This chapter traces the genealogy of the neoliberal turn in the discipline of economics around four enduring theoretical controversies that traverse the entire field from the beginning of the twentieth century into the twenty-first. This historical sketch of a theoretical genealogy grounds a ‘thinner’ definition of neoliberalism that allows us to cast the net more widely than the commonly and traditionally deployed definition that limits it to a set of marketization, privatization, and (financial and trade) liberalization policies. Viewing the contemporary state of the discipline of economics from the perspective of this genealogy enables us to identify not only pro-market approaches, such as the Chicago or the Austrian schools, but also, perhaps more controversially, what we propose to call post-market orientations – post-Walrasian or mechanism design approaches – as part of the neoliberal episteme.
Taking Foucault's 1978–79 lectures (Foucault, 2008) as our point of departure, we suggest that neoliberalism be conceptualized as a drive towards depoliticization of the social and political realm through its economization: by reshaping and reformatting the institutional environment through the interface of homo economicus (according to which human beings comprehend and affirmatively respond to economic incentives), the neoliberal form of governmentality aims to solve all social and political problems by creating appropriate economic incentives (through different institutional configurations and policy devices). As such, we distance ourselves from the more commonly held definition of neoliberalism as a mere amalgamation of marketization, privatization, and trade and financial liberalization, which cannot capture the different varieties of neoliberalism (that Brenner et al. (2010) colorfully conceptualize) and remains largely incapable of analyzing cases like Erdoan's Turkey or Correa's Ecuador (where the state apparatus remains an important, if not the determinant, player in economic life while simultaneously pushing forward with policies that prioritize the economization of the social). Instead, we claim that neoliberalism should be seen as a form of governmentality that accommodates a range of theoretical and political positions with diverse policy implications, including those that can be identified as interventionist – that is, those that favor deploying state-apparatuses or other non-market devices to govern society – provided that they stick to a conceptualization of human behavior as a form of cost-benefit calculus and adhere to a governance structure that is based on providing appropriate incentives as a means to further economic prosperity.
Understanding neoliberalism from a political economy perspective is certainly essential, and there is a rich literature that discusses structurally-transformative national and globalizing developments that led neoliberalism to emerge globally as a hegemonic mode of governance from the late 1970s onwards (see, e.g., Duménil and Lévy, 2004; Harvey, 2005; Cerny, 2008; Klein, 2008). Removal of trade barriers, declining trade union power, the shift from fixed to floating currencies, increased international capital mobility, growing power of multinational corporations, financialization, and similar developments – which can all be categorized under the term ‘capitalist globalization’ – on the one hand, and increased popular dissatisfaction with centrally-planned or guided welfare regimes, on the other hand, have been cited as factors of ‘pull’ and ‘push’ in the consolidation of the neoliberal program. Without denying the value of this line of investigation, in this chapter we will turn our attention to the theoretical underpinnings of the neoliberal turn within the discipline of economics. While our aim is not to privilege the disciplinary field at the expense of the broader political, social and economic processes, the study will contribute to an understanding of neoliberalism as an ‘episteme’ that is deeply woven into the fabric of contending economic discourses.2
We claim that the following four major, constitutive and ongoing controversies that began in the inter-war years remain essential in understanding the development of neoliberalism as a theoretical formation: the ‘socialist calculation’ debate between socialist neoclassicals and pro-market Austrians about the role of markets, the feasibility of planning, the economic implications of ownership structures, and the factors behind innovation; the ‘Keynesian revolution', which provided a theoretical framework for the modern welfare state and structured the post-war macro-economic debates even after the 1970s; the ‘marginalism’ controversy, which paved the way to the ‘selectionist', as if arguments of Chicago economists and furnished an overarching metaphor of competitive processes (natural selection) for new institutional economics; and the ‘psychologism’ controversy, which first provoked the shift from ‘cardinalism’ to ‘ordinalism’ in neoclassicism and then subsequently resurfaced in a new disguise with the behavioral turn in economics. Our contention in this chapter is that the advent of neoliberal thought in the discipline of economics should also be read as a dynamic with strong endogenous characters that has developed as the corollary of these four constitutive controversies. With this four-track genealogy of the century-long neoliberal turn in economics, this chapter aims to provide a subtler understanding of how neoliberalism (qua economization) emerged as a complex and internally heterogeneous product of enduring theoretical struggles among contending economic traditions. To put it differently, while the Chicago and the Austrian schools are usually designated as the foremost proponents of neoliberal ideas, the real hold (and strength) of the neoliberal episteme stems from the fact that these pro-market economists forged and fine-tuned their ideas and arguments in debates with their (post-market) interlocutors and detractors, who share common theoretical (methodological and ontological) presuppositions.
Michel Foucault's lectures on The Birth of Biopolitics (2008) at the Collège de France, 1978–79, begin with a critical reading of German ordo-liberalism and proceed to an analysis of American Chicago-school neoliberalism, with the latter according particular focus to Gary Becker's (1976) category of ‘human capital'. In Foucault's otherwise insightful and prescient commentary on the varieties of the neoliberal program, the Austrian tradition does not emerge as a school of thought distinct from the German ordo-liberals or the Chicago neoliberals. When Friedrich von Hayek – one of the founding figures of the Austrian school – makes an appearance in Foucault's lectures, he does so mainly as an intermediary figure between the Germans and the Americans (Foucault, 2008: 104, 193, 218).
