President Bill Clinton's proclamation that the ‘era of big government is over’ encapsulated the ‘New’ progressive ‘Third Way’ politics he and British Prime Minister Tony Blair championed and practised.1 In the 1980s, the Thatcher and Reagan administrations had pursued free market economic reforms influenced by the neoliberal ideas of Friedrich Hayek and Milton Friedman. Those ideas about monetarism, deregulation and privatisation had broken through even earlier during the Carter and Callaghan administrations of the 1970s.2 The Third Way, by contrast, aimed to reform government and the welfare state through the importation and application of market models to government and the public sector.
Neoliberal ideas were a central inspiration for Third Way reforms of government. American neoliberal scholars re-theorised the state in the 1950s and 1960s. Chicago economists George Stigler, Ronald Coase and Gary Becker were instrumental in a movement which has been both pejoratively and admiringly referred to as ‘Economics Imperialism'.3 Stigler and Coase applied markets to regulation and law by presenting government action in these areas as being economically inefficient (Coase, 1960; Stigler, 1961). Becker developed an ‘economic approach to human behaviour’ (Becker, 1976). These efforts contributed to the novel approach to politics, which would later be called ‘public choice', by two Virginia-based scholars, James Buchanan and Gordon Tullock.4 Coase bridged both Chicago micro-economic theory and Virginia public choice. A third school, born of the Bloomington workshop on political theory and policy analysis ran by Vincent and Elinor Ostrom at Indiana University, both drew from and transformed public choice into a theory capable of application in Third Way political programmes. The Ostroms did this especially through developing the concepts of public entrepreneurship, polycentricity and co-production. Third Way Progressives largely accepted the analysis of government failure generated by these economists, although their insights were sometimes delivered second or third hand. Public choice theory, which pioneered the application of markets and quasi-markets to public policy in the 1990s and 2000s, underpinned many of the Third Way ‘modernisation’ strategies implemented by Clinton, Blair and others.5
Scholarship on neoliberalism has flowered in recent years but it remains a difficult and contested term.6 In this chapter, neoliberalism refers not simply to the thinkers associated with the Mont Pèlerin Society (MPS), the international neoliberal collective founded in 1947 by Friedrich Hayek, but to the free market ideology based on individual liberty and limited government that connects human freedom to the actions of the rational, self-interested actor in the competitive marketplace (Jones, 2012: 2). This neoliberal view was applied not simply to state action in the economy, though that was clearly important to the political transformation of the United States and the United Kingdom after 1979, but also to the state itself, the ultimate non-market arena, and other non-market decision making. In particular, the public choice focus on government failure was complemented and enhanced in the Third Way programmes of the New Progressives by a series of policy proposals advocating markets to deliver better and more efficient public services. Markets would, it was claimed, enable government to do ‘more for less'.7 This chapter traces this development and argues that public choice theory profoundly influenced the Third Way agenda and entrenched and deepened transatlantic neoliberal politics.
The Third Way emerged in the 1980s and 1990s out of the political despair bred by repeated Democratic and Labour Party electoral defeats at the hands of their conservative opponents. Bill Clinton and Al Gore led the ‘New Democrats’ to victory in the United States in 1992. They were the standard bearers of a centrist political movement which grew around the Democratic Leadership Council (DLC) founded by political strategist Al From in 1985.8 ‘New Labour', heavily influenced by Clinton's triangulation strategy, came soon after, following Tony Blair's election as party leader in 1994. New Labour won a parliamentary landslide in the 1997 General Election and held office unchallenged until Gordon Brown's defeat in 2010.
‘New’ progressives argued for a ‘Third Way’ in politics which, in the words of its chief theorist, British sociologist Anthony Giddens, would move beyond left and right (Giddens, 1994). Despite Giddens’ protestations to the contrary, however, the intellectual novelty of the ‘Third Way’ effort to reform the state lay in its application of market models to ‘elevate [states'] administrative efficiency’ (Giddens, 1998). Giddens himself suggested a balanced approach to using markets so that they did not become the default option (Giddens, 1998: 75). However, if Third Way politics can be seen as an attempt to draw the strength from both left and right, the hard policy core of the proposed renewal of social democracy derived from American postwar neoliberal market-based approaches to social policy, which were to be fused with a social democratic rhetorical appeal. In other words, the method was neoliberal and the ‘values’ were supposed to come from the centre-left.
