Neoliberalism and Neoclassical Economics



I’m new here as a poster, so I’ll start by describing my interests. As you may know from my work at Firedoglake under the name masaccio, I’m interested in the way the economy actually works. That’s why I like the work done by Thomas Piketty and his colleagues on wealth and income inequality: he has collected, refined and organized huge piles of data and made both that data and his analysis public. Piketty’s book, Capital in the Twenty-First Century, tells us that we can and should insist on data as a source of analysis, not the enormous array of cute stories mainstream economists like to tell us from their armchairs. Trickle-down, life-cycle consumption, pay based on marginal productivity, free markets, and most of the neoclassical economics taught in Econ 101 to pretty much the entire college population for decades, all of them are clever, easily explained in sophomore level calculus, and wrong.

The two parties cooperated to implement self-regulating financial markets, both through the gradual abolition of Glass-Steagall, and to gut regulatory agencies. They laid the groundwork for the Great Crash, and the cheats and thugs on Wall Street did the rest. Then the elites and their pet economists insisted that the solution lay in pumping money into the banking system with no thought of criminal investigation, let alone prosecution, and only the weakest forms of re-regulation, insuring that the criminals would not be deterred and would have plenty of ways to bring on the next disaster.

US voters were angry about the bailouts, but their wrath turned onto the victims of the fraudulent lending schemes and the interest rate swaps and the other financial innovations that the Alan Greenspans and Robert Rubins enthusiastically supported. Does your city or your school district have an interest rate swap? I live in Chicago, and our school district has a bunch. The Chicago Tribune estimated they will cost us $100 million that should be going to education but instead is going to the con artists on Wall Street. The cuts to education here are painful and unnecessary. The same is true all over the country

But it was bad luck homeowners who really got cheated. First, there were knowingly fraudulent loans, then knowingly fraudulent foreclosures, and now possibly knowingly fraudulent delinquency claims.

The vast majority of the public thinks this is just fine. Screw the victims, help criminal banks is a strange goal, but the worst part is that victims of this economic system frequently do blame themselves.

This outpouring of hostility towards the losers in the economic struggle should be seen as a natural consequence of neoliberalism. In that worldview, the market is an indifferent referee, doling out rewards to the successful, and pushing the losers off the playing field into the outer darkness. Everyone is required to be the entrepreneur of themselves, investing their money or their parents’ money or borrowed money in their own human capital in the hopes of beating out some other poor bastard for some bad job that pays poorly. If they win, they might get to retire. If they lose, there’s always bankruptcy, except for taxes and student loans, and they are trash. It’s a bleak world.

Neoclassical economic theory is the linchpin of neoliberalism. It provides a theoretical underpinning for the harsh world it envisions. In this world, humans are seen solely as consumers and producers. These calculating creatures are rational optimizers, constantly using the markets to achieve their own personal highest utility. It’s an evil, reductive idea, but notice how well it corresponds to the self images of the people described by Jennifer Silva in her book Coming Up Short, which I discussed here.  The encouraging thing about the people Silva talked to is that they see themselves as having agency, they see themselves as having problems, but they are convinced they can do something about those problems.

The middle class is shrinking. Social class mobility is falling. But no one seems interested in the possibility that the economic system is the problem. The Republicans love it, and the Democrats do too, only not quite as much: they offer timid solutions like Elizabeth Warren’s suggestion that we reduce the interest rate on student loans, or increase the minimum wage to $10.10 per hour. These are not the kinds of changes that will make a significant difference in anyone’s life. They will do nothing to dilute the power of the richest 16,000 US families. And yet these represent the extreme left in politics.

In the 1920s, there was widespread intellectual ferment around alternatives to capitalism, socialism and communism, and that forced questions about capitalism to the surface. As the Great Depression deepened, the rich and politicians were afraid that the working class and the unemployed would find those ideas superior to capitalism. Eventually they were forced to compromise a tiny bit, creating a more or less regulated system of markets. Even the conservative hacks on the Supreme Court (the Court is full of conservative political hacks almost all the time), bent to the will of the people, and allowed a range of FDR’s initiatives to stand. In some cases, for a while, the hacks even enforced those laws, though that ended years ago.