Foucault demonstrates that the pro-market tone of the post-war era, the bulk of which arose from Germany and the USA, was motivated by a strong anti-state sentiment that bordered on state-phobia.3 In Germany, one of the main concerns of ordo-liberals (as represented by, among others, Ludwig Erhard, Walter Eucken, Franz Böhm, Alfred Müller-Armack and Wilhelm Röpke) was to restructure the market economy in such a way that the experience of Nazism would not be repeated (Tezuka, 2001; Vanberg, 2001; Yamawaki, 2001; Ptak, 2009). But even then, since competitive markets cannot spontaneously emerge out of thin air, ordo-liberals argued, laws and regulations should be designed in such a manner that a ‘social market economy’ that limits the possibilities for monopoly power can come into existence. In this sense, ordo-liberalism emerged as a pro-market approach with a twist: it argued that markets must be actively institutionalized and their competitive characters be protected through regulation and legislation. In the USA, on the other hand, while the pro-market sentiments of economists such as Milton Friedman, Gary Becker and George Stigler at the economics department of Chicago University compelled them to produce ‘a permanent criticism of governmental policy’ (Foucault, 2008: 248), Ronald Coase and his associates at the law school of the same university were underlining the importance of contracts and property rights, which necessitated the existence of an institutional authority to secure the successful (and safe) functioning of business.4
According to Foucault, neoliberalism is not simply a reincarnation of eighteenth- and nineteenth-century economic liberalism (as set forth by Adam Smith), where governmental control over markets was to be curtailed, but a much larger political program of modeling the overall exercise of political power on the logic of cost-benefit analysis, through ‘a grid of economic intelligibility’ (Foucault, 2008: 242–260). This program of ‘enterprise society', according to Foucault, was developed (intentionally or unintentionally) as a solution to the long-debated tension in the liberal tradition: in pursuing the extension of meaningful freedom – and in particular freedom from economic need – the government has to introduce further regulations and devise ever more apparatuses of monitoring and support.5 The emergence of neoliberalism, according to Foucault, meant the birth of a new art of government, a ‘biopolitical mode of governmentality'6, where the state would no longer act to safeguard the social rights of its citizens, but would rather design and implement the necessary economic incentive mechanisms (through imposing a grid of economic intelligibility) – which we propose to designate as ‘the depoliticization of the social realm'.
In revisiting Foucault's Lectures, we focus on two areas in which his analysis may be expanded. The first concerns Hayek, who certainly deserves more attention (Caldwell, 2004). To say the least, he was more than an intellectual figure: he was a political combatant who, in 1947, was instrumental in establishing the Mont Pèlerin Society, a research network aimed at promoting the idea of a free market and open society, as well as private property, against the post-war hegemony of the Keynesian welfare state capitalism and Soviet-style central planning. The Society has played an important role in promulgating neoliberal idea worldwide (Mirowski and Plehwe, 2009). Moreover, Hayek was influential in consolidating the Austrian school, either through his own contributions (mainly in the calculation debate – see below) or by amplifying the prominence of von Mises (his mentor). The focus of the Austrian analysis has been the market process itself, rather than the equilibrium construct of the neoclassical school (more specifically à la Walras), and the ways in which necessarily decentralized, subjective – ‘tacit’ – knowledge about an environment that is continuously changing is discovered and socially mobilized through the entrepreneurial activities of private businesses that aim at exploiting all profit opportunities. The Austrian school's contribution to theories of entrepreneurship and, in turn, innovation has been especially important in shaping some versions of the neoliberal program (Boettke, 1998).
Second, we posit that Foucault's biopolitical mode of governmentality should cover not only the Chicago and the Austrian schools, but also the so-called ‘post-Walrasian', or mechanism-design, orientation. Post-Walrasian economists, while remaining within the neoclassical framework, argue that the market mechanism is incapable of solving problems associated with information failures (e.g., adverse selection, see, moral hazard), thus creating market failures in product and factor markets. What is needed, therefore, is to design ‘intelligent’ (incentive-compatible) mechanisms that will elicit a certain desired performance from agents who are believed to be rationally pursuing their personal gains (Stiglitz, 1993; Hurwicz, 2008).7 Given the aim here is to restore overall social welfare (which was an overriding concern for Walras himself), proponents of such approaches place emphasis on welfare considerations, while some even explicitly opt for left-wing (egalitarian) policy proposals (see, e.g., Stiglitz, 1994). Given that such positions, rather than privileging actually-existing (or spontaneous) markets, propose to design and implement non-market institutional arrangements that mimic actual markets or, arguably, supersede them along a number of metrics, they may be designated as post-market approaches. In a certain way, German ordo-liberalism can also be conceived as an early post-market orientation, especially to the extent that its proponents see markets as human-designed institutions that need to be instituted, protected and, if necessary, regulated.
Constitutive differences notwithstanding, the above-mentioned approaches all depart from the position that economic agents must follow a cost-benefit logic and that the state should relate to its citizens not through a rights-based grid of intelligibility, but rather through economizing (and thereby depoliticizing) the social and, more broadly, ecological field. This conceptualization enables us to consider neoliberalism beyond the market–state dichotomy and, contrary to the anti-state, free-market rhetoric of the likes of Ronald Reagan and Margaret Thatcher, we insist that there is no strict contradiction when politicians who invoke the entrepreneurial discourses and cost-benefit language of the neoliberal program also deploy state-power and non-market instruments. Neoliberalism, in theory and practice, is distinguished not by whether governments (should or should not) intervene in markets (which they invariably do); the decisive factor, for us, is the manner in which governments are conceived to intervene by replacing the rights-based perspective of the post-war social democratic program with the incentives-based grid of intelligibility of the neoliberal episteme (as best exemplified in the areas of education and health which, while once seen as a social right, have been commodified under neoliberalism).8
To wrap up, the neoliberal paradigm, according to our definition, corresponds to a particular epistemic shift in the way governments relate to, and regulate, the entire ensemble of social relations around a cost-benefit logic, given the assumption that all agents are calculatively rational and calculably responsive to economic incentives – and, as such, neoliberalism constitutes a drive not (only) towards marketization, privatization, and financial and trade liberalization but, more broadly, towards an economization of the ensemble of social relations through governmental dispositifs. Anchoring ourselves to this definition, in the next four sections, we trace how pro-market and post-market variants of neoliberal reason emerged out of four enduring theoretical controversies that have traversed the discipline of economics for over a century. The calculation controversy gives birth to both the Austrian tradition and the post-Walrasian approach; the Keynesian revolution and the marginalist controversy provided the theoretical contexts for the crystallization of, respectively, macro- and micro-economic versions of the Chicago school; and finally, the psychologism controversy enables us to trace pivotal transformations in the concept of the economic agent (a much less stable concept than it is usually presumed to be) throughout the twentieth century and into the twenty-first.