Neoliberal ideas were not the only important influence on the Third Way. Other significant influences included the liberal left communitarianism of American sociologist Amitai Etzioni (1993) or the Stakeholder Capitalism of Will Hutton (1995) among others. Along with other more traditional liberal-Democratic (in the American sense) or Fabian Socialist (in the British) ones, these ideas gave rise to very important policy strands of the Third Way, or New Progressive, project, especially concerning rights and responsibilities and reforming capitalism.9 Equally, the Clinton and Blair administrations espoused, to varying degrees, Wilsonian liberal interventionism, a creed that became associated with neoconservatism and culminated in the disastrous support by Blair of President George W. Bush's War in Iraq. These dimensions of Third Way politics, though profoundly important, are not the concern of this chapter, which focuses on New Progressive attempts to reform the state and the public sector.
Two statements, made some years apart, illustrate the Third Way attempt to reform and renew the state. The first is from Bill Clinton and Al Gore's (1992) manifesto for the 1992 Presidential election, Putting People First: A Strategy for Change. Speaking about ‘A Revolution in Government’ they observed:
We cannot put people first and create jobs and economic growth without a revolution in government. We must take away power from the entrenched bureaucracies and special interests that dominate Washington.
We can no longer afford to pay more for – and get less from – our government. The answer for every problem cannot always be another program or more money. It is time to radically change the way the government operates – to shift from top-down bureaucracy to entrepreneurial government that empowers citizens and communities to change our country from the bottom up. We must reward the people and ideas that work and get rid of those that don't. (Clinton and Gore, 1992: 23–24)
The second is taken from a paper by Prime Minister Tony Blair's Strategy Unit in 2006, in which is described the then-Labour Government's approach to importing competition and contestability into public services:
A public service characterised by competition and contestability on the supply side and by user choice and voice on the demand side will have powerful dynamics within it to improve the effectiveness, efficiency and quality of that service. This doesn't mean, as we will see, that the need for top down pressures is eliminated, but it does mean that the potential downsides of over-reliance on top down pressures can be avoided and new and strengthened incentives for high quality services that meet the needs of users put in place… (PM's Strategic Unit, 2006: 22)
The supply of a public service can be opened up to competition in two main ways: (i) competition in the market and (ii) competition for the market. Which is appropriate in any particular instance will depend on the characteristics of the service in question:
Competition and contestability provide incentives for producers to drive down costs and improve outcomes. (PM's Strategy Unit, 2006: 48)
These quotations capture the Third Way strategy to ‘reinvent’ or, in the equivalent British ‘New Labour’ jargon, ‘modernise’ the state for the information age. Central to the concept of reinvention or modernisation were several key ideas. Generally, as noted in the introduction, market models were to be applied to government and the public sector to make them ‘leaner and meaner'. The objective of greater efficiency was to be obtained through the introduction of competition and contestability into public service delivery. Moreover, more was to be achieved with less in part through the contribution, the ‘co-production', by consumers of government services.
How did these ideas come to define the reform agendas of American and British progressives, often displacing the more traditional left-liberal concerns of equity, equality and the idea of the public interest? What was the source of the new values of choice, efficiency, competition and coproduction? From where did the wholesale scepticism of the state and its capacity to improve people's lives emanate?
The answer to this question is superficially obvious. It is to be found in the rise of free market ideas, of neoliberal politics, which took place in the 1980s. This political resurgence has been characterised differently depending on the perspective of the commentator. For supporters of the policies of the 1980s, the transformation in those years was led by a series of heroic figures – Hayek, Friedman, Reagan and Thatcher.10 Deregulation, monetarism, privatisation (especially in the British context) and tax-cuts were implemented on both sides of the Atlantic and in other parts of the Anglosphere, such as Australia and New Zealand. These policies, so the narrative goes, had ‘won’ the battle of ideas which was rubber-stamped with approval by the end of the Cold War and the destruction of Soviet Communism. By contrast, for opponents, the rise of neoliberal politics stemmed directly from a malevolent alliance between international finance capital and domestic pro-business governmental programmes, especially through the influence of corporate interests on politics in the US and, to a lesser extent, the UK (Glyn, 2006; Harvey, 2006; Klein, 2007). Neoliberalism became the catch-all term for everything that is deemed by activists and critics to be wrong with globalisation and free markets.
This binary debate has been unhelpful to the construction of a more nuanced history of the development of neoliberal politics. But it is certainly true that some of the outline remains accurate. The pat answer to the question of where the new political values of choice, efficiency and competition came from is therefore that they were mere accommodations to an agenda already mapped out by the predecessor Republican and Conservative administrations of the 1980s and early 1990s. Yet this is to miss an important aspect of what was distinctive about Third Way. The aim of the ‘Third Way’ was to reject the so-called ‘false choice’ between social justice and economic growth. Rather, the two could be fused by a restoration of faith in government. Faith would only be restored through a new approach. As the American neoliberals had argued, government failure could be corrected by the market.
