Many people feel dissatisfied with aspects of neoliberalism, but fewer know what it is or where it came from. Economic historian Niall Kishtainy recommends some of his favourite books on the history of economic thought, books that use intellectual history to examine issues confronting us in the real world.
Your book, A Little History of Economics, goes through the entire history of economics from the ancient Greeks to the present. What kind of audience or age group is it aimed at?
The history of the book is that it was inspired by A Little History of the World, by E H Gombrich, which you may know. It’s a very famous book that was written in the 1930s and aimed at a young readership and then translated into English more recently. Yale University Press have now done a number of books which take that format. There was a similar book by Nigel Warburton, A Little History of Philosophy, which tried to do the same thing for philosophy.
So, in theory, it’s supposed to be readable by a teenager who is interested in finding out about economics. In practice, the main readership is probably adults.
Yes, because I think a book aimed at teenagers can also be very useful for adults who want to learn about a subject—because it doesn’t presume any knowledge.
It doesn’t presume any knowledge. Most adults don’t know anything about economics and find it a daunting field to get into, so they find it a really useful book to read. It’s completely free of jargon and free of any assumption that people will know anything about the topic. That was the idea of the book—and obviously to put it in a historical context. There are a lot of introductory economics books, but most of them don’t take an historical approach.
Partly for that reason, when I asked you to do this interview, I asked whether you could recommend books on the history of economic thought. In your email, you said that it’s a hard-to-define discipline, so your choices are idiosyncratic rather than a definitive list. Can you tell me what you had in mind as you were choosing them? What are they about?
There are a lot of links between them thematically. In a way, there’s only one that I would say is definitely a history of thought book, which is the one by Mary Morgan. The others are more unconventional. The Mirowski and Hodgson books are written by people who are steeped in the history of thought and using that historical knowledge to engage with important, real world issues. Hodgson is asking the biggest question you could ask—what kind of economy can we imagine in the future?—and using his incredible knowledge of intellectual history to do that.
“Chemists use test tubes and Bunsen burners; what do economists use?”
I suppose they’re books that aren’t treating the history of economic thought as this isolated, academic discipline, which it is often seen as because, basically, no one studies it at university. That’s not how economics is taught. I was, in a way, looking for books that harness the history of thought and a sensitivity to intellectual history to think about real, important issues that are facing us today.
The Francis Spufford book was the wild card. It’s a slightly left field choice. For me, that’s just an amazing way of using narrative to talk about history.
They’re not really books that I’d say, ‘This is your syllabus if you want to read about the history of economic thought.’ They’re books I have liked.
Let’s go through each of the books in more detail. Let’s start with the Mary Morgan, as it’s the book that most obviously has a beginning-to-end historical narrative. It’s called The World in the Model: How Economists Work and Think. Could you tell us a bit about why she picks out economists starting to use models at all?
If you think of the starting point of modern economics as, say, Adam Smith, what she’s really trying to explain is how we got from him—he was doing economics verbally, not using maths or explicit models but broad laws of society, in an 18th century kind of way—to today’s economics, which is these tightly specified models.
A conventional history of economic thought would be one that went, ‘Okay, what did Adam Smith say? He talked about the invisible hand. What did Malthus talk about? What did Marx talk about?’ This book is more, ‘How do economists work? What’s the deep methodological underpinnings of what they do every day?’ Chemists use test tubes and Bunsen burners; what do economists use?
It’s a natural history of economics in some ways, rather than a history of thought.
What does she mean by a model?
One thing I like about this book is that by looking at what economists really do, it helps you avoid some of the conflations that are sometimes made. One of those confusions is that ‘models are the same as maths.’ People think that economic modelling is just using equations. Models are much broader than that.
She defines a model by using the idea of a small world that you create that somehow, in an interesting and complicated way, is supposed to map onto the actual world. That small world can then be manipulated so you can do little experiments with it.
