Never Let a Serious Crisis
Go to Waste
How Neoliberalism Survived
the Financial Meltdown
Philip Mirowski
To neoliberals of all parties
Contents
List of Tables
List of Figures
1. One More Red Nightmare
The Crisis That Didn’t Change Much of Anything
2. Shock Block Doctrine
Neoliberalism as Thought Collective and Political Program
3. Everyday Neoliberalism
4. Mumbo Jumble
The Underwhelming Response of the Economics Profession to the Crisis
5. The Shock of the New
Have Neoclassical Economists Learned Anything at all from the Crisis?
6. The Red Guide to the Neoliberal Playbook
Notes
Bibliography
Index
Copyright
List of Tables
4.1 Average profit per employee, United States
5.1 Economist salary differentials, by academic sector
List of Figures
1.1 Hilarity at the Federal Reserve
2.1 Growth of MPS-affiliated think tanks
2.2 MPS founding meeting, national representation
2.3 MPS 1991 membership, national representation
2.4 Mentions of Friedrich Hayek in various English-language sources
4.1 Corporate profits/U.S. GDP
4.2 Index of world equity prices, Great Depression and current crisis
4.3 Index volume of world trade, Great Depression and current crisis
4.4 Google Trends search term: “toxic assets”
4.5 Fed projection misses the mark
4.6 American bank mergers, 1995–2009
4.7 The “Flash Crash” of May 6, 2010
5.1 Proportions of U.S. mortgages originated by various financial entities, 1953–2007
6.1 European ETS prices, 2011
6.2 European public and private debt, 2000 and 2010
6.3 U.S. public and private debt, 1920–2011
6.4 Total Over-the-Counter Outstanding Derivatives
6.5 Google Trends for search term “financial innovation”
1
One More Red Nightmare:
The Crisis That Didn’t Change Much of Anything
Conjure, if you will, a primal sequence encountered in B-grade horror films, where the celluloid protagonist suffers a terrifying encounter with doom, yet on the cusp of disaster abruptly wakes to a different world, which initially seems normal, but eventually is revealed to be a second nightmare more ghastly than the first.1 Something like that has become manifest in real life since the onset of the crisis which started in 2007. From the crash onward, it was bad enough to endure house prices sinking under water, dangling defaults and foreclosures, the collapse of what remained of manufacturing employment, the reduction of whole neighborhoods to bombed-out shells, the evaporation of pensions and savings accounts, the dismay of witnessing the hope of a better life for our children shrivel up, neighbors stocking up on firearms and people confusing bankruptcy with the Rapture. It was an unnerving interlude, with Nietzschean Eternal Return reduced to an Excel graph with statistics from the Great Depression of the 1930s.
Fast forward to 2011. Whether it was true or not, people had just begun to hope that things were finally turning around. Moreover, journalists in mainstream publications bandied about the notion that academic economics had failed, and hinted that our best minds were poised to rethink the doctrines that had led the world astray. Yet, as the year grew to a close, it slowly dawned upon most of us that the natural presumption that we were capable of rousting ourselves from the gasping nightmare, that we might proceed to learn from the mistakes and fallacies of the era of Neoliberal Follies, was itself just one more insidious hallucination. A dark slumber cloaked the land. Not only had the sense of crisis passed without any serious attempts to rectify the flaws that had nearly caused the economy to grind to a halt, but unaccountably, the political right had emerged from the tumult stronger, unapologetic, and even less restrained in its rapacity and credulity than prior to the crash.