The impact of American neoliberalism or, more precisely, the Chicago and Virginia Schools, is not yet sufficiently understood. Friedrich Hayek and Milton Friedman's influence is by now well known. Both influenced journalists and think-tanks in the United States and Britain in the 1960s and 1970s, helping to shape Thatcherite economic strategy and so-called ‘Reaganomics'. Less comprehended is the precise nature of the neoliberal influence on the Third Way. American neoliberal ideas were important both in general terms and more specifically in terms of Third Way public administration and social policy. Generally, the expansion of market thinking changed the terms of the debate, introduced new ways of thinking about government and the market and the respective strengths and weaknesses of each. Specifically, research on bureaucracy and public administration led to innovative ideas concerning policy design.11
Examining the general point first, in the postwar period Chicago and Virginia economists constructed an all-encompassing economic approach to human behaviour based on what Gary Becker described as ‘maximizing behaviour, market equilibrium and stable preferences’ (Becker, 1976: 6). At the heart of this economic vision, an old idea of liberty based on freedom from interference was resurrected. Gone was the enabling ideal of freedom that underlay the welfare state and New Deal liberalism: liberation from economic insecurity. American neoliberalism in particular re-theorised liberalism around a version of limited, or negative, liberty, freedom from interference. The importance of this was to erode the dominant post-New Deal era view of the state as a benevolent force for good.
American neoliberals attacked the pillars of twentieth-century liberal and social democracy – economic planning, government regulation, civil administration, the very idea of a ‘public interest’ – and insisted that only a Madisonian ‘checks and balances’ constitution coupled with the expansion of the market mechanism into hitherto untouched areas would guarantee individual liberty. They believed that the rising tide generated by private profit lifts all boats. The magic of the market was its power to improve everyone's standard of living even as inequality increased. Inequality therefore did not matter. It was essential to competition, which increased efficiency, productivity and, ultimately, wealth. Yet the state was essential to the realisation of this project as it was necessary to enforce the deregulation, privatisation, inflation-targeting and low-tax, business-friendly approach demanded.
There were three important initial tributaries to this American neoliberalism as it was developed in the 1950s and early 1960s. First, Friedman and his Chicago colleagues George Stigler and Gary Becker developed Chicago price theory into what they saw as a comprehensive explanatory tool. Chicago price theory was characterised by methodological individualism (theories which postulate that social and political phenomena must be explained by, and should be reduced to, the motivation and agency of individuals), rational choice and free markets coordinated through the price system. Stigler (1961, 1962a, 1971) applied the ‘economic approach’ of Chicago price theory to information and to regulation. Becker's essay, The Economic Approach to Human Behaviour (1976: 14), described the economic approach as a ‘unified framework for understanding all human behaviour’ based on individuals, or ‘decisions units', ‘maximizing behaviour', in the sense of maximising utility, in an environment characterised by ‘market equilibrium’ and ‘stable preferences'. Becker (1957, 1968, 1976; Becker and Murphy, 1988) analysed discrimination, crime, the family and drugs applying the same method. The pejorative label of ‘economics imperialism’ was coined for these ideas because they aimed to expand Chicago's distinctive analytical frame into non-market areas.
Second, British Chicago-based economist Ronald Coase's ‘The Problem of Social Cost’ (1960) examined the unintended consequences of well-intentioned regulatory interventions.12 Using the example of a law to stop the harmful effects of pollution, Coase concluded that the ‘aim of such regulation should not be to eliminate smoke pollution [through fines which might have negative unanticipated effects on economic growth] but rather to secure the optimum amount of smoke pollution, this being the amount which will maximise the value of production’ (Coase, 1960: 42). Regulators should not interfere in respect of voluntary market relations unless the total cost of non-intervention would be higher than the costs associated with intervention.
Coase's argument was particularly important because it brought into doubt hitherto presumed public goods, especially the neutrality and effectiveness of government action. He argued:
The kind of situation which economists are prone to consider as requiring corrective Government action is, in fact, often the result of Government action. Such action is not necessarily unwise. But there is a real danger that extensive Government intervention in the economic system may lead to the protection of those responsible for harmful effects being carried too far. (Coase, 1960: 27)
From first principles, Coase advocated the use of market measures of economic growth and total economic and social product as barometers of policy. Such measures should replace piecemeal interventions or central government diktat to target individual problems like pollution. It should be remembered that Coase included in his analysis the prospect of wider considerations than the purely economic – ‘it is, of course, desirable that the choice between different social arrangements for the solution of economic problems should be carried out in broader terms than [as measured by the market] and that the total effect of these arrangements in all spheres of life should be taken into account’ (Coase, 1960: 43). However, because the ‘social’ element of the total product, as opposed to the economic element, was difficult to quantify, it became relegated in subsequent uses of his ideas.