Two closing remarks: first, exploring this theoretical genealogy across these four controversies and the discursive heterogeneity therein will enable us to read neoliberalism as an episteme (rather than a mere combination of economic policies). Second, it is far from our intention to argue for a one-to-one mapping between the theory and the practice of neoliberalism. At best, the theoretical heterogeneity that we identify in the neoliberal turn in economics may provide us with yet another explanatory factor to understand the diversity and vicissitudes of actually-existing neoliberalisms.
The economic calculation debate in the 1930s was about whether it was possible to have rational economic calculation of the allocation of resources towards different ends in a socialist economic system (which is narrowly defined as state ownership of the means of production).9 On the one side of the debate were economists from the Austrian school (the most prominent figure being Hayek), who denied that it was possible, while the other side comprised those economists working within a neoclassical (Walrasian) framework (the most prominent figure being Lange), who claimed that it was. According to the standard account, the first stage of the debate consisted of the salvo by Mises (1920), who suggested that rational economic calculation is theoretically impossible under public ownership. However, it then emerged that this challenge had already been addressed by Barone (1908), who had claimed that the allocation of resources could be rationally conducted in a public ownership environment given that the economic realm is presented by a set of (linear) functions (with the implication that Mises does not appear to have been aware of Barone's contribution). Hayek (1935a, 1935b), as a young scholar trained under the supervision of Mises, then claimed that the computational and informational problems involved in solving Barone's simultaneous equations would be tremendous. The third phase corresponds to the counter-attack presented by Lange (1938), who proposed a decentralized market socialist model within a Walrasian framework (claiming that managers of state enterprises would adjust their products’ prices in accordance with the marginal-cost pricing rule by observing the alterations in their inventories given an aggregate demand level) and, as such, refuted the alleged practical impossibility of rational calculation under public ownership.
The standard account of the debate is that the socialist side won (with the caveat that the mechanism to motivate public managers to follow the marginal-cost pricing rule was understudied – as Hayek (1940) claimed in his ripostes to Lange's salvo).10 Yet, even though the debate was primarily regarded as an important and controversial episode of the history of economic thought, we argue that the calculation controversy continued to shape the divisions within the neoclassical tradition in the post-war years. Various mathematical economists affiliated with the Cowles Foundation in the USA, many of them European émigrés with left-wing political sentiments, modified and fine-tuned the Lange model and investigated the incentive mechanisms of managers.11 Their ‘high modernist’ social engineering worldview and groundbreaking work in combining statistical research with linear programming, activity analysis and optimization procedures made them strange bedfellows with the US military (first during the war effort and then during the Cold War) and its needs pertaining to command, control, communication and information (Mirowski, 2002).
In the 1980s, the modern Austrian school (Israel Kirzner being the leading figure), emboldened both by the crisis of Keynesianism in the aftermath of the oil shocks of the 1970s and the subsequent rise of neoliberal ideas globally (heralded by Hayek's receipt of the Nobel prize for economics in 1974), contested the standard account that the socialist side won the debate on the grounds that the Mises–Hayek position was misunderstood by their opponents and that the challenge is still in effect.12 They reiterated (with much rigor) their predecessors’ emphasis on discovery, entrepreneurial activity and the importance of private property in conjunction with a well-functioning market environment. In addition, they added that the Walrasian socialism fell short in responding the Austrian challenge that promotes the discovery and innovation aspects of market processes (Brus and Laski, 1991).
The debate was an important input to the modern economics discipline in general and, above all, to neoliberal thought. First, the reiteration of the Austrian case against replacing the market mechanism had serious resonance – a claim that was fortified by the retreat of the bulk of the Walrasian socialist camp in the 1970s onwards to a ‘market socialist’ position, attempting to combine the market mechanism with that of planning (see, e.g., Elson, 1988; Bardhan and Roemer, 1992). But, more specifically, the enduring impact of the calculation debate on neoliberal thought was on how the issue of information (in the parlance of neoclassical economists) or knowledge (in the parlance of Austrian economists) could be incorporated into economic analysis. The usage of the two different terms is due to the distinct epistemological standpoints of these two contending economic approaches.13 The neoclassical camp acknowledged that key pieces of economic information will always remain asymmetrically distributed among agents. This could be due to two factors. First, as Chicago economist George Stigler (1961) argued, given that information may not be readily available, there may be a price dispersion that makes it economically feasible for economic agents to incur ‘search’ costs (up to a certain threshold) for gathering the requisite information and finding the right price. In other words, Chicago economists conceptualized information as yet another commodity and promoted the introduction of (new) markets for information as a remedy to this market failure. In contrast, post-Walrasian economists highlighted the strategic nature of information and argued that, given ubiquitous opportunism among economic agents, they may have economic incentives for withholding information. Given the strategic nature of information asymmetries, these post-Walrasian economists insisted that the introduction of new markets may not be sufficient to alleviate a large class of principal-agent problems that may prevent markets from clearing or even coming together. Accordingly, while some theoretical post-Walrasian economists tended to explain existing institutional configurations (e.g., the ‘efficiency wage') as historically developed, incentive-compatible mechanisms that instrumentally address informational problems (Shapiro and Stiglitz, 1984; Bowles and Gintis, 1990), more policy-oriented practitioners sought to engineer and implement such non-market mechanisms to solve endemic information problems (in most cases, by aiming to elicit the desired behavior without needing to reveal information; see, e.g., Arrow, 1963a; Peterson and Boisvert, 2004). It is in this sense that we distinguish between the Chicago and the post-Walrasian skeins of the neoclassical tradition as pro-market and post-market, respectively.