You might even think about one of those old papier-mâché models of the solar system—little planets on bits of wire. You can move them around and see how the orbits go around. That’s basically what economists have been trying to do. There have even been occasions where they actually made mechanical models…
Yes. Sometimes they’re just verbal, like David Ricardo’s models. Then there is the modern method, which are these tightly specified mathematical models that you might investigate using computers. Her idea is that economists create a small world and then manipulate it and that somehow allows them to understand.
An interesting point is that these models then have a double life. Part of what economists do is just understanding the model. What happens when you manipulate it? What happens when you push particular levers, maybe metaphorical levers? How does that model function within its own terms? Then, the trickier part is, what do those experiments say? What do they imply for the actual world out there?
She talks about the difference between inquiring ‘with’ something and inquiring ‘into’ things.
Yes, a lot of what economists do—and here we might get into some of the criticisms and complaints that people have made about economists, post the financial crisis, and about economic education—is the inquiring into. All economists seem to be doing, sometimes, is creating models and manipulating them forever and becoming completely self-referential. It’s just about the model and ‘What if we add this lever and that lever and create this more and more complicated structure and what does that do?’ That’s the inquiring into.
The inquiring with—‘How does this map onto the world?’—is obviously a really important part of it that, perhaps, economists haven’t been doing quite so well. She’s not really making that point in the book, that’s just my extrapolation. But it’s a really important distinction she’s making.
Does she suggest that something has been lost by economics moving away from the laws-based narrative approach of the 18th and 19th century?
It’s a big, rich book, but I don’t think that is the main thrust. The main point of the book—and this in itself is a really big job—is just to show, using various case studies, these ‘exhibits,’ if you like, how the daily apparatus of economists has changed. That’s really what she’s doing.
There are sometimes slightly lazy, straw-mannish type objections that ‘all economists do is create models’ and that this is somehow bad in itself. At the end, she makes quite a nice analogy. She says that another kind of small world that also maps onto the real world in an interesting way is a poem (or a painting).
A sonnet, for example, is a small world that uses very tightly defined constraints, but when it’s done well can be a vehicle for incredible expansion and inquiry into truth. How that happens is an extraordinary and mysterious thing. So the small worldness in itself can’t be the problem. I thought that was a lovely way of ending the book.
One of the things that I picked up from reading your book was that the first people who called themselves economists were French, which seems appropriate given they’re still well represented at the top of the economics profession. That’s one of the early models she covers, I believe?
She talks about the naturalisation of models in economics and these three moments in history. One of them was the 18th century French school. This was Quesnay who, in a way, was the first to create something akin to a modern economic model. His Tableau Economique was this incredible series of zigzags with numbers. He was really quite visionary in doing that, creating a macroeconomic model of the French economy. She calls that the ‘prehistory’ of economic modeling, the initial tremor before economic modelling really got going.
“A sonnet, for example, is a small world that uses very tightly defined constraints, but when it’s done well can be a vehicle for incredible expansion and inquiry into truth.”
You then have the second episode in the late 19th century, the so-called ‘marginal revolution’ in neoclassical economics, which is still a lot of what is taught in university courses today—supply and demand, utility functions and all that sort of stuff. Then the final big modelling explosion, which really embedded modelling into economics, was the interwar period—the macroeconomic modelling done by people like Keynes and Frisch and Tinbergen.
It says, in the introduction, that the book offers a ‘tourist guide to economics.’ But she wrote it for her undergraduates rather than beginners, so it’s probably not one to start off with?
It’s a very sophisticated book. It’s beautifully written and I think she does well in making it as accessible as possible. But it does assume that you know a certain amount. A more basic way of talking about the history of thought is to go through the thinkers and say, ‘This is what Smith said and this was the neoclassical revolution.’ She’s assuming you know that.
It’s definitely not a beach read, I would say. In contrast to the next book on your list, which is Red Plenty by Francis Spufford, which I think you could read on a beach. It’s a novel, isn’t it?
Yes, it is a novel—more or less.