Third, influenced by Chicago price theory, by Coase and by the new constitutional theory of John Rawls, economists James Buchanan and Gordon Tullock developed public choice theory in the late 1950s and 1960s from their base at the Thomas Jefferson Center at the University of Virginia.13 With the publication of The Calculus of Consent in 1962, the Virginia School of Political Economy was born. In the book, Buchanan and Tullock elaborated a market-based analysis of politics from a ‘methodologically individualist’ perspective and argued that the ‘public interest', broadly conceived, was a mirage (Buchanan and Tullock, 1962: 3).14 The noble civil servant impartially pursuing policies in society's best interests (in the Weberian sense, discussed further below) did not exist in Buchanan and Tullock's model. Rather, just as in a conventional market, individuals and groups seek to use government processes to pursue their own interests for their own ends (Buchanan and Tullock, 1962: 270–272). Another less virtuous, more pernicious, ‘invisible hand’ operates, according to which, individual actors in the public sphere intending to serve the public interest merely end up furthering private interests. Stigler's research on regulation in areas like electricity, where regulators appeared to become ‘captured’ by the regulated, provided examples of the effect (Stigler, 1962b).
The policy implications of the Virginia and Chicago analysis were clear. Since no public interest, or collective good, could be identified separately from the interests of particular individuals or groups working in government and the public sector, constitutions should limit collective action as far as possible to areas in which broad agreement exists. Public policy should work with the grain of self-interested motivation by introducing incentives into government and the public sector just as these spurs are used in private enterprise. All but the barest essentials of government should be limited.
There were other parallel developments that contributed to market-based understandings of politics and government in this period. Methodological individualism was expanded across the social and political sciences in ‘rational choice’ theories such as William Riker's (1962) work on political coalitions and Mancur Olson's (1965) explication of the so-called ‘free-rider’ problem. Riker's Rochester School of Political Science applied rational choice across the discipline but especially to the study of elections, the Presidency and Congress, while the Chicago Law and Economics movement, led by Richard Posner (1973) and Coase, focused on an economic understanding of law.
The cumulative effect of these disparate but connected strands of postwar American economic and political thought was to introduce a fundamental challenge to the prevailing view of government. Although these were, in the first instance, developments within academic research, they would percolate through transatlantic culture via a diverse range of political, business and journalistic routes. Before turning to their dissemination, it is necessary to consider the specific insights and theories which American neoliberals generated about government bureaucracy and public administration. Two developments are worthy of particular attention: Tullock's analysis of Bureaucracy and the Ostroms’ Bloomington research programme.
The general developments in American neoliberal economic and political thought described above contributed to a rethink of governmental capability, its limits and the problem of how best to organise public administration. Central to this task was the problem of bureaucracy itself. The classic understanding of bureaucracy was Weber's in Economy and Society (1978 [1922]).15 Weber argued that industrialisation and capitalist development necessitated the expansion of large hierarchical structures with chains of command that resembled political bureaucratic organisation. Such hierarchies, Weber suggested, were the most efficient mode of organisation to meet complex demands. Weber's central assumption was that the public interest was an objectively understood goal best pursued through bureaucratic organisation, a tradition best exemplified by Keynes, Beveridge or the ‘Young Turks’ of FDR's New Deal. British Fabian Socialism also contributed to the classic ideal of the public servant, often liberated from financial need, dispassionately examining the landscape of society, politics and the economy and applying rationality to problems in order to reach solutions that could be readily accepted across elite political discourse.
American neoliberal critics challenged this Weberian view of bureaucracy. The progenitor of the neoliberal critique was the Austrian ‘Paleo-Liberal', Ludwig von Mises.16 Mises’ 1944 tract entitled Bureaucracy presaged many of the most important themes of the American neoliberals that followed. Mises drew a contrast between the bureaucratic mode of management and the strictures imposed through a system governed by profit. Under a profit system, businesses and their operations were necessarily accountable to consumers. Bureaucratic management was, instead, unaccountable and generative of its own internal impulses that were removed from people's real needs and wants. Such impulses, Mises suggested, changed the nature of government power and distorted outcomes. Bureaucratic organisations tended to accrue more and more responsibilities but because the king, despot or government which initially delegated the authority did not want its powers to be used independently by local, provincial or sector-specific governors or managers, it tended to introduce codes, regulations and decrees which limit and change the nature of their power. Thus, initiative and innovation is stifled:
[T]he whole character of their management changes. They are no longer eager to deal with each case to the best of their abilities; they are no longer anxious to find the most appropriate solution for every problem. Their main concern is to comply with the rules and regulations, no matter whether they are reasonable or contrary to what was intended. The first virtue of an administrator is to abide by the codes and decrees. He becomes a bureaucrat. (Mises, 1944: 41)
Thus, the incentive structures of bureaucratic administration and organisation tended to produce twisted results because the bureaucrat would seek to advance up the hierarchy rather than deliver the outcomes that it was the job of the organisation to pursue.
