Will Davies of Goldsmith's, University of London and author of The Limits of Neoliberalism talks with EconTalk host Russ Roberts about the ideas in his book. Davies argues that the free-market vision of economists like Milton Friedman and Friedrich Hayek has de-romanticized politics and ensconced competition at the heart of our economy and culture. Davies argues for the value of a completely different perspective and pushes for a reduction in the influence and status of economists as policymakers and influencers. Along the way he gives his perspective on the role of economists in the financial crisis and in antitrust policy.
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Readings and Links related to this podcast episode
Related Readings
HIDE READINGS
This week's guest:
Will Davies's Home page
Potlatch. Will Davies's blog.
This week's focus:
The Limits of Neoliberalism: Authority, Sovereignty and the Logic of Competition, by Will Davies at Amazon.
Additional ideas and people mentioned in this podcast episode:
"Britain's Got Behaviour," by Will Davies, November 2015.
The Happiness Industry: How the Government and Big Business Sold Us Well-Being, by William Davies at Amazon .
Efficiency and Antitrust:
Efficiency, by Paul Heyne. Concise Encyclopedia of Economics.
Antitrust, by Fred McChesney. Concise Encyclopedia of Economics.
Vilfredo Pareto. Biography. Concise Encyclopedia of Economics.
A few more readings and background resources:
Behavioral Economics, by Richard H. Thaler and Sendhil Mullainathan. Concise Encyclopedia of Economics.
Public Choice, by William F. Shughart II. Concise Encyclopedia of Economics.
Privatization, by Robert W. Poole Jr. Concise Encyclopedia of Economics.
Creative Destruction, by W. Michael Cox and Richard Alm. Concise Encyclopedia of Economics.
Side-topic, Max Weber:
Max Weber. Biography. Concise Encyclopedia of Economics.
The Economic Point of View by Israel Kirzner. Various discussions of Max Weber's influence on economics and sociology.
Side-topic, the open society and Popper:
Karl Popper. Wikipedia.
Open Society. Wikipedia.
Adam Smith. Biography. Concise Encyclopedia of Economics.
Friedrich Hayek. Biography. Concise Encyclopedia of Economics.
John Maynard Keynes. Biography. Concise Encyclopedia of Economics.
George J. Stigler. Biography. Concise Encyclopedia of Economics.
Milton Friedman. Biography. Concise Encyclopedia of Economics.
Joseph Schumpeter. Biography. Concise Encyclopedia of Economics.
Ludwig von Mises. Biography. Concise Encyclopedia of Economics.
Mises Institute.
Friedrich Nietzsche. Wikipedia.
Gary Becker. Biography. Concise Encyclopedia of Economics.
More ideas: Scott Sumner on Neoliberalism:
Sumner on Growth and Economic Policy. EconTalk. June 2010.
"The Unacknowledged Success of Neoliberalism", by Scott Sumner. Library of Economics and Liberty, July 5, 2010.
Lorenzo on the opponents of neoliberalism, by Scott Sumner. EconLog, September 10, 2014.
A few more EconTalk podcast episodes:Luigi Zingales on Incentives and the Potential Capture of Economists, by Special Interests. EconTalk. October 2014.
Richard Thaler on Libertarian Paternalism. EconTalk. November 2006.
Edward Glaeser on the Economics of Paternalism. EconTalk. September 2006.
Boettke on Elinor Ostrom, Vincent Ostrom, and the Bloomington School. EconTalk. November 2009. Some discussion of pseudo-markets.
