What comes after neoliberalism? Reframing markets

As the world bounces back from the Great Recession more quickly and after less suffering than expected, progressives will need to adjust their strategies. The opportunities for a paradigm shift away from neo-liberalism are still there, but it will be a less dramatic rejection of the status quo than initially thought. As we come together to consider our options, it is my view that we could benefit from taking a leaf out of the neo-liberals’ book. There is a lesson to be learned from how they challenged and ultimately displaced social democracy.

S.M.Amadae argues, in her fabulous book, Rationalising Capitalist Democracy[i], that a crucial element of the cold war battle of ideas was a struggle over the nature of democracy. She argues that, in the 1940s, civic republican conceptions of democracy – as the public deliberation on the common good – had collectivist and therefore socialist undertones. At the time, socialist ideas were in the intellectual ascendancy and ideals of democracy had growing popular appeal. As a result a reconception of democracy was a key battle ground for those seeking to defend capitalist individualism. Amadae argues that the Schumpeterian perspective was taken as a starting point, and public choice theory accounts of democracy were built upon it and actively developed to this end. Instead of arguing against democracy, neo-liberals sought to reconceive of it in away that rendered it consistent with market individualism. Democratic politics was increasingly understood as the struggle for power and a share of public resources between narrowly self interested actors. The strength of democracy was that this struggle for power could be contained and channelled to the public good by a process of political competition. Amadae noted that it was not until the 1970s that a suggestion of a natural relationship between free markets and democracy became a staple of the pro capitalist argument.

These public choice/rational choice accounts of democracy became powerful through the 1970s. By the 1980s their account of democracy as mediating between rent seekers was widely accepted in government circles. The ideas legitimated the winding back of the welfare state. They ultimately undermined social democracy and cleared the way for free market reforms.

I think there are two very important lessons we can learn from this example. Firstly, they did not try to win a direct confrontation with a hegemonic concept – they resisted the desire to swim against the rip and instead swam across it. Secondly, they looked at an existing idea that had become widely accepted and they looked for different ways to frame and explain its strengths. They developed ways of explaining its achievements which resonated with their social philosophy, and then down the track began the process of stigmatizing the aspects of the institution that they disliked.

It is my view that progressives in our confrontation with free markets need to do
much the same thing. The global financial crisis has not led to the type of crisis that will see the old ideas thrown out. A belief in free markets is here to stay and will only be moved on incrementally.

In my view, we need to take a fresh look at markets. The framing of political debate as between ‘government’ and ‘the market’ has allowed the classical liberal account of
markets to go unchallenged. The opportunity now, for progressives, is to look at the market afresh, to examine different ways of understanding how markets work. Fresh understandings of markets’ strengths and fresh understandings of the things markets have achieved is paramount. If we can come up with new accounts of the features of markets that work well, we will then be able to move onto the step of stigmatising, and, more importantly, excising the exploitative features of markets.

My starting point for a rethink of markets is Adam Smith[ii].Smith argued that the nub of economic growth was the division of labor. He tracked economic development as the move from being subsistence farmers who produced almost everything they consumed themselves to a society in which people became more specialized. The first step away from subsistence was when some people became dedicated blacksmiths, carpenters or bakers. The specialization enabled people to become more skilled at what they did and to make tools that assisted with the task, resulting in people becoming much more productive. As industrialization took hold, manufacturing led to greater and greater levels of specialization, creating higher and higher levels of productivity.

The flip side of all this specialization was that we developed longer and longer production chains where more people were involved in creating a single product. In the modern world these production chains flow from primary producers, who sell to wholesale manufacturers, who make inputs for other manufacturers, who make inputs for other manufacturers, before it finally goes to a retailer and on to the consumer.

This notion of efficient economies being marked by specialization and long production chains strikes me as having considerable potential for reframing.

Firstly, economic growth, the creation of genuinely new wealth, is a product of gains from co-operation. Secondly, a key condition for economic growth was that you needed social conditions that made these long production chains possible. You needed to have a society in which people were ethically developed enough that they could have trusting and cooperative relationships with strangers. These two points together, it seems to me, are the basis of a progressive case for how markets can contribute to our communities. It is a notion that productive markets thrive on co-operative relations, trust and ethical behaviour.

This specialisation and long production chains approach also seems to me to have some other desirable features as a paradigm shifting framework.

Its third quality is that markets as we currently think of them can be seen as existing between links in the chain. As a result, it is an approach that could incorporate existing theories of markets but build on them and expand them. It does not require existing economists to recant, rather it asks them to build new extensions on their existing thinking. Fourthly, and most importantly, this larger more encompassing framework enables us to start doing some more sophisticated analysis of both the strengths and weaknesses of markets.  We can distinguish between good profit making behaviour that expands the size of the pie, and bad profit making behaviour that simply shifts wealth from one part of the chain to the other – what I might call profit shifting.

We can see examples of this sort of profit shifting when farmers have to negotiate with the major supermarket chains, Coles and Woolworths. Coles and Woolworths are able to increase their profits not by creating new wealth but simply by redistributing it from farmers to themselves.

We can see similar sorts of profit shifting between workers and employers. We can
distinguish between good profits that genuinely create new wealth and bad profits where employers increase their profits by shifting costs onto employees. Whether it is by pushing down wages, shifting income risk onto employees by making them casuals, or by reducing work hours or conditions.

These sorts of approaches that seek to re-imagine the market, to politically neutralize its strengths, and to focus on excising its exploitative qualities, strike me as having the greatest potential for a post-neo-liberal future.

[i] S. M. Amadae (2003)  Rationalizing capitalist democracy: The cold war origins of rational choice liberalism. Chicago: University of Chicago Press.

[ii] A. Smith (1976)  An inquiry into the nature and causes of the wealth of nations. Oxford : Clarendon Press.