There was a strong connection, acknowledged by Buchanan in particular, between the a priori approach of Mises’ early twentieth-century Austrian School of Economics and the Virginia School of the 1960s onwards. This influence stemmed from a basic concern to examine constitutions and political institutions from first principles. However, the public choice theorists took the analysis on a stage. In The Politics of Bureaucracy (1965), Tullock, who, like Buchanan and Mises, was a member of the MPS, the international collective of mainly neoliberal scholars first convened by Hayek in Vevey, Switzerland, in 1947, launched a new sub-discipline in the field of public choice theory. He went further than Mises. Tullock (1965: 29) considered ‘the behaviour of a utility maximizer in a political situation [which he distinguished from an economic or conventional market]’ in order to ‘develop general rules or principles on the functioning of organizations, to outline methods through which their efficiency might be improved, and to suggest limitations on the type of social tasks which hierarchical organizations may accomplish'. Tullock (1965: 13) defined politics, ‘generally speaking', as ‘social situations in which the dominant or primary relations are those between superior and subordinate’ as compared to economics, where individuals enter into voluntary market relations with each other. Notwithstanding the different character of political relationships, once the essential characteristics of bureaucracies are analysed, Tullock argued that it was clear that the rational pursuit of self-interest motivated public servants and thus the public institutions, or group interests, through which they operated just as it did in the conventional market.
Tullock argued that the creation of appropriate incentives throughout bureaucracies would make them operate more efficiently. Greater efficiency ‘could increase both our liberties and our ability to control the future’ (Tullock, 1965: 235). In particular, decentralisation of decision making through the expansion of local government was likely to make more manageable the ‘supervisory load’ of the average voter and ‘maximize the probability that the government will, in fact, do as he wishes'. Crucially, according to Tullock, government should attempt to do less because it was impossible to control effectively the activities of an expanding bureaucracy. As Tullock (1965: 238) put it: ‘Only by frankly recognizing the limits on our ability to control giant organizations can be obtained the benefits which can be bestowed by a well-functioning government.'
The public choice analysis of bureaucracy had two key features which would later become notable in Third Way administrative reform. First, public choice scholars like Tullock were sceptical of the ability or desire of public servants to achieve public goods through bureaucratic state action. Consequently, such action should be limited and, where possible, functions should be contracted out to be performed by private actors who, it was argued, would do so more efficiently. Second, the fundamentally important change in the way that bureaucratic organisation should be assessed was, in Tullock's words, ‘not through judging their actions or decisions, but through judging the results of their actions'. For example, as William Niskanen, the future Chair of President Reagan's Council of Economic Advisers, had argued in Bureaucracy and Representative Government (1971), bureaucracies were incentivised to maximise their budgets rather than to deliver their objectives as cheaply, or efficiently, as possible. The recovery of a focus on outcomes, on results, was the best way to foster public entrepreneurship in government and the public sector.
These were key insights informing Third Way governmental reform. Government should be smaller. Private service providers should be encouraged. Bureaucratic and administrative systems should be designed, in the jargon, to deliver ‘outcomes not inputs'.
Another important strand bridged neoliberal analyses and Third Way reform agendas. Vincent and Elinor Ostrom, a husband and wife team, were the prime architects of what is sometimes known as the Bloomington School of Political Economy.17 They and their colleagues at the Workshop of Political Theory and Policy Analysis at Indiana University nuanced public choice theory in the 1970s by developing the concept of ‘polycentricity’ in government administration. This idea, elaborated most fully in Vincent Ostrom's (1973) The Intellectual Crisis of American Public Administration, started, like the public choice of Buchanan and Tullock, with an analysis of the US Constitution. Ostrom argued that the strength of the American constitutional system was its separation of powers. The simple proposition was that competing centres of political power, governed by competing interests, operated as an overall safeguard for the protection of public goods.