In contrast to the neoclassical tradition, the Austrian school assumes knowledge is, by definition, tacit, consequently not objectifiable and transferable, and can only be articulated through entrepreneurial activities that are embedded in a market environment where ‘rivalry’ is the norm of interaction among agents. As such, they put emphasis on market processes through which resources in the short run are effectively allocated and, more importantly, innovation is realized. But what is common to all these three perspectives is the presumption that agents who have private information (to use the neoclassical lens) or who engage in economic activities to accomplish their entrepreneurial capacities (to use the Austrian lens) are primarily motivated by their private interest, acting in an opportunistic manner, within an environment of rivalry. Hence, the core of the economic problem, that of the allocation of resources to different usages, is framed as an operation around the issue of information/knowledge.14 It is in this recasting of the problem of information/ knowledge in terms of a variant of the individualist ontology of economic incentives (whether it be as a commodity, strategic asset, or entrepreneurial savoir faire) that we find a cornerstone of the theoretical foundations of neoliberal thought.
The second dimension takes Keynes at its center. The gist of his argument is well known: following the Great Crash of 1929, in the middle of the Great Depression, Keynes (2007 [1936]) forcefully suggested that markets, left to their own devices, may not correct themselves, and that macro-economic aggregates may well not equilibrate at desired levels, thus causing unemployment, recession and, worse, a long, drawn-out depression. It is the duty of national governments (and, if necessary, international institutions), Keynes concluded, to step in and take corrective measures through counter-cyclical fiscal and monetary policies to mitigate the adverse effects of economic recessions and depressions.
One can easily read his argument as an extension of the socialist calculation debate (recall that Hayek's challenge was made in 1935, a year before the publication of Keynes’ magnum opus). However, Keynes was not a part of that debate and his call had a totally different motivation: he placed emphasis on a ‘fundamental’ uncertainty that structures the economic system, one that is likely to cause at least some economic agents (entrepreneurs, investors) to take precautions that prevent them from fully engaging (e.g., investing) in economic life (Keynes, 1937). As students of Keynes would remember well, beginning in the 1920s, Keynes started to investigate the modality of acting without knowing the future, proposing a distinction between probabilistic uncertainty (risk) and fundamental uncertainty (Keynes, 1921): in contrast to situations where the likelihoods can be known in advance (risk), fundamental uncertainty corresponds to a situation where there is no reliable information on the future and, thus, no basis to calculate probabilities.15 It is this latter, fundamental uncertainty that would always be behind economic crises and, in defending the capitalist system, Keynes came to the conclusion that since the decisions of the private sector may sometimes lead to inefficient macro-economic outcomes, active public policy responses are necessary to save the system.
Mainstream variants of the Keynesian economics (in particular, the ‘neoclassical-Keynesian synthesis', which articulated the Walrasian general equilibrium framework with the Keynesian hydraulics of injections (investment, government expenditure, exports) and leakages (savings, taxes, imports)) served as the standard economic models following the Great Depression until the late 1970s (mainly in the USA and Europe) (Bernstein, 2001). Moreover, in the post-war period, the Keynesian vision, coupled with the Pigovian tradition of public finance, became hegemonic in the welfare regimes of the West (Madra and Adaman, 2010). Ironically, it has been forcefully argued that the Keynesian economics was a petro-knowledge – a vision of an ever-growing economy which could not be possible were it not for the free-flow of cheap oil until the mid-1970s (Mitchell, 2011) and had little concern with what Pigou himself had much earlier designated as ‘social’ or ‘environmental’ costs. If anything, the capital-labor accord that the Keynesian program and the underlying Fordist regime of accumulation forged in practice through a mix of counter-cyclical macro-economic management and redistributionary policies was premised upon the displacement of the class conflict either onto increasing reliance of energy-intensive technology or towards the future through deficit spending that will be eventually paid off as the economy grows (Caffentzis, 2008).16
As this regime of accumulation reached its limits, the Keynesian economics started to lose much of its influence in the 1970s. In addition to the well-known factors, such as the oil shocks of the 1970s, the intensification of (financial and trade) globalization, the cost burden of the Vietnam War on the US economy, the stagflation of the late 1970s, and the overall institutional sclerosis of the post-war welfare state, we would like to highlight a deeper legitimacy crisis of the welfare state. The welfare regimes of the West, being vertically organized (however democratically elected) entities, were unable to incorporate large segments of societies into their governance structures, thus causing a prolonged malcontent on the part of the governed (Devine, 1988).17 We believe that this created a fertile ground for a turn towards neoliberal ideas during the 1980s. Perhaps, it is in this context that Foucault, ‘like many progressive intellectuals of his period and later', would turn to neoliberal thinkers – such as Hayek, Friedman, and Becker – ‘to find ways of renovating social democratic or socialist politics and escaping its perceived fatal statism’ (Dean, 2014: 5).
Within the field of economics, critique of the Keynesian program emerged primarily through two clusters of theoretical arguments, both of which would then be used, at least partially, in the legitimization of the neoliberal program (Madra and Adaman, 2010).18 The first one, known as the ‘agency problem', corresponds to the family of theoretical and applied research on the implications of extending the homo economicus assumption into the governing body: bureaucrats, rather than being assumed to behave as Plato's guardians, should be seen as self-interested agents who are capable of abusing their (state) power (Rose-Ackerman, 1975). This position was extended by Buchanan and Tullock (1962) through proposing the concept of ‘government failure’ to denote situations where government intervention would cause a more inefficient allocation of goods and resources than would occur without it. This critique of the bureaucracy through extending the assumption of opportunism could be read as part of a broader ‘economic imperialism', whereby Chicago economists began to theorize the areas of social life that, until that point, remained outside the reach of economic analysis: education, health, crime, family, and so on (Fine and Milonakis, 2009). Interestingly, these areas of ‘applied economic analysis’ were precisely the areas in which the welfare state had extended its policies since the end of the Second World War (through New Deal and Great Society programs in the USA and the Beveridge Plan in the UK). This family of research served to de-legitimize the use of bureaucratic means for redistribution and – directly and indirectly – paved the way for a neoliberal political economy.