It’s looking at the last moment when the Soviet model of planned economy was thought to be something that might actually work and even exceed anything that had been done in the West. And it covers the reasons for the collapse of that confidence.
That’s absolutely right. It’s set in the 1950s and 1960s—that moment before things started to tank. What’s so brilliant is the way he knits together the economic history and the history of ideas. He talks about some of the economic trends; the Soviet Union was making great strides. Then there were the heated economic debates that went with that. Which side was going to win? Socialism or capitalism? He’s taken that episode in history, those few years, and created this incredible narrative.
The picture of Nikita Khrushchev is hilarious. He talks about how all the hard work has been done under Stalin and how he is going to produce this Soviet society where there will be 3% growth forever and the more hedonistic interests of humanity will be satisfied. Does Spufford show why that didn’t happen?
He’s a brilliant writer. He creates these characters who, to me, feel authentic. He really knows how to bring these characters alive, through their voices. Through these various economic debates, yes, I think he does show why it didn’t happen. There is the problem that planning runs into as the economy gets more complicated. It’s very tricky for a central authority to manage everything—to deal with innovation and all the complicated aspects of an economy as it develops.
One of the things that really struck me is the character he has called Galina, who goes to some sort of industrial fair in the West. He paints this brilliant picture of her being consumed by desire for all these consumer goods she sees. She hadn’t expected to feel like this. You really can’t plan for what people want to consume…
You can’t. This is a classic debate in comparative economics, which does that better? Is it the price mechanism or the central planners? There’s another episode in there when Khrushchev is driving through New York and he’s amazed by the fact they’re making little hamburgers. That’s a perfect way to feed workers! And these little plasters that you put on when you’ve got a cut! They have glue but not very strong glue so you can rip them off very easily. This capitalism is “a torrent of clever anticipations”—which is just a brilliant way of summing up how the market works. The market somehow is able to do this; how difficult it is for a planner to do it.
The way he deftly weaves in these discussions of big questions of economic philosophy is really quite brilliant, I think. That’s why I put the book in there, to show the potential for narrative and the use of characters to create a panoramic view of classic questions.
The Russians got the first man into space; they developed the nuclear bomb very quickly. It’s easy to underestimate the extent to which there were genuine questions about whether a planned economy could work better than a market-based one. And, actually, looking at East Asia’s economic miracle, some measure of planning does seem to help economies get going.
Absolutely, and we’ll get back to that again with the Hodgson book, because that’s really what it’s all about.
We forget how heated that debate was among western economists as well. There was the so-called ‘calculation debate.’ It’s a technical, arcane-sounding debate, but he weaves it into the narrative somehow. So you can think about a market economy as a set of equations. The price mechanism solves out all those equations and gives you an optimal set of prices to efficiently allocate resources around the economy. But if that’s the case, couldn’t you solve that set of equations as the planner in the Soviet Union? Couldn’t you solve them and then implement them in your economy? And then tweak them to make things a bit fairer?
A huge debate about that was going on through the mid-20th century. Again, it’s not something that students learn much about nowadays, but it was an enormous issue then.
He talks about the Soviet approach to culture and trying to view it as a product. It’s the there’s-nothing-outside-the-economy approach to things, which paradoxically, is also the case with the neoliberal school for exactly the reason you’ve just explained, that everything must be explained by this pricing mechanism, which is a form of revealed preference.
Yes, in some ways they’ve got a lot in common. We’ll see that in the Hodgson book, he critiques both of them in the same way. He puts them as actual bedfellows.
One thing I really like about the book is the way he brings these issues alive across chapters through different characters. For example, there’s a chapter about the planning algorithm, so figuring out how to tweak prices and the plan to get things to work properly. One of the characters, a woman, turns up to this ‘science city’ to get a job and she goes to a party and meets these slightly tipsy, young mathematical economists who say we need to raise the price of meat.
“This capitalism is “a torrent of clever anticipations”—which is just a brilliant way of summing up how the market works.”
