GEOFF DAVIES. Brexit, Trump and a Rigged System. Part 2 of 2.

Feb 3, 2017

Neoliberalism let loose the anarchic forces of free markets just at the time when we most needed them to be restrained and redirected so as not to wreck our planetary home.

False Premises and Destructive Results

Part 1 argued that the neoliberal program has failed even on its own terms. Part 2 argues this failure flows from two false premises at the heart of neoliberalism: the libertarian claim that people should be rugged individualists, and the neoclassical claim that free markets (usually) will automatically optimise an economy. Neoliberalism has corrupted government, fractured society and visited destruction upon the Earth.

Neoliberals claim we are, or ought to be, like the grotesque asocial caricature called “rational economic man”, but which I have called a calculating reptile. All mammals are social, and you have to go back to reptiles to find the requisite lack of social interaction.

People in fact are highly social, as is abundantly clear outside the hermetically sealed intellectual world of mainstream economics. We are attuned to living in small groups, with social responses to support the continuance of our group. For example we spontaneously punish cheaters, even at a cost to ourselves. On the African Savannah a disintegrating social group would have meant a very short life expectancy. Highly sophisticated language is a strong social glue that can only have a function within social groups.

Communism and neoliberalism are equally extreme and equally misguided. One stresses the group over the individual whereas the other stresses the individual over the group. However the richness of life flows from the tension between our individual needs and the needs of our social group. It is unhealthy to try to live always at one extremity, as Taoist philosophers figured out a long time ago and as recent history demonstrates all-too tragically.

The neoclassical economic theory has no useful relation to real economies. It excludes social interaction and economies of scale, and claims we know the probabilities of all future contingencies. If you relax any one of these or several other core assumptions you do not predict a general equilibrium. Economies of scale lead to monopoly. Social interactions generate stampedes, fashions and viral fads. The unknowable future regularly voids the promises implicit in financial debts. As a result the system is full of instabilities. There is no general equilibrium. Rather, the system is always far from equilibrium. This kind of system is known from systems theory: it is a self-organising complex system, erratic, not very predictable, and radically different from the gentle equilibrium of neoclassical theory.

If there is no general equilibrium, no claims for optimality can be made. A market might be efficient, or not. A market might deliver desirable results, or not.

The conclusion is that there is no basis in relevant theory for expecting real-world free markets to be optimal. The evidence cited in Part 1 shows that neither are they very good in practice. The basis for market fundamentalism evaporates.

Paul Krugman is fond of saying that economists use models because they are a useful discipline on thinking, implying that neoclassical models are still some sort of useful approximation to reality. However neoclassical models resemble real economies about as much as a rocking horse resembles a troop of wild horses.

Milton Friedman is often quoted along the lines that all models are wrong and assumptions don’t matter if a model’s results resemble reality. Apparently Friedman was trying to say that all models are only approximations to the observable world, but he got the idea hopelessly mixed up. The test of a model is whether it provides useful guidance to the behaviour of the observable world. Assumptions matter great deal, they condition the whole character of the model and can exclude whole classes of behaviour; for example the neoclassical assumptions exclude booms and busts. Neoclassical models are not useful, they are wildly misleading, as I have discussed at greater length here and here.

Yet markets are clearly powerful. They allow a great deal of information to be processed collectively, though not necessarily very rationally. They can provide a stimulus to innovation.

A resolution of this apparent conundrum is to recognise that markets follow financial incentives, and financial incentives can be managed. Activities can be taxed or subsidised or regulated, as they commonly are. So markets can be managed. They are managed at present, but incoherently or perversely. If they were managed to improve our quality of life we might be amazed at how rapidly our lives improve.

This account does not exhaust the deep and disastrous problems with current economic management, including destabilisation by banking and finance and wholly deficient national “accounting”. However it serves to underline the need for a fundamental reappraisal of how we run our societies.

The inequality that is a major feature of the current global system, and the source of much alienation, is not a mysterious and inevitable feature of “capitalism”. One can readily identify at least seven mechanisms by which wealth is pumped disproportionately to the wealthy. Dean Baker identified a different list, only partly overlapping. These mechanisms were created or exacerbated by policy choices, and different choices can be made.

In other words the present system is rigged in favour of the wealthy, just as many people suspect. The fair go seems to have been abolished. First Dog on the Moon wants it back, and so do I.

Resentment of inequality is commonly dismissed as envy, or as “class warfare”, but the most pernicious of its effects is that the very rich buy our representatives and corrupt our governments. Our democracy has become systemically corrupt, and many people perceive it that way.

In case anyone is in doubt, recent surveys document a sharp drop in public trust in Australian institutions and leadership. More than 70 per cent of Australians believe the country needs a strong leader “to take the country back from the rich and powerful”.

Neoliberalism let loose the anarchic forces of free markets just at the time when we most needed them to be restrained and redirected so as not to wreck our planetary home. Habitats, soils, water, oceans are stressed and toxic pollutants spread far and wide. The Earth’s living systems are showing increasing signs of stress and imminent collapse. Global warming comes on top of all that. It is hard to see how the Great Barrier Reef can survive the inevitability of at least several more decades of warming, and indeed it seems increasingly unlikely we will avoid tipping into catastrophic, runaway warming (I write here as an Earth scientist).

There are widespread and well-developed movements to create more sustainable and fulfilling ways of living, also discussed for example by Gar Alperovitz, Naomi Klein and myself, and they can be integrated within new supportive systems. However these developments still run mostly below the radar of mainstream political discourse, though they are the source of a lot of the support for Bernie Sanders and Jeremy Corbyn.

The problems behind current political instability have been developing for a long time and run very much deeper than a need for more sensitive management of market liberalisation. Social researchers like Ray and Anderson and Richard Eckersley (here and here) have documented many signs that people fear the future and long for something better. Neoliberalism is simply incompatible with what we need to do to give our descendants some chance of decent and fulfilling lives into the indefinite future.

Dr. Geoff Davies is an author, commentator and scientist. He is a retired geophysicist at the Australian National University and the author of Sack the Economists (Nov 2013). He blogs at BetterNature . This article is adapted from an essay posted there.

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