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In both cases they came to a dismal conclusion: the ethical standards of Ph. They reflect the vicious brotherhood between neoliberalism and the neoclassical economics taught in graduate courses in the United States. It happened because neoliberal ideas became dominant, because neoclassical theory legitimized its main tenets, and because deregulation was undertaken recklessly while financial innovations principally securitization and derivative schemes and new banking practices principally commercial banking, also becoming speculative remained unregulated.
This action, coupled with this omission, made financial operations opaque and highly risky, and opened the way for pervasive fraud. How was this possible? How could we experience such retrogression? We saw that after World War II rich countries were able to build up a mode of capitalism — democratic and social or welfare capitalism — that was relatively stable, efficient, and consistent with the gradual reduction of inequality.
So why did the world regress into neoliberalism and financial instability? First, a few words on the fear of socialism. Ideologies are systems of political ideas that promote the interests of particular social classes at particular moments. While economic liberalism is and will be always necessary to capitalism because it justifies private enterprise, neoliberalism is not.
It could make sense to Friedrich Hayek and his followers because in their time socialism was a plausible alternative that threatened capitalism. Yet, after Budapest , or Prague , it became clear to all that the competition was not between capitalism and socialism, but between capitalism and statism or the technobureaucratic organization of society.
And after Berlin , it also became clear that statism had no possibility of competing in economic terms with capitalism.
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Statism was effective in promoting primitive accumulation and industrialization; but as the economic system became complex, economic planning proved to be unable to allocate resources and promote innovation. In advanced economies, only regulated markets are able to efficiently do the job. Thus, neoliberalism was an ideology out of time. It intended to attack statism, which was already overcome and defeated, and socialism, which, although strong and alive as an ideology — the ideology of social justice — in the medium term does not present the possibility of being transformed into a practical form of organizing economy and society.
It also implied a generalized process of eroding the social trust that is probably the most decisive trait of a sound and cohesive society. When a society loses confidence in its institutions and in the main one, the state, or in government here understood as the legal system and the apparatus that guarantees it , this is a symptom of social and political malaise. This is one of the more important findings by American sociologists since the s.
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For sure, a neoliberal will be tempted to argue that, conversely, it was the malfunctioning of political institutions that caused neoliberalism. But there is no evidence to support this view; instead, what the surveys indicate is that confidence falls dramatically after the neoliberal ideological hegemony has become established and not before. Neoclassical economics except Marshallian microeconomics have a major responsibility for this crisis.
The method allows them to use mathematics recklessly, and such use supports their claim that their models are scientific. Although they are dealing with a substantive science, which has a clear object to analyze, they evaluate the scientific character of an economic theory not by reference to its relation to reality, or to its capacity to explain economic systems, but to its mathematical consistency, that is, to the criterion of the methodological sciences Bresser-Pereira They do not understand why Keynesians as well as classical and old institutionalist economists use mathematics sparingly because their models are deduced from the observation of how economic systems do work and from the identification of regularities and tendencies.
This is not surprising: ideologies and economics both deal with economic interests. Besides, economic liberalism is the ideology of markets, whereas economics is the theory of how markets coordinate economic systems. Marx denounced the ideological character of classical political economics, but acknowledged the major contributions of Smith, Malthus and Ricardo to explaining economic systems.
Schumpeter was a great economist and the greatest ideologue of capitalism. Keynes, despite having criticized capitalism and liberalism, was a progressive liberal — not a socialist. Economics was mixed with ideology, but it was reasonably truthful and oriented economic policymaking.
After the s, however, when neoclassical economics recovered its dominance after 30 years of Keynesianism, there was a major turn in academic economic theory as it became either extremely empiricist or extremely mathematical.
The empiricist turn was the outcome of the development of econometric research methods and of the need of academic economists to publish papers. It is the practice of normal science in the Kuhnian sense; it has limited scope, but is valuable because it checks theories. The mathematical turn, however, had disastrous consequences for economics in so far as it led economists on to a false and highly ideological path.
This was a wrong path that, nevertheless, produced a great economist, Alfred Marshall, who developed microeconomics. Yet, if we assume that economics is the science of economic systems, while economic decision-making science studies choice between economic alternatives, Marshallian microeconomics was not a major advance in economics itself but rather in economic decision-making theory complemented later by game theory. As the Great Depression demonstrated, while neoclassical microeconomics proved helpful in making choices in markets, neoclassical economics was not an effective instrument for macroeconomic policymaking.
This opened the way for the Keynesian macroeconomic revolution that remained dominant up to the s. Finally, the United States had come out of World War II as the new hegemon, and, supposedly, as a liberal example of economic organization that should be a model for the whole world.
These facts defined the setting for the return of neoclassical economics to the mainstream position. But three things were lacking for that: a neoclassical macroeconomic model, a neoclassical financial model to replace simple financial management practices, and a neoclassical growth model. Neoclassical economists now had at their disposal a consistent theoretical model explaining economic systems: a great model that did not have as truth criterion its approximation to or compatibility with the reality to be explained the economic system , but rather its own internal consistency, as is proper for pure mathematics but makes no sense for mathematical models trying to explain reality.
