Perhaps, perhaps, this crisis marks an end of the “neoliberal era”.

The word “neoliberal” immediately provokes contention, but let’s not get fancy or upset here. For our purposes, neoliberalism is just a set of social heuristics: 1) that markets are in general the most capable institution for organizing human affairs; 2) that therefore, absent strong reasons to the contrary, use of market or market-like institutions should be maximized, “completed”, expanded even into domains heretofore intentionally insulated from them; and 3) that other institutions, including the state, should take a supportive, even subservient role: filling in gaps (“safety net”), addressing “market failures” that are presumed to be rare rather than pervasive, and only when a high burden of proof has been met. Any other intervention is a “distortion” to be avoided at all costs.

I think it fair to describe the period from about 1980 until the 2008 financial crisis as a neoliberal era, a period of time during which these social heuristics were widely accepted by governing elites and policy, in the United States and the broad West, was informed and shaped by them. The period from 2008 until now has been a kind of undead neoliberal era. Post Great Financial Crisis, neoliberal ideas have been discredited among much of the public and are actively contested even within governing elites. But, absent consensus on some new set of social heuristics, not much has actually changed. Material interests in the continuity of institutions shaped by neoliberalism remain strong.

Continuity now is broken. When this pandemic is “over” (whatever that means), the undead bones of neoliberal governance may well yet again gather themselves from the chaos and reconstitute the suave, smooth-talking vampire to whose predations we have grown unhappily accustomed. But they may not. We may find ourselves in a period of social experimentation and change. If so, as we diminish (not eliminate!) the role of markets, it is useful I think to understand the variety of functions that markets serve, so that framers of new institutions understand what will be excised, what may sometimes need to be replaced. So. Here are four functions of markets:

1. Markets serve as Hayekian information processors
2. Markets naturalize outcomes, defusing social conflict
3. Markets “flip the incentives” surrounding resource utilization
4. Markets launder history

Obviously, the list is not exhaustive.

I. Markets serve as Hayekian information processors 🔗

This is the function of markets that economists emphasize. Voluntary exchange plus a price system compose into a massively decentralized calculating system for allocating and distributing resources. Individual units (households, firms) need know or compute very little to participate in a gigantic computation that, ideally, ensures scarce, highly sought, resources go to where they are most needed (because the most-needers are willing to pay their high price), and are most eagerly produced (because those capable are eager to receive the high price). No formal match, no central tabulator is required, because any unit’s choice to purchase puts upward pressure on prices which in theory ripple immediately to everyone, and any unit’s choice to produce and sell has the opposite effect. Widely dispersed information about preferences and abundance are continuously summarized in a price vector while goods and services flow between units with no central coordination at all.

There are a lot of problems with this story. For one, “need” gets operationalized as purchasing power, so under conditions of inequality, the calculation yields an allocation of resources not to where they are most needed, but to whom is the richest. If producers or consumers have market power, they can rig the computation towards self-serving, socially destructive ends. Even under conditions of near equality, the informational case for markets declines as market institutions are transplanted from real commodities (which really are subject to diverse, widely dispersed preferences and availabilities) to more abstract settings (financial capital, health insurance) where preference diversity is not actually so great (people participating in capital markets are mostly trying to make money, humans who might get sick similarly want effective and pleasant care as cheaply as possible) and information is more asymmetrically held than widely dispersed (insiders and professionals know more about stocks than dispersed potential buyers and sellers, insurance buyers cannot really evaluate and compare 200 page contracts that implicate but omit thousands of negotiated prices).

Nevertheless, the sphere of real goods and services is not insignificant. Distortions of inequality may corrupt the computation for big city real estate but leave the marvels of a grocery store mostly intact. Markets really can function as Hayekian information processors. It really is remarkable how, despite a lot of consolidation and predation, a massive range of goods and services gets produced and distributed across huge geographies, among consumers and firms with extraordinarily heterogeneous requirements, pretty damned well under market institutions.

II. Markets naturalize outcomes, defusing social conflict 🔗

Adam Smith famously described market outcomes as “led by an invisible hand”. Of course, markets are social institutions, and market outcomes are made by human hands, sometimes myriad and dispersed, sometimes centralized among monopolists or rule-makers. In any case, to market participants, it is usually not obvious who decided the outcomes, or that there is meaningfully such a “who” at all. “Market forces” shape our fortunes and misfortunes, rather than identifiable human beings whose judgments we might appeal.