The second strand of critique may be labelled as the ‘legitimacy problem'. From this perspective, critique derived, first, from the field of social choice theory: there are no mechanisms, it was argued, to ‘properly’ aggregate individual agents’ preferences at the societal level. To put it differently, the assumption that democratically-elected governments can base their policy decisions on a social preference function derived from individual preferences is strongly problematized through impossibility theorems (Madra, 2017: 53–58).19 This finding provided further ammunition to the neoliberal critique of certain types of government involvement in the economy. As a corollary of this line of critique, a second was derived from within the field of macro-economics. Combined with the failure of the Keynesian macro-economic policies to manage the stagflation of the mid-to-late 1970s, the monetarism of Friedman and, later, the rational expectations approach of John Muth and Robert Lucas claimed that economic agents are – at least partially – capable of foreseeing macro-economic measures and, in turn, taking counter-positions to maximize their personal benefits at the expense of undermining the impact of the public policy. Further increasing the presumed rationality of economic agents undermined the theoretical integrity of the Keynesian paradigm and gave additional ammunition to the neoliberal discrediting of government involvement in the economy: it was not only illegitimate (cannot be grounded in an aggregation of individual preferences) but also ineffective (cannot have an effect as rational actors would always adjust their behavior accordingly). An interesting and perhaps ironic point is the distance traveled at the University of Chicago from Knight's vision of entrepreneurial activity in the face of (fundamental) uncertainty to Lucas's rational expectations environment that relies on the assumption of an ‘objective probability environment’ (Davidson, 1991).
The marginalist controversy, the third track we are going to cover, was concerned with whether producers in their (short- or long-term) decision-making follow the marginalist calculus as the neoclassical theory suggests, or formulate their decisions based on a different set of criteria (such as ‘mark-up pricing'). The introduction of marginal analysis was the definitive twist that the neoclassical approach (emerging simultaneously in Manchester, Lausanne and Vienna) brought to the table at the turn of the nineteenth century, so much so that this new approach was initially labeled as the ‘Marginalist School'.20 However, skeptics were quick to ask whether this assumption held in reality, and many field researches were conducted to test it, with the conclusion that most managers of firms made their decisions without reverting to the marginal calculus of costs and benefits (Hall and Hitch, 1939; Lester, 1946; for surveys of this debate, see Lavoie, 1990; Vromen, 1995: 14–17; Mongin, 1998). In a more general theoretical context, American institutionalist economists, such as Thorstein Veblen, were persistently questioning the realism of descriptions of economic agents grounded in the concepts and constructs of utilitarian psychology (Lewin, 1996), while also pointing to the shortcomings of the abstract and formal models of neoclassical economists (Rutherford, 1994).
This challenge to the realism of assumptions, in the particular context of theories of the firm, was taken seriously, especially by the Chicago-wing of the Neoclassical school. The first one to acknowledge the criticism and produce a counter-argument that explicitly positioned itself as a mix of ‘Marshallian’ and ‘Darwinian’ types of analysis was Armen Alchian. Shifting focus from the individual firm to the Marshallian construct of the ‘representative firm’ of an industry, Alchian (1950) argued that while individual firms will not be able to behave as predicted by the neoclassical firm theory under the plausible conditions of uncertainty and incomplete information, the industry average, due to the dynamics of market forces operating as a selection-mechanism, will tend towards the pattern of behavior as predicted by theory. Three years later, Milton Friedman (1953), in his now-canonical paper on the methodology of economics, made a much bolder appeal to the biological analogy of the market as a selection mechanism. Expert billiard players, he argued, do not solve complex Newtonian equations before making their shots; but they hit the ball as if they satisfactorily solved them. Or, to put it otherwise, those that are successful must be the ones that made their shots as if they had already done the necessary computations. Nesting the billiard player analogy in a more fundamental biological analogy, Friedman argued that, since the selection mechanism of market forces will make sure that the surviving firms will be the ones that ‘approximated behavior consistent with the maximization of returns’ (1953: 22), regardless of how actual firms behave, it is ‘not at all unreasonable’ to construct models that assume that producers do follow the marginal-cost pricing rule.
A third line of defense came nine years later by another soon-to-be Chicago economist, Becker (1962), who argued that markets will tend to produce efficient results, even if individual economic agents do not act in accordance with the theory and display a spectrum of modes of behavior that range from ‘impulsive’ (random) to ‘inert’ (resistant to change). Becker's argument, like that of Alchian, hinged on the distinction he made between individual and market rationality. He argued that changes in opportunity sets (e.g., budget constraints), induced by the changes in relative prices, will compel ‘the average economic actor’ to behave in accordance with the predictions of the neoclassical theory, regardless of how irrational individuals may behave in practice.
These ‘selectionist papers’ are subsequently read as the foundational texts of new institutional economics (see, e.g., Vromen, 1995), or as the antecedents of evolutionary game theory (Samuelson, 2002), or even as the inspiration for simulation-based experimental economics (Gode and Sunder, 1993, 1997). Nevertheless, in several ways, these three authors – Alchian, Friedman, and Becker – are difficult to place appropriately because, despite the fact that their papers have been immensely influential subsequently, none of them pursued the systematic introduction of evolutionary ideas, but instead continued to build models based on the homo economicus construct.
Indeed, their explicit evolutionary-theory-inspired structuralism is in sharp contrast to their subsequent normative commitment to ‘individual choice'. In a commentary on Becker's essay, Austrian economist Kirzner (1962) was not able to make sense of what Becker was trying to do within his methodological individualist framework: if no one in the economy is behaving rationally, and if everyone is a price-taker, what causes the shifts in the relative prices? This may be an early instance of the recurrent ‘behaviorism’ in Becker's thinking that Foucault later drew out in his 1978–79 Lectures: ‘Rational conduct is any conduct which is sensitive to modifications in the variables of the environment and which responds to this in a non-random way, in a systematic way, and economics can therefore be defined as the science of the systematic nature of responses to environmental variables’ (Foucault, 2008: 269). Perhaps, the only qualifier we would add to Foucault's insightful reading of Becker is to point out that for Becker (at least in his 1962 paper), rationality is taken not at the level of the individual (who could as well behave irrationally), but rather at that of the market (as a statistical construct).