Then, in the next chapter, you go to a provincial city and you’re in the office of the mayor and there’s a riot breaking out because the price of meat has been raised. So you get this lovely panorama—what seems like this arcane theoretical discussion at a party—and then you see the results on the ground: people not being able to buy meat. There’s a huge riot and lots of people get killed by the police. It was a real historical event.
Let’s move on to the Philip Mirowski book, Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown. I thought this was an amazing book for a variety of reasons. He’s an academic economist, but it’s a really angry book. It starts off with Mont Pelerin so perhaps you’d better tell us what that is.
The book is about the financial crisis, but it’s also a history of neoliberalism and how these two connect together. One starting point for neoliberalism is Friedrich Hayek founding the Mont Pelerin society (Mont Pelerin was a small Alpine ski resort). It was founded in the 1940s and the idea was to get together thinkers—economists but broader thinkers as well—who wanted to talk about and, in a way, save liberalism from the tide of socialism. This was the time of these calculation debates and which was going to be better, capitalism or socialism? There was also Keynesianism, the idea that the government should be intervening in the economy.
So these guys wanted to get together and really set up an intellectual counterweight to all that. That was the starting point of the Mont Pelerin society and what Mirowski is doing is tracing the intellectual lineage forward from that point.
That in itself doesn’t seem to be anything particularly corrupt, but when he comes to the role of this thought, he really shows how it triumphs. Can you tell us a little bit about how he explains this neoliberal thought becoming triumphant? He then talks about how power went to its head. It really became corrupt as a result of the interaction of the academy and finance.
It’s such a massive, rich book that it’s quite hard to get hold of in some ways. One strand is to do with the sociology of knowledge. Why do particular ways of thinking become dominant? He has the concept of the ‘neoliberal thought collective,’ as he calls it. It wasn’t these Bond-like villains sitting in the Alps conducting a conspiracy. But nor was it the result of a naïve, 19th century view that there’s a laissez-faire jostling of ideas and the best stuff will float to the top. It’s something in the middle.
“His basic argument is that the crisis hasn’t acted as a point of falsification for neoliberalism. ”
There was a concerted attempt by Hayek and others to push these ideas in a setting where the intellectual movement was going in the opposite direction—intellectuals were very much attracted to socialism and leftist thinking. He talks about a Russian doll structure emanating out from the MPS—various think tanks and research institutes fanned out from it in the post-war period. There’s a nice phrase in the book that Milton Friedman always said that government upsets things. What Friedrich Hayek was saying was, ‘Intellectuals upset things.’ Intellectuals at that time were leftists and there needed to be a fight to convert them to a different way of thinking.
That’s a big theme that runs through the book. Towards the end he says something like, ‘If you’re on the left and are worried about some of this stuff, you need to understand the history a bit better. Know your enemy before you dream of a better world.’ There are movements—like the Occupy movement—that didn’t really understand that history very well, and where it all came from.
He describes this incredible march through the institutions. And he’s phenomenally rude about the economics profession and their response to the crisis. He says it’s corrupt—there’s no other word for it, right?
It’s pretty trenchant stuff. His writing is extraordinary. It’s so erudite and he’s a polymath in terms of his learning and, at the same time, it’s so irreverent and rude at times, a bit heated. It’s not always easy reading. He really doesn’t pull his punches. He’s very, very, very critical of the economics profession. It’s been, according to him, guilty of evasion and obtuseness.
But a lot of economists in academia are quite leftist, like, say, Joe Stiglitz.
You’re right there, but he would probably say that neoliberalism is this protean entity that is very good at co-opting objections. I can’t remember if Stiglitz comes into the book, but probably even someone like Stiglitz he’d be quite critical of, I suspect.
He’s very critical of Ben Bernanke and Larry Summers. Bernanke, although he had this very Keynesian reputation, with his response to the crisis didn’t fundamentally challenge anything very deeply of the neoliberal, Chicago school consensus. There could have been a much more radical response and with TARP the government did pay financial sector firms to bail them out and didn’t get its money back. He’s very rude about the bailout.