In 2010, we were ushered into a grim era of confusion and perplexity on the left. It took a rare degree of self-confidence or fortitude not to gasp dumbfounded at the roaring resurgence of the right so soon after the most dramatic catastrophic global economic collapse after the Great Depression of the 1930s. “Incongruity” seems too polite a term to describe the unfolding of events; “contradiction” seems too outmoded. Austerity became the watchword in almost every country; governments everywhere became the scapegoats for dissatisfaction of every stripe, including that provoked by austerity. In the name of probity, the working class was attacked from all sides, even by nominal “socialist” parties. In the few instances when class mobilization was attempted by trade unions to counterattack, as in the recall petition for Scott Walker in the state of Wisconsin, the birthplace of American progressivism, it failed. The pervasive dominance of neoliberal doctrines and right-wing parties worldwide from Europe to North America to Asia has flummoxed left parties that, just a few short years ago, had been confident they had been finally making headway after decades of neoliberal encroachment. Brazenly, in many cases parties on the left were unceremoniously voted out because they had struggled to contain the worst fallout from the crisis. By contrast, the financial institutions that had precipitated the crisis and had been rescued by governmental action were doing just fine—nay, prospering at precrisis rates—and in a bald display of uninflected ingratitude, were intently bankrolling the resurgent right. Indeed, the astounding recovery of corporate profits practically guaranteed the luxuriant postcrisis exfoliation of Think Tank Pontification. Nationalist proto-fascist movements sprouted in the most unlikely places, and propounded arguments bereft of a scintilla of sense. “Nightmare” did not register as hyperbolic; it was the banjax of the vanities.
The Winter of Our Disconnect
I remember when I first felt that chill shiver of recognition that the aftermath of the crisis might be suspended in a fugue state far worse than the somnolent contraction itself. I was attending the second meeting of the Institute for New Economic Thinking (INET) at Bretton Woods in New Hampshire in April 2011.2 There probably would have been better places to take the temperature of the postcrisis Zeitgeist and observe the praxis of the political economy than up in the White Mountains, but I had been fascinated by the peccadilloes of the economics profession for too long, and anyway had felt that the first INET meeting at Cambridge University in 2010 bore some small promise—for instance, when protestors disrupted the IMF platitudes of Dominique Strauss-Kahn in Kings great hall, or when Lord Adair Turner bravely suggested we needed a much smaller financial sector. But the sequel turned out to be a profoundly more unnerving and chilly affair, and not just due to the caliginous climate. The nightmare scenario began with a parade of figures whom one could not in good conscience admit to anyone’s definition of “New Economic Thinking”: Ken Rogoff, Larry Summers, Barry Eichengreen, Niall Ferguson, and Gordon Brown. Adair Turner was summoned for a curtain call, reprising his previous year’s performance, but offered only tired bromides on “happiness studies” and rationality. The range of economic positions proved much less varied than at the first meeting, and one couldn’t help notice that the agenda seemed more pitched toward capturing the attention of journalists and bloggers, and those more interested in getting to see some star power up close than sampling complex thinking outside the box. It bespoke an unhealthy obsession with Guaranteed Legitimacy and Righteous Sound Thinking. But, eventually, even the journalis
ts and the bloggers sensed the chill in the proceedings. Here were a few contemporary responses:
University economists, of the sort gathered at Bretton Woods, are now under relentless pressure to conform to a narrow, established paradigm. Inexplicably most supporters of that paradigm also feel that the crisis confirmed its validity.3
The last great crash caused a revolution in economics. Why hasn’t this one? . . . None of those theories appears to have appreciably shaped the economic policy proposals coming from the White House or Congress, where lawmakers draw much of their economic inspiration from think tanks built on dogma . . . Neither party seems keen to search for orthodoxy-challenging economic answers.4