One other possible way to interpret these ‘selectionist papers’ is to read them as responses to the normative implications of the then-dominant Walrasian neoclassical paradigm and its conceptualization of the market through the ‘auction’ metaphor. Rather than being an apologetics for the market system, general equilibrium theorist Frank Hahn himself would claim that the Walrasian paradigm should be read negatively, so as to demonstrate ‘why the economy cannot be in [general equilibrium]’ (Hahn, 1984: 52). The assumptions under which stable, unique and efficient equilibrium outcome may be reached are so restrictive that it cannot be realized. Government intervention was made necessary by a range of market failures (e.g., externalities, public goods) and imperfections (e.g., concentration of market power), while the conceptualization of markets through the ‘auction’ metaphor also allowed for the separation of the efficient operation of the market adjustment process from the distribution of the initial endowment. This latter property of the model made the redistribution of assets prior to the market adjustment process a plausible proposition. In other words, interventionism made possible by the Walrasian paradigm dovetailed nicely with the Keynesian macro-economic program of the post-war years, giving way to the ‘neoclassical-Keynesian synthesis'. The ‘selection’ metaphor was an alternative way of conceptualizing the market adjustment process, one that rekindled the liberal neoclassical trust in the efficacy (and the efficiency) of competitive market economies. Yet, this was more than a return to classical liberalism: the introduction of the biological notion of ‘natural selection’ into economic analysis and subsequent ‘naturalization’ of competition elevated the latter into an overarching social ontology that explains mutatis mutandis everything (as inaugurated in Becker's essay, aptly titled The Economic Approach to Human Behavior (1976)).
The marginalist controversy and the ‘selectionist papers’ that came out of it had a much more profound impact than many historians of economic thought may be prepared to admit. Through them, the foundations for the consolidation of the market mechanism as a meta-metaphor were forged. The neoliberal claim that the market and market behavior are the driving forces of efficient resource allocation were therefore put forward with much force.
The fourth and final track belongs to a meta question pertaining to the motivational orientations and cognitive capacities of individuals qua economic agents. As already noted in the previous section, during the inter-war years, the assumptions that early neoclassical economists made regarding how consumers and producers make decisions were severely criticized by American institutionalists. In these early days, the individual was conceptualized through a framework of cardinalist utilitarianism (à la Bentham), where satisfaction derived was subject to comparison among commodities as well as individuals. However, in part due to the increasing prevalence of logical positivism among neoclassical economists, these external criticisms struck a chord, and the discipline opted for an ordinalist approach, which meant the end of a framework that allowed for comparisons of welfare among individuals and the transition to a Paretian universe.21 With a minimalist set of information (when two bundles of commodities are presented, one needs to know whether one bundle is preferred to the other one or the two are of equal order), the ordinalist version was enough to provide the foundations for demand theory (Mandler, 1999).22
Since the main reason behind this shift was to assume as little as possible regarding the human psyche (an unobservable), this ordinalist turn meant that neoclassical economists could reduce the assumptions regarding the human mind to the axioms of rationality (defined over preference orderings) and dispense with the utility construct and all the eighteenth-century Benthamite ‘psychologism’ that it relied upon (Samuelson, 1938; Little, 1949). On the side of the Walrasian neoclassicism, economists and mathematicians at the Cowles Commission gave a rationalist bent to this positivist tendency by pushing forward with a complete axiomatization (Koopmans, 1957; Debreu, 1959; Arrow and Hahn, 1971; see also Ingrao and Israel, 1990). So much so that, in the formalist general equilibrium theory, the various functions of the human body (rather than the mind) are disassembled and disintegrated into a series of functions, agencies, and axiomatic properties (Ruccio and Amariglio, 2003: 110–119). On the side of Chicago neoclassicism, the ‘selectionist papers’ discussed above gave an open check to economists like Friedman and Becker to use the utility maximization framework pragmatically, as a ‘good enough’ approximation of human behavior without much impunity.
Yet, the ordinal turn did not really mean that the need to peek into the human mind could be dispensed with. On the contrary, even the internal consistency of choice, a very ‘thin’ (if not the thinnest) definition of rationality, must depend on ‘the interpretation of [the observed] choices and on some features external to choice as such (e.g., the nature of our preferences, aims, values, motivations)’ (Sen, 1987: 14). In other words, for Amartya Sen, any meaningful concept of rationality, unless our working assumption is to be ‘rational fools', must refer not only to the underlying motivations of economic agents, but also to a broader communicative rationality of the communities within which these agents conduct their ordinary business of life (see also Sen, 2002). In a similar manner, fairly early on, Kenneth Arrow (1972) also noted the necessity of mutual trust for market exchanges to be conducted. Such interventions from mathematical economists were important in rekindling the interest in understanding the underlying motivations of human behavior beyond the narrow opportunism of homo economicus. The mushrooming literature in the last four decades led to a proliferation of behavioral orientations such as homo reciprocans (rather than pursuing narrowly-defined private interests, individuals respond to the external word by reciprocating – that is, by being courteous to those who have been good to them and by punishing those who have been bad to them) or as homo altruist (again, rather than pursuing narrowly-defined private interests, individuals respond to the external word by helping others) (see, e.g., Margolis, 1982; Stark, 1995; Fehr and Gächter, 2000). To a certain extent, these departures from the construct of homo economicus can also be considered as departures from the neoliberal program.
Nevertheless, the ways in which these theoretical constructs are introduced and mobilized in policy-making compel us to conclude otherwise. These alternative behavioral orientations are introduced to explain why they may either cause markets to fail to function properly or make up for market failures (Adaman and Madra, 2002). In other words, within the neoclassical theoretical corpus, these behavioral orientations are introduced in order to establish the conditions necessary for the proper functioning of markets – a problematic located squarely within the purview of neoliberal governmentality. To put it differently, if governing the social requires ‘getting the incentives right', then the incentives should be properly calibrated for a range of behavioral orientations or ‘social preferences’ that diverge from the homo economicus construct (Bowles, 2016).