While the celebration of the principles of the Founding Fathers was not new, the identification of the quasi-market character of the US Constitution was. By approximating the conditions which exist in conventional economic markets, Ostrom suggested, governments were more likely to be able to meet the diverse needs of their citizenry. This was because the contestability fostered by rival power or decision centres introduced competition within the political system to deliver the public goods which would ultimately determine their success. As Ostrom put it later:
A self-governing society requires skill in putting together enterprises that appropriately reflect diverse interests so as to achieve shared communities of understanding that serve as the basis for informed public action. Public administration is then concerned more with public entrepreneurship than with management. (Ostrom, 1973: 155)
Alongside the outcome-focused theory of public choice, public entrepreneurship, to be fostered by ‘polycentric’ institutional arrangements, was another key influence on the Third Way reform agenda, which highlighted the importance of harnessing self-interest through incentives to produce innovation and better outcomes for citizens. This focus on competition, contestability and innovation provided the reform logic underlying the New Progressive attempts at reinventing government and transforming public services.
Another key idea elaborated by, especially, Elinor Ostrom and her colleagues at the Bloomington Workshop was co-production. Where her husband's work often had a distinctly theoretical bent, Elinor carried out important empirical research into local public service delivery in the United States. Her PhD dissertation (Ostrom, 1965) completed at UCLA, for example, was a study of ground water basin management. During the 1970s, Ostrom (1976, 1978) produced a number of studies of local police services which showed the importance of forces retaining a connection to the communities that they served. Recounting an interview with Ostrom from 2006, Nick Zagorski (2006: 19222) records Ostrom describing her research findings as follows:
‘The presumption that economies of scale were prevalent was wrong; the presumption that you needed a single police department was wrong; and the presumption that individual departments wouldn't be smart enough to work out ways of coordinating is wrong,’ Ostrom says. Most aspects of police work in fact experienced diseconomies of scale. ‘For patrolling, if you don't know the neighborhood, you can't spot the early signs of problems, and if you have five or six layers of supervision, the police chief doesn't know what's occurring on the street,’ she explains.
Instead of hierarchical and centralised metropolitan police departments, Ostrom's research indicated that citizen-consumers were better served by neighbourhood-level policing that remained close to the community.
Ostrom and the Bloomington School's work led to a new understanding of the interdependent relationship between producers of services and their consumers, which she and her colleagues termed ‘co-production’ (Parks et al., 1981). Teachers cannot teach without the cooperation and engagement of their pupils. Refuse collection is made possible by kerbside or back yard collection. Healthcare services are only effective when the patient's experience and symptoms are communicated to the professional clinician. Once these symbioses are understood, it was argued, co-production revealed several clear implications for the potential reform of public service delivery.
First, market-based delivery of services would be most efficient in many instances to ensure that the focus of producers and providers was fixed on the co-producers, or consumers, who would determine whether services would be effective or not. Second, where market delivery would be ineffective or inappropriate, there was still a role for the imposition, through institutional design, of market-type incentives to help facilitate greater responsiveness and outcome-oriented institutional behaviour. Third, producers of public services, the police forces or the teachers for example, are likely to have greater resources (and incentive) to lobby or pressure the service providers, the local and municipal governments and agencies to ensure that the structure and means of service delivery suits those producers as opposed to the consumers, or co-producers of the service. By contrast, ‘local coproduction of public services may help to illustrate the efficiency gains that can be made’ (Parks et al., 1981: 1009).
The Ostroms argued that polycentric institutional arrangements would improve public sector performance. They de-emphasised the importance of public ownership or the need for public goods to be delivered by the state. Rather, communities themselves could, and often did, organise themselves to protect important public resources.18 Entrepreneurial and incentivised structures, it was argued, would mould public services around the needs and wants of the users of the services themselves. By the 1990s, these ideas, and those of the Chicago and Virginia Schools, were dominant in many Third Way governmental and social policy reform efforts.
There were several conduits through which Chicago, Virginia and Bloomington ideas transmitted into the Third Way agenda, specifically: think-tanks, journalists and politicians, especially those with a transatlantic focus. First, the New Public Management (NPM) school of administrative and management reform, itself partly arising out of public choice theory approaches in the 1970s and 1980s, emerged as an influential driver of administrative change in the 1980s.19 NPM drew on American neoliberal ideas. Neoliberal insights were often repackaged as management and business tools and combined with various kinds of organisational theory to inspire a wave of restructuring of large organisations both public and private.