Highlights
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0:33
Intro. [Recording date: February 18, 2016.] Russ: Let's start off by defining neoliberalism. What does that mean? Guest: Neoliberalism is a term that attracts quite a bit of controversy because some people think it's a term of abuse used by people on the Left to attack those that they disagree with--they sort of use it to dismiss capitalism or free markets, whatever it might be. But I try and use it in quite a specific way. And my understanding of neoliberalism and the definition that I provide in the book is that it's an attempt to remake political institutions and political institutions around particular ideals and norms and ethics that are associated with the market. So, for example, the idea of democracy, which is clearly a key political ideal for many societies, is re-imagined by neoliberals as a form of marketplace in which people can exercise preferences, just like consumers. And the voting becomes viewed as no different really from going to the supermarket and selecting a product or a brand. And one of the things that I argue in the book is that the neoliberal era--before the neoliberal era, which really began in the late 1970s--before then, in the thought of neoliberal intellectuals, in Germany, Austria, United States--that there is a deliberate project of trying to strip political institutions and states of their political logic and to try an instate an economic logic. To apply an economic calculus to political institutions. To treat bureaucrats as economic agents or treat politicians as economic agents. And it's actually trying to strip the political realm of human life, of its distinctive qualities. Russ: Yeah. It's an issue that comes up a lot on the program. And I'm in that group. I'm neoliberal certainly in that sense--that I often on this program talk about my disenchantment with politics, which is a phrase you use in a similar way. So, what's wrong with that? The defense of that view is that, 'Well, we're just scientists. We are just looking at politics in a dispassionate way. And it's full of people making decisions subject to their own self-interest just like anywhere else.' It's what's called--as you don't in your book--the Public Choice school of political economy, the analysis of politics using the tools of economics. What's wrong with that? Or what's the alternative that might be better or more productive? Guest: So, you pick up on a phrase that I do use, which is what I call the 'disenchantment of politics by economics.' Which is actually a kind of a nod toward the German sociologist Max Weber, who spoke of modern science, modern rationality, as leading to the 'disenchantment of the world.' It's a very famous phrase that Weber uses. And just as for Weber, I use the term in a slightly mournful sense: that under the attack of neoliberal critique and reforms and thinking, that politics has become viewed in an increasingly cynical way. But it's seen as a space purely of calculation, of self-interest, of a kind of utilitarian logic. And this is partly, I suppose--why would one mourn a different form of politics? Well, one reason is that politics can be a space in which people achieve a kind of fulfillment that is greater than they are capable of just through their business relations or their consumer relations and so on. And in a way this is an argument that goes a whole way back to Aristotle and the ancient times. And if Aristotle--human beings are what he calls "zoon politikon"--they are political animals. They have an innate need and tendency to debate questions of justice, of the common good, and to do so publicly. And that this is the essence of politics. And in a way, neoliberalism, because it fears politics, it views politics as the root of totalitarian movements, really, wants to strip politics of that kind of romanticism. Now, I completely understand the risk of a romanticized vision of politics. And it's a romanticized vision of politics that is present in extreme political movements and so on. But at the same time, it leads to a, I would argue, an emptying of public life and an emptying of social life, if it's re-conceived and modeled purely in economic terms. But there's a more specific and I would say a more tangible reason why there's a problem here. Which is: As any sensible political economist understands, even the most libertarian economic system, the most pro-market economic system, is dependent on institutional preconditions and contexts. So, I'm talking about regulations, property rights, money, rules of what you can and can't do. Or one of the things I talk a lot about in the book is antitrust law. But even if you are the most fervent free-market believer, you still recognize--and okay, there might be one or two exceptions on the absolute extremes of libertarian thought--but for anyone within the neoliberal movements of the Austrian and Chicago school neoliberals would recognize there's [?] a need for the rules and the state in order to make the system work. And one of the things I stress in the book is, one of the differences between the neoliberals, intellectuals of the 20th century, and the classical liberals within whom I would include people like Adam Smith, English, really the founder of economics in the late 18th century, is that the neoliberals are actually more attuned to the need for these rules and state interventions than the original classical liberals. So, actually neoliberals have always been quite concerned with: What is the role of the state? What do we need the state to do? What kind of law do we need in order for a free market society to work? But one of the problems is: If you are going to have laws and rights and [?] some institutions, you need to recognize them for what they are. Which is that they are institutions which need--in order to work, they have to carry authority. And authority is a political concept. 'Norms' is a social concept. The idea that there is a right and a wrong way to behave is something which everybody right back to Adam Smith has realized that you don't get a functioning market if people don't have a sense of right and wrong. You can't just have a--you can't have complete anarchists and nihilists in order for market society to work. It might be that there are certain institutions in the [?] sector that give some space to those sorts of ethical orientations. But ultimately a successful free market society is one that is founded in institutions, rules, norms, and legal systems. And one of the contradictions of neoliberalism, and one of the ways I would argue that it's running to its limits over the last decade, is that it doesn't offer a basis with which to think about things like law and regulation and authority. Because it only offers more and more economic calculations and economic ways of thinking. So ultimately it loses the capacity to think what is a legitimate state or legitimate regulation. All it can do is apply economics to more and more corners of social and public life.