A second and equally relevant aspect of the problem pertains to the cognitive capacities of economic agents. Arguably, the literature on the cognitive limitations of human beings, more so than the literature on motivational diversity, constitutes the bulk of what is today known as the behavioral turn in economics. Here, on the one end of the spectrum, we have Herbert Simon's work (1957) on ‘bounded rationality', which highlights the computational limitations of economic agents: due to uncertainty about the future, costs of acquiring information in the present, and computational limitations of the human mind, agents are unable to make an ‘optimizing’ decision, but rather settle for ‘satisficing’ ones. On the other end of the spectrum, we can refer to Daniel Kahneman and Amos Tversky's work (1979) on psychological traits (e.g., framing effects) that prevent agents from behaving in ways predicted by the homo economicus framework.
Again, here it is possible to interpret the behavioral turn in two opposing ways. On the one hand, there are those behavioral economists who wish to demonstrate through experiments why and how the homo economicus assumption fails to represent adequately the reality of the human mind. Francesco Guala (2007) calls this group ‘testers’ (as they are testing economic theories and assumptions regarding human motivations and cognitive capacities) and differentiates them from a second group, ‘builders'. This second group is much more pragmatic and takes as its task to build the appropriate mechanisms, institutions and interfaces that will accommodate for all the deviations (documented in and operationalized through an accumulation of experiments and simulations) from the standard homo economicus assumption – in order to supplement or, if necessary, supplant actually-existing markets. If what the first group does can be seen as critical of the neoliberal program, the second group's objective seems to be explicitly to secure the smooth functioning of neoliberal governmentality given that the homo economicus interface (either due to motivational diversity or cognitive limitations) is very prone to fail in eliciting the desired behavior from the economic agents (McMahon, 2015).
In the long trajectory of this fourth, meta-track, a constant is the crisis of the homo economicus construct as a description of the reality of the human subject. From the ordinalist turn to the behavioral turn, we can discern the structure of a longue durée dynamic: if the ‘structuralist drift’ (in both its Walrasian formalist and Chicago selectionist variants) towards assuming as little as possible regarding the economic agent was, in part, a response to the psychologism controversy, the behavioral turn in economics can be read as a reaction to the austere, flattened and disassembled representation of the economic agent in post-war neoclassicism. Yet, this disciplinary dynamic of reaction and counter-reaction could also be understood as a process of the increasing sophistication of the neoliberal program in engineering its institutional interfaces in increasingly subtle ways.
In this chapter, we proposed to trace the genealogy of the neoliberal turn in economics through four enduring theoretical controversies. Consideration of the socialist calculation debate not only enabled us to trace the origins and evolution of the Austrian school, but also to demonstrate how the Walrasian socialist camp and, later in the last quarter of the twentieth century, the post-Walrasian mechanism design approach are also within the neoliberal episteme – defined here as the governance of the social through economic incentives. The rise and fall of the Keynesian macro-economic program and the modern welfare state provide us with one history of the emergence of the Chicago school, as well as an account of the key theoretical controversies and conflicts endogenous to the discipline. In a parallel manner, the marginalism controversy and the curious case of the ‘selectionist papers’ offer another history of the emergence of the Chicago school, along with an account of how the ‘selection’ metaphor (which naturalizes markets and contributes to the depoliticization of the economy) is introduced by Chicago neoliberals as a rival to the ‘auction’ metaphor of the then-dominant Walrasian general equilibrium approach. And, finally, we traced in the psychologism controversy both a century-long dialectics of reaction and counter-reaction of first assuming less (the ordinal turn) and then more (the behavioral turn) about the motivations and cognitive capacities of economic agents, and also the failure of the early neoliberal program (which relied exclusively on the homo economicus interface) and the fine-tuning of late neoliberal governmentality by accounting for the diversity of motivational orientations and limits of human cognition.
This four-track genealogy read the neoliberal program in its various forms as a project of the economization of the social, as materialized either through the naturalization of economic processes (as in the Chicago and the Austrian schools, albeit in different ways) or technocratization of their governance (as in the post-Walrasian mechanism design approach and the Austrian constitutionalism, albeit in starkly different ways), or a combination of both. What is common to both paths to economization is the depoliticization of the social (which, of course, is a very political act – one that actively implements and pushes for the very institution of economic incentives in place of political negotiation through democratic participation). Even when behavioral economists acknowledge that individuals do not necessarily comprehend (due to cognitive (computational and psychological) limitations) and affirmatively respond (due to diverse motivational orientations) to economic incentives, they tend to make use of these insights to modify and reform the institutional frameworks of governmental rationality. In this precise sense, the neoliberal program of depoliticization through economization of the social, despite its vast internal heterogeneity (with its pro-market and post-market, formalist and pragmatist, hyper-rationalist and behavioral variants) can be read as a complex and adaptable political program of the mainstream of the economics discipline.
1. This chapter builds on our previous writings on neoliberalism: Madra and Adaman (2010, 2014) and Adaman and Madra (2014). See also Madra (2017). We are thankful to the editors, as well as to Duygu Avcı, Ozan İşler and Pat Devine, for their constructive comments. The usual disclaimer applies.
2. Following Foucault's earlier work (1970), we understand ‘episteme’ as an ‘interdiscursive horizon, situating all historically determinate discourses, different and dispersed, in a common spatial field’ (Amariglio, 1988: 586–7). This way, both pro-market and post-market approaches are rendered intelligible as part of a common spatial field. While the category of episteme carries with it all the limitations of structuralism (such as the difficulties it faces in explaining transition from one episteme to another, and the exhaustive nature of an episteme, making it difficult to theorize discourses that are heterogeneous to a given episteme), it does serve a useful function for our efforts to theorize the neoliberal turn as a deeply woven, interdiscursive phenomenon that has far-reaching implications beyond the discipline of economics and into the fabric of the social as a form of savoir faire.
