2

We Are All (Partly) Neoliberals Now

In 1887 The British Liberal politician Sir William Harcourt declared in the House of Commons ‘We are all socialists now’ (Hansard, 11 August 1887). Although a preposterous over-statement, it represented recognition by many Conservative and Liberal politicians that the state would in future have to play a greater part in securing the welfare and security of the mass of the population, and in developing the infrastructure of a modern economy and society. There is a sense in which a discussion of overall socio-economic political strategy today must start with a similarly restricted recognition that ‘We are all neoliberals now’.

To grasp what this implies, we need to distinguish among three different meanings of the idea of neoliberal:

• First are the pure neoliberals, who believe that society will be at its best when the conditions of perfect markets can be achieved in all areas of life, with extensive competition among multiple producers and with the role of the state restricted to maintaining the conditions necessary for such markets to operate. That does not imply a weak state; it is strong in protecting property rights, extending the role of markets to ever further areas and guaranteeing competition. But it limits itself to these tasks. I term this ‘neoliberalism of the first kind’.
• Second are those who, while accepting the value and priority of markets in the economy, are aware of their limitations and deficiencies, in particular their inability to cope with externalities and public goods. They also believe that the market is not appropriate in some areas of life and wish to protect these from it. They differ from socialists in that they accept the superiority of a capitalist economy over a state-owned one, but do seek to use the state and other non-market institutions to remedy what they perceive as the market's defects. Various combinations of social democrats, environmentalists, religious groups, conservatives and others are found within this critical ‘neoliberalism of the second kind’.
• Third is what we might call ‘actually existing’ neoliberalism, which refers to the amalgam of corporate lobbying of governments and the deployment of corporate and other private wealth in politics that today usually accompanies introduction of the neoliberal agenda. This is ‘neoliberalism of the third kind’. Aspects of this were attacked in the previous chapter. It produces a politicized economy very remote from what economists understand by a liberal market economy, and a polity so unbalanced by plutocratic power that it seriously compromises the idea of liberal democracy. Like actually existing socialism in the old Soviet bloc, actually existing neoliberalism stands diametrically opposite to its originating idea at many points.

We need to consider these three kinds of neoliberalism in more detail. The most succinct statement of what I mean by the second, critical kind is to be found in the 1959 Bad Godesberg programme of the German Social Democratic Party (SPD): Wettbewerb soweit wie möglich. Planung soweit wie nötig! (Competition as far as possible. Planning as far as necessary!) This was later generalized by Karl Schiller, finance minister in Willy Brandt's government, to read So viel Markt wie möglich; so viel Staat wie nötig (as much market as possible, as much state as necessary). German Social Democracy in that period might seem an odd place and time to find a major enunciation of the core neoliberal principle, but in fact the geopolitical logic was clear. The West German SPD needed to separate itself absolutely from the monster of ‘actually existing socialism’ that was showing its appalling attributes the other side of the barbed wire in East Germany, the so-called German Democratic Republic. The state socialist system clearly prioritized the state as the source of all initiative and control, in both the private lives of its citizens and the conduct of the economy. At that time it did not have the reputation for inefficiency that it was later to acquire; the Soviet Union was about to succeed in putting a man into space, in advance of the USA, and the gap in living standards between east and west Germans was not yet so wide. But in 1953 a workers’ protest in East Berlin had been put down by tanks and slaughter by occupying Russian forces – the incident that led even Bertolt Brecht, an East German public hero, to wonder ironically whether the government should not ‘dissolve the people and elect another’ (löste das Volk auf und wählte ein anderes). The SPD was distinguishing itself from the socialist regime in East Germany largely on grounds of human freedom. It was for this reason that it believed in giving priority to free choices within the market, bringing in the state only when ‘necessary’. Today we have additional grounds for preferring markets as efficient allocators of resources, enabling citizens to engage in masses of transactions and choices without a need to keep referring to a central authority. A major advantage of a market economy is the scope it provides for choice among alternatives, rapid change and adaptation, and the encouragement of innovation; attributes that were not so obvious in the 1950s. And choice does not just provide something for consumers at the point of purchase; it gives providers an incentive to ensure that the quality of their goods and services is high, so that in a free market they will continue to be chosen. Therefore, ‘the market where possible’ has even more force today than in the 1950s.

But still, ‘the state where necessary’. The formula is neat, but begs the big question: when and why does the state become necessary? Developments in regulatory economics enable us to provide four general reasons why we might be dissatisfied with the outcomes of free markets, and want to call on the state – or perhaps some other institution – to come to our aid. These are imperfect competition, inadequate information, the existence of public goods and the existence of negative externalities.

Market Inadequacies

These problems with markets are usually termed market ‘failures’. I shall here use instead the notion of market ‘inadequacies’, which includes the idea of market failure but goes further. The narrower term implies that, provided it can be fixed in a particular case, the market is perfectly able to cope with the task in hand. There are however many instances where markets are simply unable to help us; they are just inadequate. This will become particularly important in Chapter 3, where we shall explore major problems in the development of market societies. Here we first concentrate on instances at a more micro level.

Imperfect competition

The first, imperfect competition, refers to a potential gulf between the theoretical requirements of free markets and actually existing markets. For markets to work the way that economists say they will, there must be many producers and many consumers; no one producer or consumer should be in a position to influence the market price by his/her/its actions alone, and they must not conspire together to do so; it must be easy for producers and consumers both to leave and enter the market. It can be shown that, if these conditions are absent, markets do not do their work of bringing producers and consumers together in ways that enable both to exercise choice while achieving overall efficiency. Real markets often do lack one or more of these conditions. It might be practically impossible to have more than a small number of producers serving particular consumers, as with many public utilities. In real markets it may be difficult for new firms to enter, because of high start-up costs, or to leave (remember the banks that were defined in 2008 as being ‘too big to fail’, i.e. to leave the market). Some firms may be sufficiently large within a market to be able to manipulate prices – even without resorting to the criminal behaviour of the kind that a number of global, ostensibly respectable British and other banks practised on the London Inter-Bank Lending Rate from around 2005 until 2012. In some of these cases markets might be able to correct themselves, but in others the defect will only worsen – that is, if enough powerful actors benefit from it and can keep it from public gaze. The ‘state where necessary’ may therefore be called upon to act, whether by ensuring that markets are working properly (e.g. by breaking up monopolies), by regulating their operation so that the power of dominant firms is not abused or by removing a sector from the market altogether if it appears that markets simply cannot be made to work satisfactorily within it.

It should be noted that identifying these problems of markets in no way denies the validity of a market economy; indeed, this critique assumes a preference for true markets, and is therefore fully compatible with economic theory and with neoliberalism – with reservations to be discussed below. Social democrats have indeed often been found insisting on a need for more competition more insistently than the conservative political forces that often espouse the free market more emphatically in their rhetoric. For example, Martin Höpner has shown how governments headed by the SPD have imposed more competition rules on German banks than have those headed by Christian Democrats. The most explicit state document in recent British history that advocated the strengthening of market forces in order to...