He’s also making deeper criticisms about how economics is done and how it’s taught. There’s no history in it anymore. There’s no broad study of philosophy. It’s become this rather narrow subject and that has created blinkers, a rather group think-y approach to these issues. Those are then magnified by the Fed-Bank-Academy ‘unholy trinity,’ as he calls it.
He’s a historian of economic thought. He’s coming from quite a heterodox intellectual background that is not particularly sympathetic to the way that economics is done and the deep methodology of economics today.
In terms of the title, Never Let a Serious Crisis Go To Waste, what does he mean by that?
His basic argument is that the crisis hasn’t acted as a point of falsification for neoliberalism. Rather than use it as an observation that would refute your theory, the response has been to rationalise it and patch things up and, I think he would even argue, make neoliberal ways of thought and the standard way of doing economics even more entrenched.
He talks about this epistemic contradiction at the heart of neoliberal economics, which is that if neoliberals are right that economists are irrelevant—because the market will sort it all out and no individual can—then neoliberal economists are fraudulent in pretending to understand anything.
Yes. He’s great at that kind of flourish and pulling out those intellectual ironies. I really enjoy that about Mirowski. One bit of the book I found particularly useful was his going through trying to define what neoliberalism is, because it’s one of those words that people use a lot but don’t really understand. Often there are some lazy conflations—that neoliberalism is the same as free market economics or laissez-faire. He points out that it’s not the same as that. Or, it’s the same as neo-classical economics. Again, it’s not the same thing.
What is it then?
One way of getting to that is to say, ‘Okay, why is it not the same as classical liberalism?’ The idea of classical, 19th century liberalism is laissez-faire. The government is neutral and doesn’t do very much. It just lets markets do their thing, and you get a lovely outcome. This is Adam Smith, David Ricardo.
What he’s saying is that neoliberalism is a constructivist type of project. It’s about having a more market-based society that goes across not just economics, but politics as well. And you actually have to impose that. You have to construct it—so actually neoliberal governments can be quite authoritarian. If you think about the Thatcher years, there was some real battling going on there. Neoliberalism has to have its shock troops. So, there’s a bit of a paradox there. The market is not this natural free-floating entity that will just settle here and emerge naturally. It needs to be created, imposed and built up. The structures need to be put in place for it to happen.
Let’s move on to Economics and Utopia: Why the Learning Economy is Not the End of History, by Geoffrey Hodgson which has drifted into the conversation already a few times. It’s actually quite a good place to come to it because he talks about utopias of left and right and neoliberalism, this marketization of man, as a crucial sort of utopia, doesn’t he?
Yes. One of the starting points for the book is to say that utopia is often associated with socialism and that with the end of communism—and books like Francis Fukuyama’s The End of History—there was the idea the we can’t be utopians anymore because socialism has failed. His basic point is that the conventional economic view of the world—neoliberal or market-based or whatever you want to call it—is a utopia as well, and is actually as unfeasible as the socialist one. I think this is a really powerful and important idea. It’s often forgotten and not realized that these free market visions are as utopian as their alternative.
Again, what I really liked about the book is that’s he someone who is steeped in the history of thought and uses all that history of ideas narrative to critique those two utopias and show why they’re problematic.
And, looking forward to the future, we could have quite a different socio-economic system than the one we have.
Right. He’s not denying the need for utopian thinking at all, in fact quite the opposite. He’s saying that if we refuse to engage in utopian thinking, then we just end up with unexamined utopias. We actually do need to be explicit about it. It’s a very skillful, rich argument, going through critiques of these two utopias. He sets out a possible future that is neither socialist nor capitalist, but some other thing, a different kind of system. He calls it the ‘epsilon scenario.’