The weight of the 1920s-decorated rooms, and the grey presence of so many headliners of the economics profession (which we are making the most of with the interviewing) is creating great confusion about what is “new” in New Economic Thinking. One line is nostalgia and it began with the opening session when Rogoff recalled with regret and humor how as a young man he was unengaged by Charles Kindleberger’s teachings . . . In a trope that I saw repeated thrice, it was said that economics is at a stage where a Copernican revolution has occurred but one needs still to use Ptolemaic cosmology for a few decades more, for policy advice . . . None of this is new, and worse still, none of it is very critical. New Economic Thinking is hard to win. For nearly a century philanthropic money tried to steer economics into interdisciplinarity and social and historical consciousness, in the 1970s they gave up. And because change is so hard, there is a danger that INET gives up, and becomes a left of center think tank to argue the policy wars. The task of producing knowledge against the grain requires imagination. I would have wished to see the big headliners back to back with some new ideas from INET grantee portfolio. I would have wished more collaborative work and less staging [sic] speeching. I would have wished more time for debate and critique. I would have wished less farce and more tragedy.5
Unlike Gordon Brown, Mr. Summers portrayed himself in the role of a Chinese mandarin tired at the world daring to challenge his mandate from heaven. For example, when the irrepressible Yves Smith asked Larry Summers about whether banking risks in the United States could not be helpfully diminished if its large institutions were run (read: compensated at the top) more like utility companies, he immediately aborted any effort at an intellectually honest answer by making it sound as if she were proposing to bring state socialism to banking. A man who reportedly earned millions for having advised hedge funds one day a week for a year shortly before serving in the Obama Administration (and who is quite likely, now that he’s out, to do so again), he ought to have been patriotic and intellectually honest enough to provide a real answer.6
The most interesting moment at a recent conference held in Bretton Woods, New Hampshire—site of the 1945 conference that created today’s global economic architecture—came when Financial Times columnist Martin Wolf quizzed former United States Treasury Secretary Larry Summers, President Barack Obama’s ex-assistant for economic policy. “[Doesn’t] what has happened in the past few years,” Wolf asked, “simply suggest that [academic] economists did not understand what was going on?” . . . For Summers, the problem is that there is so much that is “distracting, confusing, and problem-denying in . . . the first year course in most PhD programs.” As a result, even though “economics knows a fair amount,” it “has forgotten a fair amount that is relevant, and it has been distracted by an enormous amount.” . . . [Unlike Summers,] it is the scale of the catastrophe that astonishes me. But what astonishes me even more is the apparent failure of academic economics to take steps to prepare itself for the future. “We need to change our hiring patterns,” I expected to hear economics departments around the world say in the wake of the crisis.7
Many at the conference confessed their perplexity as “The crisis is over, but where was the fix?” The political debacle of the “rescue package” promulgated throughout the West was acknowledged by all and sundry, although accounts concerning the nature and causes of the failure would have drawn much less consensus. Some suggested that the immediate imperative of being seen to act (by the Federal Reserve, or the Treasury, or the ECB, or other authority) had preempted the equally necessary stage of reflection and reform. Yet the nightmare cast its shroud in the guise of a contagion of a deer-in-the-headlights paralysis: beyond their pretense of expertise, no one who fancied themselves opposed to neoliberal decadence really possessed solid convictions concerning where the intellectual failure behind the crisis should have been well and truly situated. They seemed united by nothing more than a vague disaffection from the status quo in economics. And worse, while the authorities dithered, the Ghoulish Creatures of the Right had gotten back up, dusted themselves off, and discovered renewed strength. Economists such as Ken Rogoff and Carmen Reinhart had the audacity to stand up at INET and treat the contemporary world crisis as just another ho-hum business cycle: nothing untoward or unprecedented had happened here. Thus doctrines concocted at the American Enterprise Institute and the Cato Institute began their slow seepage back into respectability. The INET crowd kept trying to wake up from—what?—neoclassical microeconomics, rational expectations, the efficient markets hypothesis, Black-Scholes, the Coase theorem, faux-Keynesian macroeconomics, optimality, public choice theory, baroque fiduciary mathematics, the end of history—what exactly? How could you even know if the fix was in or not, if you weren’t even sure about where one needed to look for conceptual guidance?
