Neoliberalism has not been about applying Chicago-style economic theory

Scottish-born economist – Angus Deaton – recently published his new book – An Immigrant Economist Explores the Land of Inequality – in which he provides a swathing critique of the state of the economics profession, particularly in the way that it impacts on policy making and societal well-being. He is a microeconomist who made a name for himself studying consumer demand, which means he has not contributed anything significant to the field of macroeconomics, where I hang out. The title refers to his migration to the US from Britain in the 1980s and his reflections on what he found and how the economics academy has changed over this 45 years in the profession. His point is that the economics profession has lost its purpose and should return to a focus on advancing well-being. He is particularly critical of Chicago-style economics – or ‘free market’ thinking. The problem though is that the neoliberal era has not been about applying Chicago-style economic theory. The elites just say they are doing that when in fact all they are doing is utilising the immense government capacity to shift the intervention dial in their favour. The government has not given way to the free market – it has just been reconfigured to become an agent of capital.

At the outset, his background involved hanging out with Keynesian economists at Cambridge University in Britain as an undergraduate and postgraduate student during that department’s heyday.

But, those economists were quite different in outlook to an Modern Monetary Theory (MMT) economist, even though we share a lot of underlying theory.

The major difference is that the Cambridge Keynesians considered there to be a government budget constraint – that is that currency-issuing governments were financially constrained, whereas, clearly, an MMT economist rejects that proposition as a violation of the reality before us.

What that difference means is that the Cambridge Keynesians were not hostile to the use of fiscal deficits when non-government spending growth fell below that necessary to maintain full employment, as the more extreme Monetarist economists were, but still believed that over the course of an economic cycle, the government should balance its fiscal position.

Economists who hold this view are termed ‘deficit doves’.

They will advocate fiscal deficits but only as an emergency measure to combat recession.

MMT economists don’t think that and highlight the need to understand the context before making any assessments of whether the current fiscal position is appropriate.

So, an MMT economist can easily advocated permanent fiscal deficits if the non-government spending and saving decisions are such that a permanent private spending gap is evident.

A private spending gap just means that non-government spending is not sufficient to provide the conditions where all workers who want to work can find a paid job.

For example, if a nation has a very strong export sector, which brings in significant non-government spending to the economy, then it is possible an apppropriate fiscal position will be to pursue a surplus outcome.

Most nations are not in that position and so a fiscal deficit will usually be indicated as the appropriate policy stance.

That background, as Angus Deaton moved into microeconomic research, left him in the ‘deficit dove’ camp, and he gave an interview recently about his book where he talks about how health expenditure in the US (Source):

It’s a share of GDP and beyond that, even in total dollars, it’s bankrupting us. I mean, almost all of the dysfunction about government deficits in Washington is to do with healthcare. And people like Alan Blinder or Vic Fuchs have said if we don’t fix the cost of healthcare, we will never fix the budget problems in Washington.

An MMT economist would never say something like that.

We might talk about the dysfunctional health care arrangements and the private profit gouging.

But never about government bankrupcty, which is an impossibility really.

His new book really is about inequality and the ‘growing gulf’ between the top-end-of-town and the rest of us.

He wrote:

I write about health care, pensions, the stock market, and poverty at home and abroad.

He also argues that economists have a very narrow perspective on these matters and should broaden their horizon to consider family, community and quality of work.

There is a lot that I agree with including:

1. The need not only to consider redistribution as a solution to reducing inequality but also to consider what he calls “pre-distribution”.

When I was at university and studying income distribution, I read a book by Dutch economists Jan Pen – Income Distribution – which was published in 1971.

I wrote about that in this blog post (among others) – Parents are advance secret agents for the class society (June 25, 2015).

The title of that post comes from one of Pen’s memorable sentences: “Parents are advanced secret agents of the class society”.

By which he meant that it was crucial that public policy target disadvantaged children in low-income neighbourhoods at an early age if we were going to change the patterns of social and income mobility.

The message from Pen was that the damage was done by the time the child reached their teenage years.