8:46
Russ: So, I should mention, to listeners, that Will is a Sociologist. Which is a lot of fun. One of the things I enjoyed greatly about the book is that I felt a little bit like an animal at the zoo, as an economist. It's really almost an anthropological study of how economists think and their influence. But I want to challenge the effectiveness of this transformation that you mention, this disenchantment with politics. So, I agree that, certainly for myself--and I would put myself in the camp that you describe: I'm not an anarcho-capitalist. I'm certainly aware of the importance of institutions and the role of the state in allowing economic choices to be made. And not just economic choices, but what might be called 'civil society'--the voluntary ways that we come together to help other people or to achieve certain goals either in commercial or in our social spheres. So, I'm sympathetic to that worldview. But I wonder how effective we've been in disenchanting politics. So, I agree that in the academic world there is a large group of economists, and maybe others, who wonder about the efficacy of the state as a source of meaning--the political sphere as a source of meaning. But I'd say in the body politic--in the masses, in the average citizen, it's pretty alive and well. We're seeing that--we're in the Winter of 2016, in the run-up to the next Presidential election--and we see a lot of, I see a lot of romance on both the Republican and Democratic side, without going into specifics. But I see a lot of desire that people have to express themselves politically who are not cynical at all about the enterprise and who are very romantic about it. Do you agree with that? Guest: I suppose that's right. And maybe I'm partly--not being a U.S. resident or citizen, that, what I would describe as--that's a kind of famous feature of U.S. democracy and civil society right back to the work of Alexis de Tocqueville in the early 19th century, where he visited America from France and discovered this amazing passion that people had for the public sphere. Things like--talk radio, whatever it might be. And that's something which we don't have in the same way in my own country, in Britain. I suppose, in a way, my book is less about democracy and those spaces of citizenship, which, I think you are right, could be a lot of that going on. Although, I think there's also some convincing analysis, although it may be more European. But there's a book called Ruling the Void by a British political scientist called Peter Mair that came out a couple of years ago about the demise of political participation, the demise of political parties. In the 1950s Britain's Conservative Party had a membership of over 2 million people, and now I think it's well under 100,000. So that type of political participation has disappeared. As it has on the Left as well, with the demise of trade unions. And instead, there is a shift towards a more, of a tele-visual form of politics, where effectively, you know, a lot of the techniques that were important to politics came from the business world. I mean, Bill Clinton, and Tony Blair in Britain, were well known for having been masters of using focus groups and branding exercises and so on. So effectively the political party, or the political project becomes the sort of product that's being sold. But it's impossible to disagree with what you are saying about the passion that's currently being exercised around something like the American Presidential election. But most of my analysis is more--and I wouldn't want to romanticize the state--I think that's clearly a dangerous thing to do. But I think that there is a sense that the state itself becomes viewed by mainly[?] an economic lens. And in some ways the fact that, you know, the difficulty of developing a critique of lobbying or limit to lobbying power, or in the United States campaign finance and so on, is in some ways a manifestation of some of the problems that I am trying to describe, where the way in which, say, a corporation behaves economically is seen as just a way in which, a kind of different variant of the way it can behave politically. If you've got billions of dollars to spend then your right to spend them in the political arena is no different than your right to spend them in the economic arena--[?] in their view to the same thing. This is the logic--effectively the colonization of the political sphere by an economic logic that I'm describing--I think is also part of the problem of something like the power of lobbying. Which is more of a problem in the United States I think than it is in Europe.
13:56
Russ: Yeah. Let's turn to the role of competition, which is a big chunk of the book. Which fascinates me, because I have a little bit of a love-hate relationship with it. A little more hate than I used to have. Mostly love, still. But a little bit of unease. What role does competition play in the neoliberal vision? Guest: Well, this is really where I got interested in all of this in the first place. Because I worked in the policy world in Britain--I worked in think tanks in the early 2000s. I became very interested in the rhetoric of national competitiveness. This is how I became interested in all of this--people would talk about, 'You need to make Britain more competitive' or 'London more competitive' and so on. And I became interested in at least the rhetoric that surrounds competitiveness. So I started thinking: Why would we deem competitiveness to be something we want more and more and more of? Now, there are various answers. You might say, 'Well, it's natural. It's hardwired into us because of what Darwin argues.' Or you might say that it's exciting. Or whatever. Like you might say, 'We like competitiveness in sport.' But I began to look at some of the ways in which neoliberal thinkers back to the 1930s have described and valued competition as just, not just something which is present in markets but actually as a principle that is crucial to human progress and human freedom--which is how they viewed it. And I think in some ways the simplest defense of competition--it's not just a defense of competition: it's actually a prioritization of competition as the ultimate basis for a liberal society to be organized around--comes from the work of the Austrian economist and philosopher Friedrich Hayek. And he described competition as a discovery process. He argued that via institutions which are competitive--and mainly markets, but I don't think it's only markets: I think you could say that something like academic publishing would be an example of this as well, or something. Russ: Cults[?]