The Chronicles of a Capitalist Lawyer: Neoliberalism

Showing posts with label Neoliberalism. Show all posts

Around two weeks ago, I had an opportunity to attend a debate on Neoliberalism Thought at the University of Chicago between Gary Becker (Professor of Economics at the University of Chicago), Bernard Harcourt (Professor of Law and Chair of the Political Science Department at the University of Chicago) and François Ewald (former assistant to Michael Foucault and Professor of Insurance at Conservatoire National des Arts et Métiers, Paris). I think the quality of the debate is very good and it would be a pity if I don't share the ideas raised in such debate in this blog.

First of all, the debate spins on the idea of Homo Economicus or the Economic Rational Men by Gary Becker. Michael Foucault, a famous French philosopher and historians, believe that Gary Becker's idea on economics rationality provides the necessary theoretical foundation of Neoliberalism. This is interesting because usually Neoliberalism is more associated with political economic thoughts rather than pure theoretical economic thought.

I think even most of the time, when Indonesian people talk about Neoliberalism, they think about the idea of excessive free market, non governmental intervention, injustices by corporations and dictators, etc. Of course, I heavily doubt that this is the correct interpretation of Neoliberalism since pure Capitalism does not support any crony capitalism, dictatorism, business without liabilities, and so on. See my previous post on this issue here.

For now, let us return to Foucault ideas. He is a proponent of the idea that history is determined by the power relationship that controls men. Law and morality are things that are defined by those who have power and authority, and therefore they might be simply an illusion for the society. However, Foucault finds some consolations in Gary Becker's concept of Homo Economicus, which according to him is liberating.

Gary Becker, which is also a Nobel Laureate, is the proponent of idea that the science of economics can be used as a powerful tool to analyze almost all, if not all, of human behavior and activities. He introduces the use of economic analysis on crime, family and discrimination and is also considered as a part of Law and Economics development at the University of Chicago.

Within Becker's theory, human is viewed as a rational being that always wants to maximize his own interest. It does not mean that human has a perfect capacity of calculating the entire costs and benefits of his action. It simply means that when they are making their decision, they pay attention and respond to incentives, and thus, to certain extent, human behaviors are predictable.

A separate note though, even Becker agrees with Foucault that a perfect rational men is a fictional concept. What matters is that the theory is useful to understand the world in an insightful way by taking certain aspects of human behavior and make a simple model. After all, all theories are fictions, and a good theory of fiction is the one that works the best among many other fictions.

Then, why this kind of theory is liberating? According to Foucault, economists are seekers of truth, their analysis is not based on moral or legal issues, rather they focus on human behavior and incentives, and they also prioritize liberty (through free market concept). This is important for Foucault who sees the possibility of maintaining order without any coercion or doctrine as presupposed by laws and morality.

But the Neoliberalism view of Gary Becker is not totally free from any problem. Although it may be a liberating theory it can also be used to suppress the people and here we are moving to Gary Becker theory of Human Capital which is an essential part of Neoliberalism. Becker believes that human capital is very important, i.e. investing in people, making them to be a better and more productive person which will contribute to the welfare of the society.

The problem with that view, at least according to Harcourt and Foucault, is that once human is viewed as a part of capital, the government may favor certain group above other groups, discriminating and investing only in people who will produce the highest benefits and left the ones who are bad to suffer in the slumps. An example would be the case of mass incarcerations in the United States that target most of African Americans and poor people based on various criminal actions. Eugenics can also be a problem here since there was a time where the Government of US actually allow the sterilization of imbeciles and people with mental disorders.

Furthermore, viewing human as only a part of capital production could be degrading, i.e. human is viewed like a machine with the sole purpose of producing more capital and whose value is solely determined on how much capital will be produced and accumulated by him in the long run. I take this as the modern critics of Neoliberalism and Capitalism in general.

Becker's response was simple. His theory on human capital is established to liberate the people and while he agree that some aspects of economics theory on production and capital can be used to analyze issues on human capital, human capital is still a separate subject (and thus the reason why he makes a separate class on human capital in the University of Chicago).

From any point of view, human cannot be fully compared with machines. We can put machine in the warehouses and easily disassemble them whenever we want, we can't do that with human. Furthermore, the theory put a lot of stress in building human capital so that everyone may reap the benefit of social welfare. It includes investment in education, on the job training, health, etc.

The most interesting response from Becker is that his theory of human capital focuses on efficiency, but most of the time, things that are efficient, are also equitable. Through his theory, Becker want to show that human is the most important part of our capital. By investing in people, we hope that they can develop themselves and free to make their own life decisions without any interference. He also notes that there is an underinvestment in poor people and that is actually an inefficient thing to do, since better human capital always lead to better welfare maximization.

I completely agree with Becker's notion. This is indeed the main purpose of introducing the concept of human capital, preserving freedom and reducing paternalism, finding the most efficient way to allocate resources among the people. And I think this should be the main idea of Neoliberalism. It is just too bad that politicians and even some academics are using this concept in such a misleading way that they confuse the original concept of Neoliberalism that focuses on liberation and freedom of the people with crony capitalism, dictatorism, and the freedom to do anything without any legal liabilities which are not even parts of original concept of Neoliberalism.