While the later stages of Capitalism has found new ways to reinforce the elites which support the continuation of its exploitation and surplus labour appropriation (for example, deregulation, suppression of trade unions, real wage suppression, fiscal austerity), it remains that class differentials, which have always restricted upward mobility and ensured income inequality and access to political influence persist, are still well defined and functional.

This is a point that Angus Deaton dwells on in his book.

Moreover, rather than fix up the inequality after the fact, why not increase minimum wages which provides an income stimulus to the lowest paid workers and for which no credible evidence exists that such an improvement reduces their employment prospects.

2. State intervention into the pension and health care systems are essential to ensure all workers can enjoy a reasonable post-working life.

He clearly regards the US health care system as a corruption, where basic health services are denied those without the financial resources and massive profits are made by medical companies who prey on the weak.

We can agree on that.

However, when he starts on a critique of the mainstream economics profession my views diverge somewhat.

It is true that he admits, that when it comes to macroeconomic issues that:

I’m not really a great expert on that.

And he is also critical of the mainstream obsession with deregulation;

I think economists under pressure from Chicago economics and free markets could look after themselves, really became too complacent about the harm that the financial sector could do. And there was a belief that modern finance, all these regulations that we’d had since the 1930s, you didn’t need them anymore because modern banking could look after itself …

what modern banking had learned to do was to protect itself against scrutiny and do even more harm than before …

a lot of ordinary people believed that trickle down might work, and if these bankers got paid huge sums of money, somehow it was benefiting the rest of us.

He considers the GFC blew up that belief among ordinary people.

He also recounts a story about a researcher (famous) presenting a paper at the University of Chicago that argued that civil rights legislation in the US had “a very strong positive effect on black wages”.

When the audience at Chicago was confronted with the facts, the researcher was told that his work was:

… ridiculous … You’ve got to be wrong. I mean, I don’t know what you did wrong, but I know this result is wrong …

Because we know the government can’t possibly do any good, and if you get results showing that it did some good, there must’ve been something else going on that you didn’t pick up.

It reminds me of a professor who told us in graduate school that when the facts contradict the theory the facts are wrong!

This is the exemplar of Groupthink.

He argues how mainstream Chicago-style economics – which we often term ‘free market’ thinking – has undermined societal prosperity.

He thinks it has led to a “predatory brand of capitalism in the US” that (Source):

… enriches corporations and the wealthy at the expense of working people, deepens inequality of wealth and opportunity, and – although many Americans will deny it – is fuelling the rise of a class system.

He concludes that economists no longer serve society.

There are two problems with his account here I believe.

One, is that the Chicago ‘free market’ thinking that they espouse in staff seminars might be ‘cuckoo land’ but it is not what is applied in the real world by those who profess to be doing so.

Second, and related, there is nothing in the way the conservative elites operate, that would win plaudits by an honest Chicago economist.

Angus Deaton thinks the problem is Chicago-style economics which he says:

… it is hard to imagine a body of work more antithetical to worrying about inequality …

He argues that:

The very strong view in Chicago was that government attempts to do anything to fix the economy would make it worse. They really believed that the government couldn’t do anything at all, which is absurd.

While all that might be true, it doesn’t describe what those who use the ‘Chicago’ mantra as their authority actually do.

As we outlined in our 2017 book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, September 2017) – the conservative elites that Angus Deaton rails against, never believed for one minute that there should be no government intervention.

For these elites, the issue was how to reconfigure that intervention in their own favour.

The entire neoliberal agenda has been about that reconfiguration – using the powers of the state to advance the agenda of the elites and undermine the prosperity of the rest of us, to varying degrees.

The ‘pure’ Milton Friedman line that emerges out of Chicago, for example, would never support the massive Military-Industrial complex funded by engorged government money, which is helping Israel commit human rights abuses in Gaza as I type.

Friedman advocated a volunteer army which would be market driven – citizens would pay for protection according to their own valuations of that service.