. Guest: Or you could say that Internet dating, or whatever it might be. But that it's, you know, culture, as you say. And through eliminating that which is of less value, or less truth or less beauty, you've hit on that which is of more value or truth or beauty, and also what someone like Karl Popper, the philosopher of science, argued really with his vision of the open society was that you need to have the chance of something being eliminated in order for it to be valued. And you see that today, in Britain, you know, in my own sector, the university sector, the government is trying to introduce more markets into higher education. But do they really introduce a price mechanism? They are not making it a market in the sense of kind of a commodities market. What they are doing is making it competitive. So they are trying to [?] a situation where bad universities stop, you know, basically go bust. Or have to get gobbled up by another one. Something like that. So they are looking to processes of competition in order to govern universities differently, in order to discipline, in order to get people to change their behavior in certain ways so that they behave in a more enterprising way. And that would be an example of the way in which competition is mobilized within a neoliberal political system. Because, firstly, if you take that example of something like the way universities are governed in Britain, it's something being pushed very much by the state. It's not sort of natural competition that emerges in the way that you might see in a native[?] documentary or something. And it's also not a natural competition of the sort that Adam Smith was interested in, in the late 18th century, where he thought that capitalism involves--people begin to naturally compete against each other and that has certain kinds of efficiencies[?]. Competition is something which is actively inculcated in a neoliberal political system as a deliberate way of trying to achieve some kind of progress, but also to impose some kind of discipline. One of the curious things, to me, looking at the way in which different neoliberal intellectuals and policy-makers have tried to do this, is that often they become more interested in pushing competition into areas outside of the market than to ensuring that it exists inside the market. Russ: Yeah. Guest: So, if you look at the Chicago school influence on antitrust from the 1970s up until, well, ongoing really, it became--antitrust authorities became far more sympathetic towards corporations than was previously the case. So, by some standards, United States' competition authorities were more, provided more of a defense of competition in the sense of achieving some kind of pluralism in the market than they do nowadays. And yet you would assume that where we now live in a more pro-market era than was the case under the, during the Keynesian era of the 1950s and 1960s; yet competition enforcement has become more pro-monopoly over that period. Now that instituted interesting questions to me about what exactly is meant by competition and competitiveness.
19:06
Russ: I want to come back to the antitrust thing; but I want to react to, and get you to expand on this just general set of remarks about competition. We've talked on this program before about what I call a pseudo-market--the introduction of certain features of markets without the rest of the features that emerge organically in a real market. So, your education example is a perfect example. And, Milton Friedman proposed, in Capitalism and Freedom in the early 1960s, and I think there are others who proposed it around that time as well, that by introducing vouchers into public schools we'd have competition. Well, we would--we'd have more competition. Whether that would be good or bad--my first thought is, probably good; certainly probably better than what we have. But it wouldn't be a market system of education. It would have some of the features of a market system. But I think there's a psychological, philosophical, romanticization of markets that you sensitize the reader to--that those features are not really, necessarily going to lead to the outcomes that occur in more organically emergent markets. And yet we sort of[?] bring all of the romance that we have about those markets along with them. Even though they may not be present. The other factor is the role that competition plays in everyday life and in our culture, that perhaps comes from this neoliberal, economist's vision of the virtues of competition. And then there's the pushback against it. So, I see, in today's world, in many ways there's a fight between those of us who are eager to see competition work its magic, say in the real marketplace, versus those who think, 'Ehhh, I don't like a lot of the aspects of that.' So we want to have everybody get a trophy in sports work, in the sports world. We want to have a social role for business; the social responsibility movement. We don't want it to be a dog-eat-dog world where businesses can creatively destroy others--the Schumpeterian ideal. That's too harsh on the members of those corporations and businesses. So I see there's a strife between those two cultural trends. So, I wonder if you can comment on that, and see if you agree with me on the educational part. Guest: Well, absolutely I agree that there's this distinction between what's a market and something that's become a pseudo-market. I think it's an important one, that distinction you are drawing. And to me, the key issue is whether there is a price mechanism. Whether there is going to be some price for the good that is going to rise and fall, vaguely, in response to blind change in response to supply and demand. And this is clearly something that--this distinction is quite important. And people go around--in Britain, which has had historically a large state involvement--a larger public sector than most of the United States--and there's been various trends towards forms of privatization over the last 30 years--and many of them don't actually involve a sell-off. They don't actually involve taking goods that were previously