Second, conservative policy innovation during the Thatcher and Reagan administrations was crucial. In particular, policies such as the ‘contracting-out’ of local services and the introduction of quasi-markets into the public sector began under these administrations. Perhaps the most important example, as well as state-level social policy experimentation in the US, was the introduction of the so-called ‘internal market’ to Britain's National Health Service in the late 1980s. These policy initiatives were in part spurred by the intellectual entrepreneurship of certain of the neoliberals themselves. Hayek, Friedman, Buchanan, Tullock and the Ostroms energetically pushed their ideas through think-tanks, especially the American Enterprise Institute, the Cato Institute and the Heritage Foundation in the United States and the Institute of Economic Affairs and the Adam Smith Institute in Britain. These think-tanks brought neoliberal ideas directly to the attention of sympathetic policymakers in the Thatcher and Reagan administrations.
Third, neoliberal ideas were applied to the problems of public administration by influential academics in government. In Britain, one of the most significant and influential of these was the future adviser to Tony Blair on public service reform, Julian Le Grand. Le Grand, based at the London School of Economics, sought to develop a viable ‘market socialism’ which applied quasi-markets to the public sector, especially to the health system (Le Grand and Estrin, 1989; Le Grand, 1991, 2003). His aim was to harness the efficiency of markets in the service of traditional social democratic concerns such as public service performance. In the United States, neoliberal ideas about the failures of government bureaucracy found a fertile political culture. Following the election of Ronald Reagan, the default policy setting was switched to pro-business. While Governor of California, Reagan had wanted to introduce more business leadership into government roles. However, while president, Reagan and his successor, Bush, focused more on cutting regulation than reforming government. Nonetheless, the cumulative effect of 12 years of government retrenchment and anti-government rhetoric cemented an attitude shift towards ‘bureaucracy’ and ‘red tape', which had begun when Tullock was writing in the 1960s, and which was readily apparent by the time the Third Way politicians took the stage in the 1990s. This shift was epitomised in the success of the New York Times bestseller, Reinventing Government: How the Entrepreneurial Spirit is Transforming the Public Sector from Schoolhouse to Statehouse, City Hall to the Pentagon (1992) by David Osborne and Ted Gaebler. This book became the blueprint for Clinton's ‘Reinventing Government', or ‘Rego', Initiative.20
By the 1990s, Clinton and Blair entered office promising to reform government so that it would be more responsive to the diverse needs of its citizens, or ‘customers’ as they were now called, by efficiently delivering services through markets and quasi-markets. That agenda had been born in the neoliberal ideas of Chicago, Virginia and Bloomington.
This chapter has highlighted an intellectual and political trajectory which leads from American neoliberal thought to Third Way policy practice. When people criticise the Clinton and Blair administrations, they often accuse them of being too timid by not challenging the dominant politics of Thatcher and Reagan that had preceded them. This chapter demonstrates (though more research is necessary) that such an accusation would be a misreading of the intentions of the policies of Third Way ‘modernisation'. In fact, what was being attempted was an application of certain crucial neoliberal insights.
The public service reform agenda aimed to personalise service delivery so that it became, in the jargon, more ‘customer-focused'. It aimed to cut expenditure and reduce the size of the state in general and the public sector in particular, though this conflicted with other competing demands and objectives which were in play in both administrations. Notwithstanding the competing preoccupation with public investment and an element of redistribution, it is nevertheless noticeable how both Clinton and Blair in their different ways introduced a politics of budgetary restraint from the Centre-Left. Clinton's support for and practice when in office of balanced budgets was a strikingly more Virginia-type approach to public finance than Milton Friedman's support for the ballooning deficits of the Reagan years. This new emphasis arguably paved the way for the ‘Austerity’ retrenchment that was pursued with varying degrees of vigour on both sides of the Atlantic after the financial crash of 2008. Equally, the attempt to ‘reinvent’ government through markets continued. The choice agenda advanced by Third Way policymakers also shaped key American social policy reforms, such as the introduction of Charter Schools and the transformation of the US welfare system to incentivise benefit claimants back into work. It formed the basic received wisdom that ran through the major social policy innovations, for example Andrew Lansley's reform of the NHS in 2011 or the introduction of a single welfare payment, known as the Universal Credit, of the British Coalition Government of 2010–2015.21
Another significant conclusion is the enduring force of transatlantic neoliberal politics. This power was illustrated in three main ways prior to the advent of the New Progressives:
These trends of cooperation and dissemination were complemented and diversified in the growth and ultimate success of the Third Way:
The transatlantic political networks which helped to generate, spread and ultimately entrench neoliberal ideas were strong, resilient and mutually reinforcing. Policy networks continually reinvent themselves in sometimes overlapping ways. This has been true of the last twenty years almost as much as it was in the immediate postwar years. The networks that helped to build the New Right of Thatcher and Reagan or the Third Way in the following decades are as powerful as those which emerged around the Keynesian paradigm of the 1930s–1970s.