In the same way, for the same reasons, we respond very differently to a terrorist attack than to an even more devastating hurricane, many of us accept unfortunate market outcomes as things we just have to deal with, where had some identifiable individual prosecuted the same harm we might contest it, demand compensation, even engage in retaliatory violence. Market outcomes portray themselves as facts of nature rather than acts of man. In any social system, events and institutions will lead to outcomes that create winners and losers. A hundred families want to live in a building with room for only twenty. Some will get a spot, some won’t. If some politician dictated the allocation, the losers might get mad, might even try to get even. If the losers are “priced out”, well, that was just supply and demand, baby. Market forces. Whaddayagonnado?

This trick of markets doesn’t always work. In fact, the senescence of the neoliberal era corresponds not coincidentally with its working less and less. When it seems like identifiable parties controls market outcomes, we describe the market as “rigged”. Market outcomes are no longer perceived as natural, and those on the losing end become inclined to contest them. A decade ago, the resolution of the Global Financial Crisis created a lot of winners and losers in a manner that was widely, and accurately, perceived as politically determined (even as the winners, just before and again now, portray themselves as skillful participants in a free market). No one except perhaps Jamie Dimon attributes JPMorgan Chase’s success or continued existence to the dispassionate operation of an invisible hand. Over the past decade, growing awareness of inequality, along with widening gaps across social fissures of geography, race, and profession, have increased the degree to which “market losers” perceive themselves as victims of self-interested action by identifiable classes, rather than individuals caught by misfortune in the economic equivalent of a hurricane.

That this trick of markets is not now working so well does not mean it is dispensable. Our society is not now functioning very well. The collapse of markets’ ability to effectively naturalize outcomes and render them immune from political contestation is precisely the collapse of the legitimacy of a neoliberal order. But any system of large scale social coordination is going to require action that creates winners and losers, often arbitrarily, and will require some means of legitimating those actions, of preventing the natural and inevitable unhappiness of losers from translating into attacks on the system of coordination that render it unworkable.

“Democratic legitimacy” is the most commonly posited alternative to markets’ naturalization of outcomes, but I think that both in practical and moral terms, it’s an insufficient answer. There are no perfect democratic institutions, and ours are particularly imperfect. Losers often perceive government actions that thwart them as usurpations of rather than expressions of the “true will of the people”. If democratic legitimacy is defined in majoritarian terms, all of us I think would agree there can and have been actions supported by majorities against minorities that should not be deemed moral or legitimate. Democracy matters, a lot. It does contribute to losers’ willingness to tolerate actions with disparate impact. But to recover social contentment, we’ll either need to improve our democratic institutions so that outcomes are more universally perceived as legitimate, or we’ll need to find new tricks that replace markets’ depoliticization and naturalization of tough cookies. Probably we’ll need a lot of both.

III. Markets “flip the incentives” surrounding resource utilization 🔗

Where market logic has not yet penetrated, people’s incentives are usually to hoard utilization of resources they possess. Households with a guest room leave it empty most of the time. Private cars sit idle most of the time. From an owner’s perspective, this “underutlization” is rational. Letting other people use your resources is costly, in terms of wear and tear and risks of damaging misuse. Further, possession of idle resources confers option value. Your empty guest room would not be available when your friends swing through town, if you used it to house a homeless person. Your idle car is always there for you when you want or need it. You don’t have to call a cab and worry about when it will come or the price of your ride.

If we let markets infiltrate households, we can flip these incentives. If you AirBnB your guest room, all of a sudden you spend hours on the website futzing, trying to ensure that bed is occupied almost every night. If you start driving for Uber, your car will no longer be so idle. The same logic holds for capital goods as households. If you happen to own a big, street-level space in a city, without markets, you might use it to host occasional parties, or as an art gallery, or who knows? But once there is a market for commercial space, you’ll rent it to a highest bidder who likely will ensure it is used quite intensively, in order to make the rent.

This “flipping of incentives” is important, economically and environmentally. Economically, intensive use of a resource by many creates more value in aggregate than very occasional use by a single party. (Even much of the option value can be retained, albeit split between provider and customer, if access is priced so that usually there is some slack.) Environmentally, intensively shared resources can have a much smaller footprint than widely replicated, infrequently used resources. (If 10 households can be served by one Uber, we could build a lot less cars by Uberifying.) There are nuances. If the shared resource is very far away (e.g. one intensively run factory in China), the environmental costs of transportation at least partially offset the smaller footprint. And the intensive, “efficient”, resource use encouraged by status quo markets often comes at a cost in resilience, as we are learning too well during the current pandemic. Many underutilized, “redundant” resources are less likely to fail or become unavailable all at once than a very few fully utilized resources. Perhaps successor institutions to status quo markets will better balance redundancy and efficiency.