The problem that Angus Deaton doesn’t address, and I am guessing it is because he is largely one of ‘them’, is that economists have been used by power elites to justify all sorts of things that increase the power of those elites and subjugate ordinary citizens further, that ultimately cannot be justified by the pure theories that the economics preach.

There is like a veil operating.

We are told – this piece of deregulation is justified by the results emanating out of economic theory, which says it will increase social welfare.

But the reality is that the policy shift does nothing of the sort, and, more importantly, could never have achieved the ‘theoretical’ outcomes that are specified in the theoretical economic models.

It is a massive con and we are all too ignorant to know any better.

Masquerading as ‘science’ is an elaborate power grab that has created the problems that Angus Deaton rightly identifies.


It is an interesting book but not one that I would recommend purchasing given the limitations I have identified.

That is enough for today!

(c) Copyright 2023 William Mitchell. All Rights Reserved.

This Post Has 5 Comments

  1. Even though you mentioned your book >Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World< it is worth emphasing that yourself and Thomas Fazi did a really great job at forensically assessing the historical transformation of the state as an agent of capital.

    'Progressive' shouldn't be associated with 'leftist' but rather more in line with not standing still.

  2. Beeing a collection of bogus economic statements, the Chicago school economic theory was/is just an excuse for imposing financial capitalism on everybody and everything.
    Only fools took that pile of rubbish seriously.
    Finantial capitalism never took it seriously; they knew exactly what was the purpose of friedman’s fairy tales.
    In a way, it was a massive tsunami of fake news, with nobel prizes and the media giving it the TINA stamp, for beeing a economic theory – that it is not.

  3. Economics lost its focus on human well-being because there were deep differences among people in what constituted “well-being” (“Dilemmas in a General Theory of Planning,” Rittel and Weber, 1973).

    Individualism, and the belief that the fundamental duty of the state was to protect the individual’s rights, became the mechanism for reducing social friction among groups. “To each his own” becomes a means to resolve friction between groups, and provides a foundation for neoliberalism.

  4. But Michael Roberts (Marxist economist) is also correct when he writes (in an article about the proposed Argentina “dollarization”):

    “Yes, and that is why MMT is wrong. Government spending cannot achieve full employment and better utilisation of resources* unless investment is in the hands of the state and is planned, not just more money handed over to the capitalist sector that then decides to invest in its interests*. MMT supporters do not talk about the socialisation of investment through public ownership and planning. They do not call for the public ownership of banks and major companies in key productive sectors. So they offer no better policy than orthodox Keynesians.”

    Face it: the currency-issuing government will have to take prior command of at least a portion of the nation’s resources and labour, BEFORE the greed-based private sector ‘free’ markets are permitted to work their creative ‘magic’.

  5. Dear Neil Halliday (at 2023/10/25 at 10:10 am)

    Thanks for your comment. You are partly correct.

    The reference to Michael Roberts and your assertion he is correct is where you err.

    Michael Roberts has for a long time now tried to characterise MMT in a stylised way as somehow being apologetic to Capitalism. The fact is that we will need a monetary system and a fiscal authority that works in the way that MMT explains whoever owns the material means of production. MMT is neither anti or pro Marxist analysis. Some of the MMT economists are pro and some anti but that reflects their value systems and wider understanding of matters non-monetary.

    Roberts errs into thinking that Argentina’s high inflation is due to MMT policies of over-spending. In fact, the early MMT economists did a lot of work studying Argentina and were closely involved with a former adviser to the Labour Minister in the government that took the economy back into recovery after the crisis and debt default in 2001.

    And the policies that have led to the current situation in Argentina which Roberts refers to have nothing in common with the sort of policies that an MMT economist would advocate. We do not advocate unfettered and untargetted spending.

    Where you are correct is that in addition to understanding the monetary system, MMT economists also need to understand power relations if they want to make policy suggestions for the real world that is currently dominated by elite owners of capital.

    But that reflection doesn’t impugn the fact that MMT is the most accurate description of how modern monetary systems operate.

    best wishes

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