publicly owned and making them privately owned. When they are in the market, often they involve some type of managerial reforms, trying to inject a [?]market ethos or a competitive ethos. So that's an important point. On the cultural point: I think this is interesting. And I think it's become--there's a kind of feedback that goes on between the ways in which our economy becomes reformed and governed, so as to create greater and greater, a greater and greater role for competition. Trying to inculcate that spirit of creative destruction. And there's probably nowhere in the world that has, places greater emphasis on this than Silicon Valley, which there is sort of an ethos, that celebrates huge entrepreneurial success but also widespread entrepreneurial failure. I mean this is, and in a way this is something which, and again, in my own national context, I think there are very few people who could actually cope with that level of sort of disruption, really. Because I think people--the need for widespread failure in a system like that--I think places huge strains on a society. And that's not to say that the success of Google, Facebook, whatever are not sensational and kind of quiet, awe-inspiring in a way. But the need to also have a large amount of the population that is willing to repeatedly put up with failure, partly because they still are dreaming of success in the future, is something that not many cultures can sustain. And I think that partly is how the--I mean, it's no coincidence that a lot of Austrian economics is so celebrated in the United States. I think the Ludwig von Mises Institute, the famous Austrian economist, I think is in Alabama or somewhere. Russ: Somewhere. Guest: You know, there's a--so there's a bit of a sort of quite a neat cultural fit between the Austrian emphasis entrepreneur, which I think stems from some quite conservative visions of heroic and quite macho individualism that some people have even linked back to the work of Friedrich Nietzsche in the late 19th century. Russ: Say it isn't so! Guest: Heh, heh, heh. Russ: I think you are right. Guest: The ability to re-make a society around that is quite difficult. And I'm sure that our current government in Britain would kind of like the idea that we'd have more people with that kind of mindset. And there are now areas of our welfare state reform--which, you know, the fact that we even have as much, a welfare state as we do would probably be seen as shocking to many people, particularly of a conservative persuasion in the United States. But as it's been reformed at the moment, there is the introduction of various sort of politive[?] thinking, behavioral modification techniques. Which in some ways are sort of the worst of all worlds. Because it's kind of big state but it's also very pro-, it's also kind of enforced competitiveness, really. Where they, people have to recite positive thinking, slogans, about 'every time I get down, fall down, I will get up again; and I'm the only person who can do it.' And in a way it's a sort of an Austrian neoliberal ethos, being converted into an attempt to try and get people out of the house in the morning and looking for a job rather than living off benefits. So, I think it's difficult to just kind of manufacture that kind of culture. But on the other hand, I think it interesting how mass media has become more and more interested in competition. I think one of the most interesting cultural phenomena of the last 15, 20 years is the rise of reality television and talent shows, which are just huge, certainly in Britain. But this, you know--in a way, what the talent shows do--we have "Britain's Got Talent" or, you know, these singing shows and so on, and dancing and cooking and everything--is that they take that, what I said earlier about Hayek calling competition a discovery process--is that they turn that into a spectacle in its own right. So, it's taking the question of singing--which ultimately singing has intrinsic value; it's a nice thing to do; it's a nice thing to listen to. It should be possible to sing in an enjoyable way or to listen to a singer without someone else being deemed a worse singer. But in a way, that's--in a way this obsession with elimination of the unworthy has become a cultural maxim that we almost are addicted to now, I would say. And--
26:41
Russ: Well, there's a flip side of it. Which is the--I think part of the appeal of those shows--and I watch them now and then on Youtube--I watch highlights. I've probably seen an hour of Britain's Got Talent. So, not a lot. But the pieces; but I've watched some. And I'm not a TV watcher generally. But what I'm watching, the reason I find it emotionally uplifting and powerful is the underdog. And I think they know that really well, and they sell that relentlessly. So, you bring a person who is working in a fish and chips shop or driving a lorry--as you say there--and this person is undiscovered and usually has some traumatic family life on top of it. And a surviving parent is there in the audience, in the wings, watching, sobbing--as this person of unknown ability, suddenly is the winner. And I think it taps into a deep human need there. And it's interesting, I never thought about it, how that interacts with the competitive aspect of it. Obviously, an underdog is by definition related to the competitiveness of it. But there's something about the victory there that is particularly satisfying, because it's somebody we didn't expect. Guest: But you're focusing on--it's interesting. You are focusing on a minority of the contestants there. Russ: Absolutely. Guest: And you can say, 'Well, of course I am.' Quality. And success. But I think if you were to view that same--you are--who wins. Russ: I'm cherry picking. Guest: Yeah. And that's the logic of the show. But this means, in order for that person to have that experience, you've got to have another--I don't, 99, who have to have a devastating experience. And some of that devastation is, it also [?] the spectacle. I mean, they--a lot of emphasis on the tears, and the hugs-- Russ: Yep-- Guest: and the person walking off, and so on. And of course, you could say, from a kind of cultural studies perspective, if you were doing a cultural analysis research, you'd say that we can, in a way we relate to both sides: We relate to the winner in our dreams but a lot of the time we do put