Partially regulated capitalism was a major force for the creation of what Piketty calls the Patrimonial Middle Class. This group, 40% of the population, roughly the 50th to 90th percentiles of wealth, at one time had enough wealth to live comfortably in retirement and leave an inheritance to their children. That group is dwindling. The bottom 50% of the population has little or no net worth. Piketty calls them the Lower Class. The top 10% he calls the Upper Class and the top 1% he calls the Dominant Class. The Upper class is taking all the money produced by the economy. These are the people who can make major donations to politicians and thus acquire influence they can turn to their cash benefit.

The Lower Class is becoming more and more angry as the recovery stomps their faint hopes into the dirt. The Middle Class is shrinking, and I hope is beginning to think that maybe it’s not their fault. Things won’t change until enough people figure out the connection between the economic myths they’ve been taught and the social and political institutions that enforce those myths, and structure their understanding of their place in the world. If Silva’s people are right, if Middle and Lower Class people do have agency, and if they learn to see through the smoke and mirrors of the neoliberals and their academic lapdogs, they can enforce demands that will actually improve their lives.

I like to think of this process as the way you’d peel an octopus off an aquarium wall: one tiny sucker at a time. Eventually it comes off, but it’s a lot of work, and the octopus resists with all its strength.
which is Piketty’s actual term


31 replies
  1. Pitchfork says:

    I studied economics as an undergraduate and realized early on that much of it was tendentious bunk. My job in corporate finance only confirmed that view. Years later, in graduate school (PhD in lit), I spent most of 2009-2011 furiously blogging the financial crisis. I’m still angry about it.

    Anyhow, that’s all prefatory to saying that I agree with this entire post. 100% of it. I hope we see more from this writer.

  2. der says:

    “Affluence and economic standing within society often are expressed in terms of percentile ranking.”

    Income bias. I know a few who make what it takes and listen only to the voices of their financial peers, Greed Is Good or why I stopped going to parties. They have a household income above $150,000 and are in the upper classes (top 10%) yet see themselves as put upon as much as the poor. These are the people who run our world, along with the help of the 9 Supreme Court Justices:

    Rigging The Wheel: More True Tales Of The New Oligarchy (

    and (

  3. bloopie2 says:

    It sounds like you’re starting from a particular point of view, with statements like “the economic myths they’ve been taught” and “the institutions that enforce those myths” and “Trickle-down, life-cycle consumption, pay based on marginal productivity, free markets, and most of the neoclassical economics taught in Econ 101 to pretty much the entire college population for decades, all of them are clever, easily explained in sophomore level calculus, and wrong.” Nothing wrong with starting from a particular point of view. But if I’m going to follow along on a whole new topic, can you provide a list of basic reading materials to get me up to that same point? Because I don’t have that knowledge in hand at this point in time, and without it, all I hear is allegations, not facts. Thank you.

    • Ed Walker says:

      Sure. There’ll be more detail as I go along. For starters, here’s a brief description of neoliberalism from Philip Mirowski:
      Mirowski’s book Never Let a Serious Crisis Go to Waste introduces the neoliberal community and describes its methods. A Brief History of Neoliberalism by David Harvey. For more on the use of neoclassical economics by neoliberals, just look at the Chicago school and its work. They are the leaders in this area, and almost all of them are practitioners. See, for example, Richard Posner, Richard Epstein and others. I wrote about both at FDL, and you can find posts at that site by searching for them.

      On markets, Bernard Harcourt’s The Illusion of Free Markets is a must read. He’s from the University of Chicago, so he may be the exception to my general rule.

      Finally, Michel Foucault. I suggest The Birth of Biopolitics and Discipline and Punish. The former is available on-line.

      For a brief introduction to the myths taught in Econ 101, see Jeff Madrick’s Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World. See also any number of books from non-mainstream economists discussing the causes of the Great Crash.