The first wave of neoliberal influence in the 1960s and 1970s challenged both conventional economic policy through monetarism, which disturbed the dominance of Keynesian demand management and the ‘neoclassical synthesis’ and microeconomic approaches through supply-side reforms, and the widespread application of Chicago School market models to non-market decision making. The second wave emanated from Chicago, Virginia and Bloomington, and by the 1990s, it had introduced a new theory of the state erected upon an idea of government, as opposed to market, failure. That theory transformed liberal left politics and helped to usher in the Third Way.
1. Clinton made this statement in his 1996 State of the Union address.
2. For the political breakthrough of Hayek and Friedman's neoliberal ideas, see my book, Masters of the Universe: Hayek, Friedman and the Birth of Neoliberal Politics (Jones, 2012). Another recent book with a transatlantic focus is Weaver (2016).
3. The ‘Economics Imperialism’ associated with the Chicago School of the 1950s and 1960s should be contrasted to the earlier Chicagoans such as Frank Knight, who argued for a more limited role for economics. On this, for example, see Medema (2011).
4. Both Buchanan and Tullock were Chicago-educated. They began collaborating at the Thomas Jefferson Center at the University of Virginia in the late 1950s. The Virginia School of Political Economy can be dated from approximately this period. Its founding text was The Calculus of Consent: Logical Foundations of Constitutional Democracy (Buchanan and Tullock, 1962).
5. The economic and governmental reforms introduced by the Hawke/Keating governments in Australia (1983–1996) and the Lange administration in New Zealand (1984–1989). While these developments are significant, the focus of this chapter is on the British and American cases.
6. For a selection of this scholarship, see: Amadae (2003), Brown (2015), Burgin (2012), Davies (2014), Mirowski and Plehwe (2009), and Van Horn, Mirowski and Stapleford (2011).
7. This is a consistent theme in Clinton's speeches in the lead-up to his election in 1992. The speeches are collected in Smith (1996).
8. For an inside perspective, see From (2013).
9. In both Britain and the US, the New Progressives were of course still able to draw upon such ideas from established think-tanks such as the Brookings Institution and the Fabian Society. The clash between the command-and-control centralising instincts of the older Fabian left and newer ideas about contestability, co-production and decentralisation associated with Blairite reform revealed a clear tension, especially in the British Blair–Brown governments.
10. The best account from this perspective is presented in Cockett (1994).
11. The following paragraphs draw on Jones (2015).
12. Coase was born in North West London in 1910 and spent the first twenty years of his academic career at the London School of Economics.
13. The Thomas Jefferson Center was first established by Buchanan and another Chicago economist, Warren Nutter, in 1957. Tullock joined them there soon after, first as a research fellow in 1958–1959. Over the following thirty years, Buchanan and Tullock would move their research centre around several Virginia institutions – Virginia Polytechnic Institute (1969–1983) and then George Mason University, where it has remained since.
14. Buchanan and Tullock (1962: xxii) explain the meaning of methodological individualism as ‘an attempt to reduce all issues of political organization to the individual's confrontation with alternatives and his choice among them'.
15. It should be remembered that this collection of Weber's writings was posthumously arranged and organised by his wife, Marianne Weber.
16. Mises is an interesting figure in the history of neoliberalism. He was Hayek's mentor, of an earlier generation, and present at the birth of the MPS. However, although a founder member of the MPS, Mises was never converted to Hayek's interwar neoliberal position, which sought a middle way between laissez-faire and New Deal-type liberalism. Mises was an unapologetic advocate of the former. For more on Mises’ view of bureaucracy, see Jones (2012: chapter 2).
17. The Ostroms were prolific writers and researchers who founded and ran the Bloomington Workshop of Political Theory and Policy Analysis. They expanded public choice theory with a focus on institutions. See, for example, Ostrom and Ostrom (1971).
18. Elinor eventually won the Nobel prize in economics in 2009 for her work in this area. See especially Ostrom (1991).
19. On NPM, there is a large disciplinary literature, much of which has been published in management journals such as Public Administration Review and Public Management Review. Also, see Hood (1991) and Ferlie et al. (1996).
20. On entering office, Clinton appointed Al Gore to head his National Performance Review, which was charged with reinventing government in the ways described earlier in the chapter, to do more with less and to introduce incentives and quasi-markets to improve efficiency.
21. The Universal Credit system was an attempt to simplify the welfare system and unify welfare payments into a single sum. It was a bastardised version of the ‘negative income tax’ idea promoted by Friedman in the 1960s.
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