He’s trying to get away from thinking about this stuff on a single line with capitalism at one end and socialism at the other and maybe some mixed economy in the middle. Those two things are not the primary colours. There are other possibilities out there.
Could you elaborate a bit on that? That’s the kind of endgame of the book. He talks about how both socialism and market individualism—which, crudely, are the pre-existing utopias that he’s discussed—face problems of information and incentives and enforcement. He’s talking about issues around contracts isn’t he?
The fundamental issue here is to do with knowledge and learning. Standard economics is about me selling you a banana, for example. In that context, knowledge and learning is a very, very paradoxical thing. There’s this nice image he has, which is that knowledge is basically like a candle. You light a candle with a candle and you don’t diminish the flame. You still have the flame on the first candle, and you can light as many candles as you want. Knowledge is like that. A banana is not like that. Once I’ve given you that banana, that’s it. You’ve got the banana and I don’t have it anymore.
Both the mainstream, market-based way of thinking about it and the socialist planning way of thinking about it are both quite conventional in that sense. The planner, in the socialist utopia, assumes away any problem of information and knowledge because he assumes that the planners have it all. Information and knowledge are basically like a load of bananas and the planners have them all and there isn’t a problem. The market-based utopia assumes that individuals know everything, so there isn’t really a problem at that end either.
Both of those are very problematic in thinking about the real economy. It’s becoming increasingly problematic because the economy is becoming much more knowledge-driven and learning-driven than it’s ever been. Marx said that the introduction of machines would lead to de-skilling so that, in a sense, knowledge would become less important. In fact, the opposite seems to have happened. Knowledge and learning has become more important as the economy has become more complex and more mechanised. That really creates problems for both these visions of the economy.
He’s not really coming up with a solution, is he? Does he hint at what the future could look like?
He’s certainly not trying to put forward a blueprint. He’s saying that these two utopias, the market and the socialist, are basically static utopias. They’re saying there’s an end game, and they’re also saying that it’s a pure endgame. To simplify, for the market-based, you’ll have pure markets everywhere, and, for the socialists, you’ll just have pure planning. There are no impurities in the system.
He’s saying that, in practice, there are always impurities in the system. So even if you look at the most free market capitalist societies, there are huge areas of life, even within the economy, that are non-market. So, if you think about what happens within a firm, there are no markets within a firm. That’s like a little planning system. There’s nothing being bought or sold.
He’s also making another claim, which is that for a system to work, you need impurities. It won’t work without them. You need structural diversity and impurity for a system to work. That’s a fascinating idea. So those two utopias are literally unfeasible, and that the one that is going to be feasible is the one the somehow embraces those impurities in particular ways, in ways that will serve us.
“The market is not this natural free-floating entity that will just settle here and emerge naturally. It needs to be created, imposed and built up. ”
In terms of his intellectual lineage, he’s very much rooted in a school of economics that flourished in America in the early 20th century, which is institutional economics, people like Thorstein Veblen. They were very different from neoclassical economists. They were talking about the role of habit and customs and the way that institutions carry the residue of history with them. They are barnacled with what has come before. They are bits of bric-a-brac. They are created out of the bric-a-brac of the past and hence are full of variety and diversity and maturity and so on.
That’s the sort of things he’s saying. He then connects that to learning. Economies are increasingly about group learning and experimentation and so on. You need that diversity and that variety for people to experiment with and learn together. And that will lead to a different kind of economy, possibly.
He talks about institutional cultural bonds. Like trust, which actually allows things like contracts to work because if you had to literally specify everything that was involved in a contract without any cultural understanding, you’d never finish writing it.
That’s right. If you think about something like the ‘work-to-rule,’ when people go on strike, what they’re doing is fulfilling the contract exactly. But if you fulfill the contract exactly, it just doesn’t work. A contract, in itself, depends on all these little impurities around it. You cannot have a purely contractual-based society because it requires all these impurities of trust and things that economists don’t normally want to talk about, in order to function.