Now, the reader may cavil I just had myself to blame for my little nightmare scenario; for, after all, whyever would a shindig produced and paid for by George Soros actually conjure up any authentic New Economic Thinking?8 True to form, there was almost no serious debate of any sort at Bretton Woods, nary even an impressionistic summary of possible alternative paths for economics; there was, however, a nostalgia so thick it curdled the sumptuous desserts, sustained by a motley scrum of B-list celebrities (since no economist after Keynes would ever attain the cultural name recognition of an Arnold Swarzenegger, or a Bob Dylan, or even a Malcolm Gladwell) hoping to enjoy a frisson of safe transgression; their jollity tempered by a caution that it was prudent to downplay any concrete divergences from the economic orthodoxy that, after all, had granted them their modicum of fame in the first place. None of the participants evinced the slightest unease in their embrace of the dogma that nothing that had transpired in the last seventy-five years had moved the goalposts of allowable economic controversy away from those supposedly positioned by John Maynard Keynes and Friedrich Hayek. Many speakers openly delighted in conjuring the Shade of Maynard in those hallowed halls. Surely it had been fatuous of me to hope INET might have provided a platform for any authentic divergent strains of economic thought, given that those glitterati would have avoided the conference like the plague if it had been stocked up with post-Keynesians, Regulation School representatives, Institutionalists, and Minskyites, much less Chinese-style Marxists.9
But the nightmare scenario was not confined to INET or George Soros. It turns out to have been far more pervasive than that.
From the White Mountains to Mont Pèlerin
On March 5–7, 2009, the Mont Pèlerin Society (MPS) held a special meeting at Ground Zero of the global economic meltdown, New York City, to discuss the implications of the tremors for their political project. Around a hundred members and an additional hundred guests convened under the banner “The End of Globalizing Capitalism? Classical Liberal Responses to the Global Financial Crisis.” Back then, many titular heads of the neoliberal movement were dreading the possibility that the snowballing crisis might just be their own worst nightmare. After all, the prime event that had originally prompted the organization of the nascent Neoliberal Thought Collective [NTC] was the Great Depression of the 1930s. The initial motley crew of Friedrich Hayek, Ludwig von Mises, Lionel Robbins, Milton Friedman, and all the rest had endured the horror of being ridiculed and lambasted for their responses to the Great Contracti
on, relegated to the margins of discourse by the sheer misfire of the Economic Engine of Human Progress. They had huddled at Mont Pèlerin in 1947 to try and figure out how to intellectually redeem themselves. In many ways, the first generation had spent the rest of their lives living down the shame that had accompanied their disenfranchisement and defeat at the hands of John Maynard Keynes, FDR, scientists such as J. D. Bernal, a phalanx of market socialists such as Oskar Lange and Jacob Marschak, and a host of European political thinkers. So it was not pitched beyond the realm of possibility that, with the benefit of hindsight, the Third Generation Neoliberals would be in for a rough ride in 2009.
Once upon a time, such an emergency executive committee meeting of the NTC might have been the occasion for truly imaginative blue sky thinking, forging an optimal response to the impending collapse of their cherished worldview. Perhaps, in a rerun of the 1940s, the neoliberals in 2009 might have come up with some transformative new ways to think about the market, stealing some of the thunder of the left by combining previously statist concepts with a novel revision of the True Nature of market activity. To a historian, it is striking the extent to which the neoliberals have repeatedly taken ideas from the left over the last half of the twentieth century and twisted them to their own purposes. Perusing the papers from the New York conference, however, one finds instead mostly predictable platitudes and tired retreads about the wicked government causing the crisis.10
Deepak Lal raised an interesting question in his keynote address: why did the crisis occur when so many “Friends of the MPS” like Alan Greenspan and Jean-Claude Trichet were in charge of the world financial system, and hinted they may not have leaned sufficiently in favor of “Sound Money.” Niall Ferguson rallied the troops with the catechism that it must have been regulation that caused the crisis, and not some failure of the market economy, while also exploring his personal theme that somehow China might be to blame. Gary Becker floated the opinion that it might be better to do nothing in response to the crisis, rather than flail about with all manner of government remedies. (This book refutes that canard, when it comes to the neoliberals.) It seems the general mood of the conference was that neoliberals (the “classical liberal” moniker was a smokescreen to be discussed in later chapters) should pretty much keep doing what they had been doing all along, even if the crisis appeared a little scary. Other observers of the neoliberals noticed this soon thereafter: “And just like that, the idea-intoxicated American right vanished . . . Instead of reckoning with a starkly transformed global economy, conservative thinkers are reviving seventy-odd-year-old talking points from the Liberty League.”11
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