Since I call myself the Capitalist Lawyer, it's hard for me to resist the temptation of enrolling in one of my law school's courses: Law and Political Thought - Neoliberalism and Its Critiques. After all, I always believe that you can't properly learn a thought if you don't learn its critiques. One of the required readings in this course is Naomi Klein's book, the Shock Doctrine. The basic idea of her book is that the globalization of neoliberalism is primarily caused by the shock doctrine, where neoliberalism supporters use a crisis in a particular place in the world to spread their ideology in an effective way, ensuring that the changes can be made in a massive scale and that such changes would be almost irreversible once they are established as governmental policies.

To add the spices, the book also shows how the shock therapy is administered to various part of the world such as Chile (Auguste Pinochet case), Iraq (the oil companies saga), Asia tigers (the 1997 crisis where Indonesia was part of the victims), China (Deng Xiaoping reformation and the Tiananmen Square) and also England's liberalization (under Margaret Thatcher rule). Furthermore, she also believe that all of these disasters were caused by the idea of Milton Friedman, the famous economist from the University of Chicago. Milton Friedman who was very famous for his teaching on the power of freedom, free market and limited government was blamed as the prime perpetrator of neoliberalism. He was also quoted as the guy who first started the idea of using crisis as a way of spreading ideology.

I must say that reading her book, I am not convinced that there is a strong relationship between the idea of Milton Friedman and the administration of the shock doctrine. It seems that most, if not all, of her critiques and evidence used in the book are precisely not a part of Milton Friedman teachings, nor should they be considered as a part of the original idea of neoliberalism. I would say that she has mixed neoliberalism with corporatism and/or crony capitalism which should be rejected from any point of view.

First of all, using crisis as a starting point of spreading your idea is totally legitimate. Through out the history, we have seen numerous times how crisis change how people perceive the world. If it is not because of the Great Depression in the 1930s, Keynesianism would never had the chance to spread. No one would believe that the solution for depression is additional government consumption. And if it is not for the 2008 crisis, no one would write books on Keynes revivalism. I think the reason why crisis is so effective to spread new ideas is simply because during crisis, people are shocked, their previous believe is shaken, they are vulnerable and would easily see any other new alternatives as the solution. This is what we call as hindsight bias.

Unlike her idea, that shock therapy is a bad idea, I believe that crisis is neutral. Any person can use a crisis for his own advantage, including spreading his ideas. Whether such idea is good or not is a separate matter and history will usually determine the longevity of an idea, whether it will survive for a long time or not. The same thing also happened in Indonesia during the 1966s. When Sukarno fell from his throne and Indonesia was consumed by more than 600% rate of inflation, it was also the right time to dethrone the socialism ideology and replace it with a balanced government intervention-free market economic system. In reality it was a success until Indonesia was turned into a state of crony capitalism and ended badly in the 1997 crisis. If we don't have such crisis, who knows where will our beloved country actually end. Maybe worse than now.

Second, her stories show how dictators use their power to force the free market idea into the society and how corrupt governmental officials cooperate with corporate officers for the sake of their own profits and interests (business lobbying is a serious problem, even in the United States). While that might be true, I don't think that represents the vision of Milton Friedman on capitalism and freedom. The capitalism that I know and believe as the best economic system for the welfare of society does not support dictatorism nor does it support crony capitalism. The capitalism that I know also does not support absolute freedom where business firms can do everything without any liabilities whatsoever. That does not make any sense. Economics teaches us that there are externalities that can be produced by a party against the welfare of the society and that in order to enable the market to work efficiently, such party must be held liable and internalize the costs that it has imposed to the society.

This is where I think Naomi Klein miscalculated her own idea. She work really hard to show how evil Milton Friedman is and how bad neoliberalism is, where government is being stripped from their power and the state assets are sold to several oligopolists who then control the market for their own benefits. Yet in reality, none of these represent neoliberalism thought. Minimum government should not be translated into: "you can do whatever you want". It means that the government should not try to be too big and then used by various interest group for their own purposes. We know that government consists of people, and we also know that they are not angels. To believe that government would always consist of good people would be as naive as believing that the market would always full with good people.

Ronald Coase in his famous Theory of the Firm has shown that firms, coordinated and integrated business units where capital, management, and employee meet and work together, exist within the market. Some empirical researches also show that 50% of the businesses conducted in the market are being run by firms. In short, this means that coordinated effort is necessary and also useful to the extent that the costs of doing so is cheaper than doing transactions via the market. So naturally, there is a balance between coordinated economy and uncoordinated economy where the invisible hand will work.

So in the end, what is neoliberalism? I am still looking for the answer during the course. But I don't believe that it should be placed in the same place with dictatorism and crony capitalism. The idea to promote the welfare of the society by maximizing the freedom of the people and limiting the role of the government in order to make it focus on its essential duties should never be used to justify greed and crimes. It is stupid if you think everything should not be regulated, but that's just the same with the idea of regulating everything. I'll update this issue once I finish the course.