  4. orionATL says:

    neoliberalism is the corporate, bottomline, money-making, numerical, “i got mine, sucker,…” view of human family-life potential, a straightened viewpoint of our lives as likely to be merely “nasty, poor, solitary, brutish, and short” – – in a word, the conservative viewpoint of human family-life potential.

    where money competes in politics, monied individuals and institutions almost always win – to date. but that can be changed with competent regulation, mandatory voting laws, and detailed, fact-based reporting on economic (e.g., bank de-regulation) and social (e.g., abortion, climate) issues.

  5. klynn says:

    Welcome Ed! Although I am in lurking mode most of the time now, it is good to see you here. Have enjoyed your work for many years.

  6. blueba says:

    I join with the others in welcoming you. I’m really glad this subject will be covered regularly at emptywheel.

    One topic if been following is the crisis in Europe, how the EU governments just rolled over and gave Merkel all the power to create economic policy by diktat. How she only listens to one think tank and they are 100% austerity will create growth while the youth unemployemnt rates in Europe are off the charts and her policies are causing wide spread and needless economic suffering.

    I hope you will shed some light on her and her policies.


  7. bloopie2 says:

    The post seems more like a screed than a list of insights. I need convincing. Any facts you can cite me to?

  8. Vincent says:

    Pleased to see “neoliberalism” being addressed here. I think that connecting it to other topics covered at Emptywheel will be very useful for readers interested in seeing “the whole.” Also important, I think, will be to both distinguish it from previous forms of political economy in the U.S. (say, the New Deal paradigm), but also to show where there are points of overlap (the country possessing a quite powerful corporate elite with formal and informal political power and influence).

    I also appreciate the critique of the left-wing of the Democratic Party who are by no means the left-wing of American politics. $10.10, for example, almost makes me want to say, “keep it,” as it doesn’t even begin to put a dent into the problem. Same with student debt: lowering the interest rate doesn’t cut it. Anything short of universal student debt forgiveness is a failure.

    • Ed Walker says:

      Yes, there is a strong connection between neoliberalism and the national security state. I intend to excavate that over time. It’s ugly.

  9. Jonf says:

    Pretty much right on I suspect. But can you explain how the original loan to someone who applied for it was fraudulent. Were these what are called liars loans?

  10. Vincent says:

    Indeed, the National Security and Surveillance State is, in its current incarnation, ultimately a necessity for maintaining the neoliberal order, as such an order generates massive inequalities that publics tend to be uncomfortable with. It is also a source of profits: the privatization of all things public, central to neoliberalism, has occurred and is occurring where “security” is concerned (the cliches would be Blackwater turned “Academi,” or Booze Allen Hamilton.) This is different than, but related to, the military-industrial complex of yore.

  11. tjallen says:

    Welcome, I’ve enjoyed your comments in the past. One part of the topic I want to hear more about is how economics moved from a scientific theory (open to empirical evidence) into an ideology (cut off from empirical basis). There is some mention of this in Chalmers Johnson’s Blowback, but not nearly enough substance. In Johnson this transformation of free market economics into ideology happens in contrast with Marxism-Leninism and the desire to keep countries from “flipping” during the cold war. However I think a larger push of western economics into ideology comes from the wealthy justifying their wealth and its further acquisition by immoral methods, needing an ideology of the free market to justify and sanction their winning the game with their current practices and their future greed.

  12. tjallen says:

    One topic you could post on immediately is last week’s OECD paper on economic inequality, which made the (startling to some American ears) claims that economic inequality itself holds back the growth of the economy, and that wealth transfers by taxation do NOT cut economic growth. I saw the story on the BBC news site. These two claims cut completely against “typical” US economic theory. I’d love to see these teased out by someone who knows what they are talking about.

