moves because the price already includes all the available information. That is financial markets are the best possible guide to the value of assets.
3. Dynamic Stochastic General Equilibrium modeling and the inherent assumption that the economy never deviates far from equilibrium.
4. Trickle down economics and the idea that a focus on efficiency will guarantee that everyone is ultimately better off, even if equity diverges.
5. Privatisation and the belief that all economic activity is better performed in the private sector - even natural monopolies.

After he explained all of these theories, why they should be dead and how they are still emerging, in his talk he went on to cover a few bits about the economic profession that didn't make the book - and that I'm not going to do justice to here. The first was that we need to factor more of the learning of behavioural economics into microeconomic theory - less homo econimus in the theory. The second was a twin recognition of the problem of assuming markets at or near equilibrium and of the need for policy to focus on risk management.

Both the book and the lecture concluded with three statements of what is needed in economics;
1. More on realism, less on rigor
2. More on equity, less on efficiency
3. More on humility, less on hubris

The ultimate question here is whether we are just seeing the need for a few "tweaks" in neo-classical economics or the need for a fundamental revolution.

This raises the question of exactly what is "neo-classical" economics?

I referred to a great paper by Arnsperger and Varoufakis on this in discussing digital economy policy. That listed the three axioms of neo-classicism as;

1. Methodological individualism.
2. Methodological instrumentalism.
3. Methodological equilibriation.

At heart Quiggin is really endorsing not just the need to walk away from market liberalism as a philosophy, but to revise these axioms.

I take a wide view that behavioural economics, institutional economics and complexity economics are all manifestations of a "realist" economics that confronts axioms 1 and 3 with the reality that the "preferences" that determine agent choices are socially constructed by the interaction with other agents - particularly so with network effects - and that as a consequence the "system" is not only never at equilibrium but is more likely than not to have multiple not singular equilibria.

The neo-classicists themselves will point to all the ways that they might piecewise incorporate elements of a widely defined institutionalism, an excellent article by Philip Mirowski showed how this attempt ultimately fails.

That article ended with a nice piece that reads;

To attempt to portray all history as the end result of purposive constrained maximization is to make the same error as was made by early biologists who touted Darwinian evolution proved that man was the peak of the evolutionary process. Biologists now teach that there is never a peak or a maximum in evolution, which is merely a process of incomplete adaptation to circumstances that are shifting, partly as a result of past adaptations. As Victor Goldberg has wrtitten in the context of his study of contracts, "the results stemming from the establishment of new institutions or modifications in existing ones are seldom known precisely and are often widely divergent from the original expectations."

As I noted Quiggin's "we" was both academics and policy makers. The challenge of convincing academics is hard enough, but at least they should understand the theory. The problem with policy makers is that they have started to incant market theory and competition policy without any understanding.

This was a point eloquently put by Evan Jones at last year's Contesting Markets Symposium..

I think I have covered it is some of the concepts I outlined in my first submission to the Convergence Review wherein I argued for a better view of "competition policy".

I think the simplest way to describe it is that Quiggin critiques Trickle Down theory, which argued that a focus on efficiency improves life for all. The way "efficiency" is now used it has become the policy objective itself. Market Liberalism as a theory said you don't need to worry about equity because efficiency improves everyone's lot, modern policy theory doesn't even get that far.

Novae Meridianae Demetae Dexter delenda est

The IPA and Economic Libertarianism

The extreme form of advocation of market capitalism that in the 80s was associated with "economic dries" and in the 90s promoted the title "economic rationalism" is a variant I refer to as "economic libertarianism". David McKnight calls it neo-liberalism, which I think does a discredit to the word "liberal" - which in the US sense is associated with the idea that Government has a valid economic role.

A variant of it can be seen in today's AFR by John Roskam in an article on CSR. I don't have time for the full critique now - suffice to say the article fails to recognise the consequences of the corporation having achieved the status pf "natural person". It also fails to acknowledge that in the real world "the firm" draws on a number of inputs - all of which expect compensation. The shareholders do not deserve to get all the "upside" over and above the return they expected.

The focus on "shareholder value" has resulted in a degree of managing in the short run that makes it easier for management to externalise costs.

But the most telling point is how his two concluding paragraphs are self-contradictory. He first claims that firms need to confront the underlying assumption that without regulation companies will ignore social, environmental and ethical consequences - but then that the second task is to re-establish the principle that the single best contribution a firm can make is to be profitable (i.e. in a choice between profit and the environment, profit must win).

The IPA item can be found here http://www.ipa.org.au/files/news_1081.html