up with situations we are the person or at least we worry about being eliminated--we worry about losing our jobs or we worry about not being the winner, and so on. And in a way it's sort of--it strikes me that if you were designing a society from scratch, if you were to think purely in terms of how can this be done to best identify the winner, or the best, or the most glorious, that would be a very strange principle on which to organize any society, because in effect what you are doing is consigning the majority of people to the states of losers. And in a way this seems to run contra to the ethos of democracy. Russ: But it also runs counter to the neoliberal version of competition in economics. Which is--I think it's important; I think it's forgotten a lot. It's not--economics almost by definition, at least the Smithian vision of it, which I think many of us still hold in the modern world, is that it's not a zero sum game. Guest: No. Russ: And reality TV is a zero sum game. The Super Bowl is a zero sum game. The World Cup is a zero sum game. There is only one winner. But the ideal of--I think the romance that I have and that many have, that has some reality to it about economics and economic competition, is that the losers get reconstituted as winners. That people who rise and fall in the economic competition, they don't die. The losers don't die. They are not eliminated from the show. They just have to come back and--their firm dies, and then the people who work there have to go find other jobs. And, or, their children thrive as a result of the competition. Guest: Yeah. Russ: So it's a very different, I think, view of that. So I agree with you--that would be a bizarre ethos to bring to a society. I don't think that's really what we have in the economic sphere. Guest: But I suppose it--now we are talking about questions of degree. Because in order for that system that you've described where people get to come back, you need to have certain forms of social safety nets, certain forms of public education. You need to have the institutions which produce what is often referred to as a meritocracy. But you also need to have--I mean, I suppose, maybe culturally, the persistence of a class system in Britain or a class system that is recognized as a class system, unlike the American class system which is not recognized as a class system-- Russ: That's right; we don't have one-- Guest: No, you don't have one. That's right. But in Britain, we have one and we admit we have one. And we joke about the fact that we have one. So it's a sort of a class system that speaks its name. But I suppose that makes it all the more obvious--that in a way, some form of meritocracy requires some type of active political intervention in order to prevent people being held back by their origins. And that in a way is a cultural problem of Britain. And in a way, I suppose--Tony Blair's Labour Government of 1997, well, he stepped down in 2007, was in some ways the most, in some ways the most effective Neoliberal government. Because it was one that recognized the need for an active state to keep this competitive game constantly ticking over. So there were a lot of efforts to try and get people to be active in the labor market, and not drop out; to help people who were disadvantaged to get into the game. So that people were constantly being helped back into the game the whole time. Now, again, there's a history of this in certain--strange as it may sound, there are some leftwing neoliberal intellectual traditions. They tend to be more in France and Germany over the second half of the 20th century--people like Louis Rougier and some of the older liberal thinkers of Germany from the 1930s through to the 1960s. And these were intellectual traditions that placed great emphasis on the need for the state in order to ensure that everybody could be a competitor. Because if you just leave capitalism to itself, which would be close to I suppose the Chicago School of neoliberalism then you can't guarantee that everyone is going to [?]. And I think if you look at--my hunch is, today, this isn't based on evidence, but when you look at the burden of rising mental health problems and the problem of depression across the Anglo-American world, I think in many ways this is near the [?] vision of a society where everyone can keep having another go is losing credibility. It may have had credibility at certain times in its history, but I'm not sure that, unless you've taken the right sorts of SSRIs (Selective serotonin re-uptake inhibitors) and you've read the right kind of self-help books and you are constantly looking up to the American flag and believing that you can still make it--there's [?] growing amounts of work on the parts of ordinary people and particularly people of low income who don't own any assets to really see this system as one that they have a chance of succeeding in. Russ: Well, I don't know. We're in a particularly unpleasant time. I think for a significant part of the population, I don't think we understand why that's true. Whether it's a response to the--an effect of the financial crisis, the Recession; whether it's a reordering of skills in the global marketplace--I think this will be a little clearer in the next, I hope, 10 years or so. But I do have to say that--well, two things. One, certainly some of the resources that would cushion the blows of creative destruction could come from the private sector--from voluntary action, motivated by altruism and compassion. Which, if they are not there are not going to be working much through the political process, either, I would add. But the other point I would make is that the rise of depression and mental issue is somewhat, unfortunately, perhaps, a different kind of example of the trends you are talking about--the empowerment of pharmaceutical corporations through subsidies to health care have made it dramatically easier for people to have access to things that they are often encouraged to take without spending their own money; the expansion of definitions of certain conditions. I'm not much with Henry David Thoreau, but I do agree that the mass of men lead lives of quiet desperation. I think that was true a long time ago; I don't think it's a new phenomenon. I think it's part of the human condition. I don't think it's a result of competitive stress. At least, that's my take.