  13. Dave S says:

    I’m gonna have to strongly disagree with the auothor on his opening thesis, which is to say Picketty is anything other than a socialist/Keynesian completely bereft of any new ideas. We suffer today from fascist government that rewards fealty to the state, nothing more. Central banking, immense beauracracies & corrupt sociopath politicians are the problems. I think NeoLiberal “economics” is a loaded term frankly, it’s the same crap politicians and free lunchers have advocated which have cartellized the world economy to the point of collapse. I don’t disagree with the author the system is broken, but common sense says Picketty’s solutions are just more of the same Abenomics style hokum. It’s time to remove govt from the ability to create money, and abolish as much of these corrupt national governments as possible. Local government with labour laws, and a small safety net for the weak and infirm are all that’s necessary. More socialist/Keynesian economic policy will only exacerbate the problems. Real economics, from the likes of Hazlitt, Mises and Rothbard are the cure, real capitalism is the cure not the pseudo fascist/socialist mediocrity we enjoy today. If you want to see the system plunge deeper into darkness call for more govt, otherwise it’s time for good old fashion abolition, and a return to common sense because there are no free lunches.

    • bevin says:

      Real economics, from the likes of Hazlitt`…….
      Please tell us more about Hazlitt`s contributions to political economy.

    • P J Evans says:

      It’s time to remove govt from the ability to create money, and abolish as much of these corrupt national governments as possible. Local government with labour laws, and a small safety net for the weak and infirm are all that’s necessary.

      Ah, another libertarioid who knows little about actual economics and government.

      • Dave S says:

        So let’s hear your brilliant ideas on how to fix the system Sir, or is low grade insults the best you can conjure?

  14. Dave S says:

    If you’d like to see probably his best known work, the complete demolition of the general theory, its called “The failure of the new economics” or “economics in one lesson”

  15. FrY10cK says:

    Ed Walker brings another lurker out of the shadows. This post reminds me of an oldie-but-goodie from The Automatic Earth circa 2011 explaining why central banks are going to such extreme measures to prop up the illusion that endless economic growth can be sustained.

    … stop talking about economic growth. There ain’t none, and we need to wonder hard and loud why we still and always unquestioningly assume and accept that we need it. No, the Greek economy will not grow its way out of its misery. Neither will Italy’s, or France’s or America’s. There’s too much debt to grow out of.

    But perhaps this is hard to fathom without resorting to more philosophical questions. For those of you who’ve never read or heard Professor Albert Bartlett’s work on exponential growth (since that is what we’re talking bout), get moving. Bartlett is a phyicist. That means he’s an actual scientist, and capable of understanding the inevitable endgame of economic growth.

    But why couldn’t we shrink a little and still be comfortable? In theory we could perhaps, but first of all the human mind isn’t made for shrinkage, and second the money we create as credit is virtual, and can disappear as fast as it was created, and into the same nothingness. If we would for instance consciously choose to shrink by 5%, we’d run a very real risk that we would cause 50% of the money to vanish. The system based on credit will have the tendency to go down like so many dominoes. It has very little resilience and is thus enormously fragile, something we don’t pay attention to when we have growth, and are therefore not prepared for when we no longer do [have growth].

    *takes deep breath* Okay here goes first post. I hope the HTML is correct or this comment section has editing capability. Apologies in advance if I left a bunch of broken links.

  16. Les H says:

    The subprime housing bubble wouldn’t have occurred if HUD hadn’t authorized the third-party downpayment assistance schemes in 2001 and the federal banking regulators hadn’t issued a regulatory letter to stop the states’ attorney generals from going after the national banks for writing predatory loans. The states were blocked by the OCC from enforcing consumer protection laws in 2003 that would’ve prevented lenders from writing mortgages that the borrowers couldn’t pay back.

    It was a classic case of regulatory capture, not the gutting of regulations.

  17. 4jkb4ia says:

    Not really so pedantic. Patrimonial means that you have property and something to bequeath to the next generation, even if it is only a house. Patriarchal is about gender dominance.

  18. 4jkb4ia says:

    Actually by the mere act of writing a book, compiling a lot of data, and selling a lot of copies, Piketty has staked out the acceptable left in American politics because anyone who is interested in inequality from the left has to reckon with his model. The line that Liliane Bettencourt has absolutely no return to labor and that her wealth cannot be a reward for personal success was priceless.

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