The most important resources for which markets “flip the incentives” are, well, us. Where markets are not very extensive, the burden of collaborations falls very heavily on people who want something for which they need assistance, rather than the people who could provide the assistance. As markets develop, this burden flips. In the beforetimes, your farm lacks a blacksmith, but larger farms have them, and your horse needs shoeing. So you wander to a neighbor and ask for help, negotiating compensation ad hoc or relying upon a spirit of reciprocity. As markets develop and specialize, blacksmiths become independent, competitive businesses who advertise and post prices. Perhaps touts even pester you as you trot by, hoping you will let them provide.

In less developed markets, we conserve our time and skills like we conserve other resources that we own. As markets develop, incentives emerge to keep our time and skills heavily utilized. Most of us are ambivalent about this. As consumers, we don’t love to be pestered by marketers. As producers, everpresent consciousness of “opportunity costs” can poison our creative and family lives. Nevertheless, this shifting of burdens from consumers to producers dramatically increases economic activity, and so prosperity by conventional measures, and I think prosperity in a real sense as well. Left alone, consumers want only occasionally. But producers produce most efficiently when they produce consistently and at scale. With the help of marketing (and macroeconomic policy), they strive to engineer want for the goods they efficiently produce.

On the one hand, this is the kind of treadmill many of us hope to escape with some retrenchment of neoliberalism. But on the other hand, I don’t think we want to escape too far. Overall we are better off in a world where our incentives are to seek to do one another favors, rather than a world in which need is the dominant incentive and we have to beg favors not eagerly provided.

For now, institutions that are insulated from market incentives, in particular government institutions, often do not have these incentives flipped, and that is a problem. As I write, millions of people are struggling to get unemployment benefits to which they are entitled from states (e.g. Florida) whose incentives were to make access difficult, not easy. Much of the conventional disdain for “bureaucrats” comes from a sense that they are people with no great reason to help us when need their help or at least their acquiescence. If the operators of Florida’s unemployment system had been rewarded for ensuring that every eligible beneficiary got their check, rather than for minimal outflow of state funds, that bureaucracy would probably behave quite differently. When politicians say governments should be “run like a businesses”, they mean lean, cheap, and efficient. But what appeals to most citizens in the phrase, I think, is that they should be accessible, helpful, and eager to please. As we pull back from neoliberalism, in part by tilting away from markets and towards governments as coordinators of our affairs, we should find ways to “flip the incentives” of state actors. One great use of a job guarantee corps would be to train up humans eager to serve as bridges between busy, distracted citizens and the governments who might serve them — basically taking a role as salespeople, but for the state.

Our political resentments play out mostly in national affairs, but antigovernment animus builds up mostly locally I think. Small businesspeople especially become jaded. They face a daunting range of risks related to local codes, registration, tax, and employment. Compliance, they are told, is their responsibility, the entrepreneur’s burden alone. Talk to owners of restaurants or small retail establishments in major US cities and you’ll hear horror stories of having to pay tens of thousands to one of a few architects able to get paperwork through city hall in order to renovate and open, of new investment demanded to bring a kitchen up to code when the prior tenant had just been operating with the same kitchen, of penalties for violating regulations they hadn’t realized existed, of getting shut down for zoning violations that make no sense at all. Whether you are on the left or the right, a neoliberal or social democrat, these just aren’t good things.

Regulation and compliance are essential, especially for dense cities. But helping people manage compliance ought to be a function of the state. If a restaurant kitchen needs better equipment to come to code, that becomes the restaurant’s property, and of course it should be purchased at the restaurant’s expense. But the process of bringing an an expert to inform the restauranteur of what their requirements will be in order to come to code ought to be a public function, rather than a domain of expensive specialists. Regulations exist to ensure valuable activities are conducted in ways that contribute to the public good, not to discourage those activities, or restrict opportunity to the very well capitalized. Spurred by “flipped” incentives, market producers routinely work to absolve customers of regulatory burdens. Car dealerships hire specialists to render the bureaucracy of a loan application almost invisible to customers, because they have an interest in the purchases overcoming that burden helps to enable. Government actors should face similar incentives. Large swathes of professions that now expensively, extractively manage compliance — law, accounting, finance, architecture — should migrate into the employ of states. Professionals should be rewarded both for quality of compliance and quantity of activity they enable. If you have a hare-brained idea for a business, City Hall should invite you in and offer you a coffee, just like a salesman at the car dealership. At both enterprises, most of those encounters will be “waste”, but the overall result will be well worth it.

It’s not obvious how to design effective public-sector institutions with flipped incentives. Neoliberal politicians have frequently attempted cargo-cultish, superficial mimicry of businesses, like having government employees refer to the people and businesses they interact with as “clients” or “customers”. That’s… not it. As the neoliberal moment hopefully recedes and we come to rely more on state coordination, this is a problem we should try to solve.