36:47
Russ: I want to move to a different aspect of your work, which I found extremely interesting, which was your emphasis on the Chicago School's championing of efficiency as a goal. Talk about--most people I think struggle with that term because it has an everyday use that sounds like 'efficacy.' But in economics it has a more narrow use that is, I think, somewhat triumphant alongside quantitative techniques that you also mention. So, talk about efficiency and the role of the Chicago School in pushing that forward. Guest: Well, the context of this is reforms to antitrust law; and the key period is the 1970s and early 1980s. So, it coincides with the conservative, the rise of Reagan and the conservative counterrevolution of the 1970s and 1980s. And the effect of it is--I would argue, and I'm not the only person to say this--that Washington regulators become much more sympathetic towards large corporations, corporations which might have been broken up during the 1950s, 1960s, such as ATT&T (American Telephone and Telegraph) and others that were even targeted for breakup in the early 1980s, become left alone as a result of certain reforms to the way in which antitrust is conceived. One of the things I explore in the book is how this is a relatively direct result of certain arguments that are made by Chicago School lawyers and economists from the 1950s onwards, particularly the lawyer Robert Bork, the law and economics scholar and judge Richard Posner, and others-- Russ: Aaron Director you mentioned as well being important in that movement. Aaron Director. Guest: Yes, absolutely. The argument that these figures make is that fundamentally the antitrust authority don't know what they are doing--that they are enforcing the law but they don't really know to what end they are enforcing the law. They seem to be targeting companies purely for being successful--this is one of the abiding hunches and arguments that is made within the Chicago School from the work of Director and others in the mid-1950s through a book published by Bork and Posner in the 1970s. And they argue that the antitrust authorities were simply targeting large companies, whereas they argue that companies might be large because they are good. And the antitrust authorities were targeting profitable companies on the assumption that profits were a sign that some kind of anti-competitive behavior was going on. Whereas from a Chicago School perspective, profits might just be a sign that you are being managed in an efficient fashion. And one of the very, very simple, almost sort of irresistibly simple arguments that was put forward by these Chicago School figures was to say that the only basis for legitimate intervention by the regulator in the market is to increase efficiency. And what they mean by this is, efficiency is an outcome. It's something that can be calculated using neoclassical economics. Efficiency--I mean, I'm not enough of an expert on economics or economic philosophy to know exactly how it's defined. Russ: May I try? Guest: Yeah, go on. Russ: So, the way I was taught--and I was taught this, as I've mentioned many times on the program, I was taught this relentlessly as a graduate student at Chicago, particularly by Arnold Harberger--and others--that you want to maximize the net benefits. You want to maximize benefits minus costs. And as a result--and that's what matters. And the argument--it goes back to Vilfredo Pareto, one of the great names of social science. Can't beat that--Vilfredo Pareto. But Pareto had different ways of thinking about social outcomes. And the way his ideas became part of economics was, I would say, the following: If a policy produces monetary gains that exceed the losses, then there is a surplus there that can be redistributed to those who were harmed by it. So that everyone is at least as well off, or better off than they were before. And it's a beautiful idea. The problem is, is that that redistribution or compensation rarely takes place. Which means that any policy has winners and losers. So, my view, as a grownup rather than as a graduate student, has become: Well, I think growth matters; I think adding to the size of the pie, which is what efficiency really is about, matters. But we do also care, both--the losers certainly care that they are hurt, and those of us who are the winners often care about the losers. So, just looking at efficiency seems rather bizarre. It's a utilitarian argument. Guest: Yes, a utilitarian argument. So it's about the outcome. And in the European Commission where they adopted this approach in the early 2000s, much later than in Washington, D.C. they call it the 'effects-based approach.' So they mean it's about assessing whether or not a behavior is legitimate or illegitimate not by looking at the behavior itself but by looking at effectively how it reshapes the overall system. What is the outcome? What are you left at the end of the behavior? So, effectively it's also quite an amoral approach--not immoral--but it is an amoral approach, because it effectively says there is no such thing as bad behavior; there's only bad outcomes. So, this means that lots of things that the antitrust authorities used to try and punish during the 1950s and 1960s--they used to punish firms for doing things purely because they were deemed to be anti-competitive in and of themselves. So, you know, if you were in two different markets--you might be selling lawnmowers in one market; you might be selling teabags in another market--you weren't allowed