3. Foucault's lectures have recently been revisited extensively. See, for instance, Gordon (1991), Lemke (2002) and Tribe (2009). For a more recent reassessment of Foucault's status as a critic of neoliberalism, see Dean (2014).
4. On the legacy of Coase and the Chicago School in the neoliberal transformation of law and economics in the USA, see Davies (2010).
5. The traditional liberal position would require the state, on the one hand, to safeguard law and order and provide basic services to poor segments of society (e.g., health and education services) and, on the other hand, to secure the competitive characteristics of the market system (e.g., by fighting monopolization). With the advent of modern state, both market-supplementing regulation and redistributive welfare policies became increasingly complex and constitutive of the social (Donzelot, 1991 [1978], 2008; Procacci, 1991 [1978]).
6. Foucault (1991 [1978]: 102) defined ‘governmentality’ as an ensemble formed by ‘the institutions, procedures, analyses, calculations and tactics that allow the exercise of [a] complex form of power’ over the social, which facilitates the materialization, maintenance and reproduction of the economic processes of production and distribution, as well as political processes of sovereignty and order-making.
7. When agents hold private information with economic value that they find it in their interests not to reveal (thus causing markets not to function properly), it is argued, an incentive mechanism should be designed to induce them to truthfully reveal their information.
8. In the USA, the neoliberal push for privatization in education took the form of a debate on charter schools, and, in this regard, ‘school vouchers’ (which facilitate transition from public schools to charter schools) were first suggested by Milton Friedman in his Capitalism and Freedom (2002 [1962]). For a recent account of the neoliberal transformation of education in the USA, see Hursh (2016). Again, in the USA, health care has been historically considered not as a right but, at best, an ‘entitlement’ (as in the cases of Medicaid and Medicare) and has been explicitly or implicitly rationed (by price or by other means). For a history of the social struggles over the provisioning of health care in the USA since the Great Depression, see Hoffman (2012).
9. This paragraph draws upon Adaman and Devine (1996, 1997, 2002).
10. See also Burczak (2006: 29–37). Recall that Hayek by the mid-1940s opened up a new front by arguing that individual liberty will be jeopardized under socialism (Hayek, 1944). On the other hand, in addition to Austrian and Walrasian socialist contributions, there was a third strand presented by Maurice Dobb (1955), who claimed that, given the unavoidable uncertainty associated with atomistic decision-making (especially with regard to investment and disinvestment), the decentralized model of Lange would not capture the core element of a socialist economy: long-term strategic planning. Yet, his contribution remained peripheral to the main debate (in part, the force of his argument was later weakened by its resemblance to the Soviet model, which was largely discredited due to its authoritarian governance structure).
11. This is the case in state enterprises, as well as private firms, where there is a separation of ownership from management – known as the ‘principal-agent problems'. For an early treatment, see Bergson (1978).
12. For a general position of the modern Austrian approach, see Kirzner (1987) as well as Boettke and Coyne (2015). Lavoie (1985) and Kirzner (1988) initially provided the basic ammunition for the second, new attack. See also Caldwell's (2010) defense of the Austrian tradition as a classical liberal one against the efforts of those presenting it as a part of the neoliberal turn in economics. While we consider Hayek to be a part of the neoliberal turn, we do so by clearly differentiating (methodologically, ontologically, epistemologically) the Austrian school from the Chicago school, in particular, and the neoclassical tradition in general (see also Madra and Adaman, 2014).
13. It is worth noting that the calculation debate was conducted not only on the basis of different ideological positions (left versus right, or capitalists versus socialists), but also on different methodological, ontological and epistemological positions. Indeed, one may find it paradoxical that the same Friedman who fully supported Hayek in his Mont Pèlerin mission remained silent when the Economics Department at the University of Chicago rejected Hayek's application to the department on the grounds that his command of technical and formal methods was found to be inadequate; see Skousen (2005).
14. Note that within the socialist camp, an alternative vision can be found in Adaman and Devine (2002), which suggests that participatory planning can satisfactorily answer such concerns, as all related parties would have their say in the planning phase – and, as such, the system would make it possible to feed the planning process by mobilizing the tacit knowledge of all interested parties.
15. Although both Keynes and the ‘old’ Chicago economist Frank Knight were almost simultaneously drawing attention to a similar fact – that of systemic uncertainty – their policy conclusions were rather different. In contrast to Keynes, who pushed the emergency button to call governments into action, Knight (1921) saw in it an element of opportunity for entrepreneurs who would exploit the foggy environment to their benefit.
16. For extensive discussions of the post-war Fordist regime of accumulation in advanced capitalist societies, see Aglietta (1976), Marglin and Schor (1990) and Harvey (1991).
17. For a discussion of how ‘functional integration’ of citizens as workers and consumers in Fordist regimes of accumulation leads to ‘social disintegration’ and alienation, see Gorz (1989).
18. As a matter of fact, these two lines of criticism would apply to any position that gives a substantial role to governments – and as such they are ipso facto equally, if not more, relevant to the socialist calculation debate. One can, indeed, ask the following question at this point: How different was the Beveridge Plan in the UK from the Gossplan in the USSR? The former had, just like the latter, a lot of planning and public ownership; and the latter had, just like the former, small-scale units with some degree of private control.
19. One path is that of Arrow (1963b): for an a priori chosen set of axioms that are seen as the cornerstones of a liberal democratic society, there is no aggregation rule that would satisfy all of these axioms simultaneously. Another is that of Sen (1970): any aggregation mechanism may fail to satisfy both liberalism and Pareto optimality simultaneously.
20. Mirowski (1984), in his seminal analysis of the marginalist revolution as an effect of a ‘physics envy’ in economics, argued that the Austrian school should be treated separately from the Jevonsian and the Walrasian traditions.
21. Lewin (1996) recovers the historical and intellectual context of the controversy.
22. As a caveat, let us remind the reader that the entire micro-economics of the mainstream approach is now based on the ordinal approach – except for cases of choice under probabilistic uncertainty, which is treated via the cardinal alternative.
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