A great model that instead of using a historical-deductive method uses a fully hypothetical-deductive method that is suited to methodological sciences, but is unacceptable in a science attempting to explain the real world, as economics is supposed to do. A great model that did not orient economic policy — actually economic policies make no sense because markets are self-regulating except for the policies defending competition — but rather justified deregulation and the neoliberal demand for the minimum state Bresser-Pereira Neoclassical economists seek to adorn these models with certain concepts that they believe to be neoclassical, such as, for instance, the concepts of confidence and of transparency.
They are, essentially, harmful ideological theories. Their models tend to be radically unrealistic, assuming, for instance, that markets are self-regulating, or that insolvencies cannot occur, or that financial intermediaries have no role in the model, or that the price of a financial asset reflects all available information that is relevant to its value, etc.
For sure, they acknowledge market failures many neoclassical economists won the Nobel Prize for discovering new market failures , and, so, when analyzing specific cases, they attempt to drop the unrealistic assumptions. But this is an arduous effort, soon forgotten. Actually, neoclassical economists use mathematics as tool not to advance knowledge but to assert the scientific character of their models. They evaluate the scientific character of an economic theory by reference not to its approximation to reality or its ability to explain the behavior of economic systems, but to its mathematical consistency.
They do not understand that this is a consequence of the method that Keynesian like classical and old institutionalist economists use, namely, the empirical-deductive or historical-deductive method — a method that starts from the observation of how economic systems actually work, from the observation of regularities and tendencies, and generalizes from them. For Keynesians, economic systems are open systems that must be explained by correspondingly open and, for that reason, simple models.
Instead, neoclassical economists use the hypothetical-deductive method, which proceeds from the assumptions of rationality and of complete and efficient markets. This is the method of the methodological sciences, principally mathematics, but also econometrics and economic decision theory. It is an intrinsically logical method that opens the way for the reckless use of mathematics.
Yet it is not an adequate method for substantive sciences, which have a reality to explain, and particularly for a social science like economics, which seeks to explain economic systems. Neoclassical macroeconomists and neoclassical financial economists, however, decided to conclude this pact with the devil. To achieve precision and consistency, they gave up adequacy. It was also a long-term consequence of the transition from capital to knowledge as the strategic factor of production as the supply of capital had become abundant, or, in other words, as the supply of credit from inactive capitalists to active capitalists had exceeded the usual demand for it.
These short-term and long-term factors meant that either the profit rate the interest rate which, in principle, is part of the profit rate should be smaller or that the wage rate should increase more slowly than the productivity rate, or a combination of the two so as to create space for the remuneration of knowledge.
We have already observed that the new role assigned to monetary policy in the s was instrumental in increasing the interest rate, but nevertheless, given the low profit rates prevailing from the s up to the mids, discontent was mounting, principally among capitalist rentiers.
Actually, the financial innovations did not increase the profits achieved from production, but, combined with speculation, they increased the revenues of financial institutions, the bonuses of financists, and the value of financial assets held by rentiers. In other words, they created fictitious wealth — financialization — for the benefit of rentiers and financists. This crisis contributes to eliminating these doubts in so far as, among the three major issues that came to the fore, one was the bonuses or, more broadly, the compensation that financists receive the other two issues were the need to regulate financial markets and the need to curb fiscal havens.
Compensation and benefits in the major investment banks are huge.
Statistics distinguishing the salaries and bonuses received by the professional class and, in this case, a fraction of that class, the financists, from other forms of revenue are not available, but there is little doubt that such compensation increases as knowledge replaces capital as the strategic factor of production.
If we take into consideration the fact that the number of employees in investment banks is smaller than those in other service industries, we will understand how big their remuneration is as the Goldman Sachs example demonstrates , and why, in recent years, in the wealthy countries income became heavily concentrated in the richest two percent of the population.
The adversaries of this political coalition of rentiers and financists included not only the workers and the salaried middle classes, whose wages and salaries would be dutifully reduced to recompense stockholders, but also the top professional executives of the large business corporations, the financists that I am defining as the top executives in financial institutions, and the traders.
In similar vein, John E. We need to reverse its course so that the system is once again run in the interests of stockholders-owners rather than in the interest of managers… We need to move from being a society in which stock ownership was held directly by individual investors to one overwhelmingly constituted by investment intermediaries who hold indirect ownership on behalf of the beneficiaries they represent.
Actually, stockholders are not entrepreneurs; most of them are just rentiers — they live on capitalist not Ricardian rents. They may have some grievance about the bonuses of the top professional managers who run the great corporations and decide their own remuneration and of the financial traders get, but the reality is that today they are no longer able to manage their wealth on their own: they depend on financists.
Actually, professionals know that they control the strategic factor of production — knowledge — and accordingly — and this is particularly true of professional financists — request and obtain remuneration on that basis.