to actually offer your two products in your two different markets bundled together as a single deal because that was seen to be an abuse of the way in which the market works. And they had no interest in whether it might be best for everyone abroad, as you say, in Pareto's way of looking at things. It was purely punished on the basis that it was a breach of a particular norm, a norm that was believed to be crucial to the way in which markets worked. So, in that sense, the Chicago School critique had a massively simplifying--well, on one level it was simplifying, because it made very clear what antitrust interventions were there to do, which was that they were there to make everybody better off overall. On the other hand it was actually quite complexifying, because it meant that the key questions of antitrust authorities and the courts which were overseeing, which were making rulings in this area, came down to often very complicated forms of economic evidence that had to be assembled in order to try and--counterfactuals: What would be the effect of this merger not going ahead? Or this merger going ahead? And you'd look at two different models of the future. And if there's a price rise for consumers in one model and there's a price fall for consumers in the other model, then the second one is deemed to be preferable. But you've got to understand what the model is and whether the model contains errors, and so on. So, one of the arguments that I make in the book, one of the things that I explore a bit, is that this shift towards a more utilitarian outlook not only means that there is less of a moral approach to the market. There's also a rising authority for techniques of economic model-building and calculation and so on. And if you take something like the financial sector which is not something I looked at, but in a way these problems are even more exacerbated. Because in a sense, the question of how do you--I mean, Roosevelt didn't have to come up with an economic model proving that if you break up investment banking, retail banking, it would make everyone better overall. He was just able to do it. I don't know the whole history of the Glass-Steagall Act, but you see the point I'm making. Russ: Yep. Guest: Whereas nowadays in order to do something like that, the banks would assemble huge bodies of evidence and data and calculations showing that this was going to be, going to have this negative effect on GDP (Gross Domestic Product) and this negative effect on consumers and this negative effect on the economy of New York and London and so on. And you'd be lost in a whole battle about utilitarian effects. And you would have completely lost sight of the question of how to structure the economy in the first place. Russ: Yeah; I was at a conference in the last year where a paper was presented showing that countries that have large financial sectors do better than countries that don't. Which--I find that analysis, that kind of analysis deeply disturbing, for many reasons.
44:57
Russ: But I want to come back to this issue of efficiency in general, and growth. Because I think they are really--talking about it and reading your book forced me to realize there are really two trends in this way of thinking. One, I consider the Smithian trend. Which is, we are easily seduced by money, and wealth, and the thrill of competition. And so it's perfectly okay if we fight against that and decide, 'You know, I'm not going to try to be as rich as possible. I might take some time off and volunteer or learn how to play the guitar, whatever it might be.' At the same time, there's sort of this trend that says, 'Hey, you're a slacker. You are not carrying your weight. You are not producing--you are not contributing to national competitiveness'--a theme, you talk about it a lot. And I feel like, in a way, the political sphere, and plenty of economists as well, have taken that really good idea, 'Well, you know, how rich you are really is important; you don't want to starve to death,' and people sometimes choose to be wealthy and sometimes less so--and they've taken it to say, 'Well, the more the better.' And they've taken this human urge that we all have to acquire, which is I think part of our nature--we sometimes fight against it; religion encourages us to fight against it. We take this, I think reality; and then we elevate it to an ideal. That, 'Well, then, the more growth, the better off we are.' And that doesn't follow at all. And I think economists have really let us down. And I want to read a quote from the book which I think really captures this beautifully. You say,
Ironically, where every other actor is considered by Chicago scholars to be driven by rational self-interest--the bureaucrat, the judge, the parent, the trade unionist, the politician--the neo-classical economist is elevated to a quasi-judicial status from where he can evaluate socio-economic behaviour and data in an entirely disinterested manner.
And that's a lie. You're right! Your statement is correct. It's a lie that economists are just these disinterested social engineers trying to find out what's best. We are also self-interested; and we also have or benefit from certain of our ideas becoming more prominent. I think your book sensitizes the reader to that. Guest: Yes. And I think of this as something--again, the financial crisis threw a lot of light and a lot of skepticism upon the power that economists have. Maybe not power. But the influence they have within the financial system. [more to come, 47:41]