As economies get more developed, the need for that sort of impurity and diversity becomes even greater. An attempt to force us into one market-based or planning-based society will just fail. It’s quite a rich, complex argument, but I think that’s what he’s saying.
He defines capitalism as a system where the central thing is an employment contract. You’re selling your labour to an employer. But this shift to knowledge and dynamic and group learning—all this tricky stuff—you can’t codify that very easily in a contract. It’s not like buying and selling bananas anymore.
Hence, the employment contract will start to become a shell. To make the contract work, you need all this other stuff around it, like trust. That will become more and more accentuated until the employment contract is a shell with all this other structure around it. The employment contract becomes less important as you start to move to a system that isn’t really capitalism anymore. Although there will still be private markets. There will still be commodities being bought and sold. That’s what he means by this ‘epsilon scenario.’
Shall we move on to Rationalising Capitalist Democracy by S M Amadae, which actually is another extraordinarily fascinating book? The subtitle is ‘The Cold War Origins of Rational Choice Liberalism’, and one of the things that amazed me was that Kenneth Arrow wasn’t an economist. He was a defence specialist. Rational choice liberalism was rooted in the RAND Corporation and American defence, not economics.
It’s a really fascinating story and it’s not very well known, particularly by economists who use these tools all the time. When you see things like game theory or social choice theory—the very technical high-end economics that you study as a graduate student—nowadays in a textbook, it’s very mathematical stuff. You see these beautiful, serene equations on the page and it all seems very neutral.
But it all comes out of this very tempestuous intellectual environment that Amadae describes, this intellectual battle we were talking about earlier. It was about trying to find a new intellectual underpinning for market capitalism—in the face of this terrible threat from the Soviet Union. This alternative way of trying to do it was using rational choice, and these new disciplines were based around rational choice.
“Marx said that the introduction of machines would lead to de-skilling so that, in a sense, knowledge would become less important. In fact, the opposite seems to have happened.”
There’s often an idea that there is a clear linear progression from the late 19th century—which is people like Marshall, with their demand curves and their utility functions—up to the present. She’s arguing no. A lot of this stuff, the new phase of it, started during the Cold War and it didn’t necessarily come out of economics. It came out of defence think tanks and simultaneously spread through lots of different disciplines—not just economics but political science. This was also the roots of the discipline of public policy, and of some public policy schools. It’s an amazing story, actually.
It’s about rooting the political legitimacy in the sovereignty of the individual, I suppose. This is a bit of a technical thing, but I wonder if you could explain it, because it seems to be quite an important part of it, which is that Arrow came up with his ‘impossibility theorem’. It wasn’t completely new, as an intellectual discovery, but he completely nailed it. You can’t rationalise peoples’ preferences collectively and, therefore, collective action is pointless. Is that right?
So if you think of classical liberalism or even the Enlightenment tradition, there is this idea of some kind of general will, or of the public interest. We can somehow aggregate all of us together and say, ‘Okay, this is what we should do and the government should do that.’ That’s implicit in classical utilitarianism. People like Hayek started to doubt this and say, ‘What is this general will? This is just a kind of tyranny.’
Then, as you say, Arrow came along and mathematically nailed it. What he said was, ‘Okay, you’ve got all these individuals.’ Let’s say you’ve got ten individuals. They’ve each got their own preference. You’re trying to decide between more swimming pools, more hospitals or more football pitches. They’ve each got slightly different preferences. One would prefer a swimming pool. One would prefer more football pitches.
If you’re Rousseau or Kant, you believe there is some way of taking all of those preferences and saying, ‘This is what the collective would actually want.’ What Arrow did was say, ‘Actually, if you impose even what seem like very innocuous restrictions—for example that people are consistent: so, if you prefer apples to peaches and peaches to grapes, you prefer apples to grapes. That’s what they call transitivity and a few others—you find that it’s mathematically impossible. Or another way of putting it is that you’ll end up with one person who decides, whose preference counts above all others. You’ll end up with a dictator. The whole idea of a general will is incoherent, according to Arrow.