IV. Markets launder history 🔗

A crucial function of status quo market institutions is to hide details surrounding the provenance of commodities, which contributes to the interchangeability or fungibility of commodities. Apple can shift the location of its production across the globe, but from a customer perspective, the only input to the process is their money which is transformed, as if by magic, into an iPhone. Outside of market processes, nothing is like this. When we produce goods for ourselves — “cottage production” as the economists call it — every item has a history. The coffee table Dad built is not the same as any other coffee table, even if it is physically not so different from some other table. As markets develop, firms try to reconstitute this kind of nostalgic, positive history, using labels like “hand-made” or “artisanal”. These attempts not very persuasive.

However, the history of commodities is not always positive. When our credit card dip magically transforms into an iPhone, it is the same iPhone whether the cobalt inside it was mined by well-treated workers or child slaves. Like Vietnam vs China vs the US, these “back ends” are interchangeable, except to the degree that one makes the product cheaper, which we prefer. But human beings are moral animals. No aspect of our experience is naturally immune from our judgments, individually and communally, and judgments have huge effects on our behavior and experience. We might not enjoy our shrimp dinner, if rather than pulling the shrimp from plastic in the freezer, it was delivered to us directly by the trafficked crewman who may have harvested it. We might feel bad, and that might impair preference satisfaction.

This function of markets is obviously essential to our neoliberal status quo. Innocuously, it allows producers the flexibility to alter and improve the internals of ethical production processes without fragmenting markets. It’s for the best that an iPhone 8 be an iPhone 8 regardless of where the screen was produced. It simplifies exchange and contributes to efficiency. The producer’s brand becomes the only history that matters, and the producer has an incentive to ensure that, however dynamic and heterogenous the details of production, the consumer’s experience is uniform. Even where we understand production processes and regard them as ethical, too salient an awareness of their history might impair our enjoyment of a product, so in a sense make us poorer. We all understand what a sausage factory is, and have some idea of why we famously might prefer not to observe one. But we all know, even if we don’t live like we know, that in fact there’s a lot of history in the goods and services we consume we’d at least be ethically squeamish about. As I write, the Federal government has just effectively coerced meatpacking workers to labor in manifestly unsafe workplaces, in the name of preserving our food supply. How should that affect our relationship to bacon? How does it, when our experience of the packaged, refrigerated product is mostly unaltered? In ordinary times, lots of us are fond of animals but do not become vegetarians. If we were required to personally kill the animals we eat, many of us would enjoy our carnivore lifestyle quite a bit less. Again, the abstraction markets offer make us richer, in the sense that we enjoy what we otherwise would not. Okay, maybe that’s gross, and we should all be vegetarians. But then what do you think about the conditions under which migrant workers harvest our garlic?

There is a case for this laundering of history. Modern production processes are complicated, involving a many stages and circumstances, each of which involves tradeoffs, conflicts, and shades of gray. If we tried as individuals to police all that, we’d do a poor job in an ethical sense and make ourselves poor in a practical sense. Instead we outsource the ethical choices to state regulation of production and trade. Then so long as commodities are produced and sold in legal markets, every purchase comes with a dollop of absolution. Individually, we might not all agree on the choices the state makes, but hey, this is a democracy right? On the whole, the theory goes, our choices will be more effective when they are collective and enforced, rather than if we tried to rely on more perfectly individualized consumer judgments, boycotts or such. So ethics as well as expedience are on the side of this arrangement.

Of course if neoliberalism is defined in part by an attitude of state subservience towards markets, perhaps, in a neoliberal era, it should not surprise us if expedience came to eclipse ethics. Many of us now think that modern supply chains are sexy Apple packaging wrapped around horrifically ugly production arrangements, and that legal and financial markets often serve to wrap theft and extraction in pretty paper bow ties. This “function” of markets is part of what motivates us to challenge them. But it remains to be answered how much and just how we might want to retain the blissful ignorance delivered by virgin commodities. Inscribing all the history markets erase on a blockchain or whatever, and then relying on individuals to evaluate the ethics of every stage of production of every good and service they consume, does not seem workable or effective. On the other hand, if markets launder history too well, that short-circuits the capacity of democratic politics to insist upon ethical production, as voters are shielded from the harms of cruel supply chains but enjoy the benefits of lower prices. Some variant of the status quo, where ethical choices are collectively made and enforced by states, seems like the only way forward. (Perhaps I am too uncreative?) It’s one thing to speak abstractly about retrenching from neoliberalism, with its corrosive effect on collective action in pursuit of moral ends. But what, concretely, do the political institutions and processes look like that would render it ethical for us to enjoy the goods and services available for purchase as though they had no history? What would be the trade-offs in what we perceive as prosperity if we instated those institutions?

This entry was posted on Friday, May 1st, 2020 at 10:40 am PDT.
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