There are problems with this. This is getting out of the book, but the little mathematical set-up that Arrow creates doesn’t actually convey what politics is about, because politics is about debate and changing people’s minds and all that sort of stuff. The idea that we’ve all got these fixed preferences that we’re aggregating together makes a nonsense of what the political process and civic life is about, but anyway, it’s a very powerful and neat result.
It completely destroyed the idea that there was a general will and the idea of classical welfare economics, which is all about saying, ‘Okay, we can redistribute some money from a rich person to a poor person, because that poor person will gain more utility from the money than the rich person loses. Therefore, in terms of the general will, there will be an increase in social happiness.’ It destroyed that whole idea.
So, that’s a big part of the book and a big part of this intellectual thrust, which was, in a sense, restating the complete and total sovereignty of the individual. The individual and individual preferences are all that matter. This was a new way of thinking about capitalism and capitalist democracy. It didn’t depend on these vague emergent ideas of a general will and what have you.
One of the other crucial figures in all of this—he also won a Nobel Prize for his work—was James Buchanan. He did a lot of work on what the implications of this were for government. Can you tell us a bit about that?
One public choice response to this was just to say, ‘The whole idea of a public interest is nonsense. All that we have are these contracting individuals who are in a market, and hence that’s all that politics is. Politics is just another market.’ It undermined the idea of social welfare liberalism and Keynesianism. Politicians are just performing within a market. Hence you’ll get these socially damaging things like rent-seeking.
These books are all connected because these are the ingredients that went into neoliberalism, in a way. Public choice theory is one strand of neoliberalism.
The other thing that came out of this book for me was that this way of thinking elevated the ‘prisoner’s dilemma’ and the economics of the strategic interaction of individuals as the workhorse of the whole system.
Absolutely. Game theory is a really critical part of this. With the prisoner’s dilemma, you’ve got these two sovereign individuals with these fixed preference functions interacting and you essentially use that structure to analyse all sorts of aspects of social and political life. That was another really important strand to it.
At the end of the book she talks about some of the possible limitations of neoliberalism. She discusses George Orwell’s 1984 and how, at the end of that, when the Secret Police are trying to make Winston confess, the final thing they do is to try and destroy his relationship with his girlfriend and get him to blame her. She draws a distinction between Orwell, who saw love and friendship as the great bulwark against authoritarianism, and rational choice theory, with its consumer sovereignty, which sees those kinds of attachments as a potential impediment to freedom and where cheating is often sensible.
Absolutely. Under the consumer sovereignty view it’s as if we’re just these little individual preference functions. Let’s all retreat back into these little bubbles of our preferences that are disconnected from other people’s preferences, basically.
There is a kind of pathological fear of socialism in America. When you talk to ordinary people about Europe, they think it’s socialist and that’s a bad thing. I guess that springs from the Cold War and associations with communism?
I think it predates even the Cold War. It probably goes to the context of the creation of America—as this last open space that rugged individualists could come and fill up, create their own little micro-communities and be very autonomous. I think there’s something deeper in the culture there.
One of the things that did strike me about all of these books, but certainly the Mirowski one, this one and the Hodgson one was this sense of a massive cultural assault from the rationalist, socialist model in the middle of the 20th century. And this response from the US was very broad and culturally rooted. It wasn’t about, you know, pointy-headed academics sitting in the academy, thinking rational thoughts in isolation.
Yes. That’s why, coming back to what I said earlier, when you open a textbook on game theory, everything looks so serene, but it comes from this sort of environment. An interesting point she makes actually there is that Arrow himself, with this impossibility theorem, stressed that it is a very abstract, general theory. It applies to markets just as much as it does to a planning system. But that bit of the message kind of got lost. Going back to Mirowski, these are highly politicised environments. It’s not a laissez-faire emergence of ideas. This is highly political stuff, although actually Arrow’s politics were fairly liberal/left-ish.
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