New Perspectives

In Economics and Finance

Crisis and Sustainability: An Interview with Alessandro Vercelli

Alessandro Vercelli, author of Crisis and Sustainability, expands upon some of the concepts within his latest book.

One of the most striking ideas in the book is the changing conception of freedom and liberty. You touch on how this idea was reframed by the architects of current economic orthodoxy like Hayek, Mises, and Freedman. Can you sketch out your challenge to this idea for us?

The architects of current economic orthodoxy claimed that liberty was the fundamental inspiration of their vision and that only free markets can guarantee the liberty of civil society. However, this basic assertion is vitiated by the assumption of a concept of liberty that is narrow and misleading because it focuses only (or mainly) on the liberty of economic agents from state interferences (negative liberty) but ignores (or downplays) the liberty of all the citizens to being and becoming what they wish (positive liberty). The redistributive, health and education policies of a well-designed welfare state contribute in a crucial way to the positive liberty of the majority of citizens.

The book is an interesting synthesis of culture, politics, and economics. Do you believe in a more interdisciplinary study of economics?

I believe that an interdisciplinary approach is necessary in all social sciences, including economics and finance, because the society is increasingly complex, subject to accelerating structural change, and interacts more and more with the biosphere. The single tesserae of knowledge produced by specialized analysis in one discipline is meaningless for society at large unless it is inserted in the full mosaic that cannot ignore the most significant tesserae produced in other relevant disciplines.

The systematic adoption of an interdisciplinary approach is synergic to the adoption of a pluralist approach, aiming to a constructive dialogue with different points of view, methods and theories within economics, finance, and other disciplines. Interdisciplinarity and pluralism are a necessary prop of critical thinking, as has been thoroughly understood and advocated by the students of “Rethinking Economics” who aim to revise the curricula in Finance and Economics to educate to critical thinking future experts and decision makers (as argued in their excellent recent book “Econocracy”.)

Can you give us your own definition of neoliberalism? Why do you distinguish it so sharply from liberalism?

Neoliberalism as political philosophy aims to defend the freedom of the individuals from the interferences of the state. Its origin was a reaction to communism originated in the 1920s. This point of view was later extended after WWII also against Keynesian and welfare-state policies. Neoliberalism as economic paradigm is a vision of the market as a self-regulating system believed to be so efficient to maintain always a full-employment stable equilibrium. A new sophisticated formulation of this idea in the early 1970 by the New Classical Economics succeeded to align much better than before the economic models and their policy implications with the Neoliberal Political Philosophy.

As for the second part of the question, let me recall that Liberalism was born as distinct political philosophy in the 17th century to defend the citizens from the oppression of despotic states (as argued by the great philosopher John Locke). Adam Smith showed a century later (in The Wealth of Nations 1776) that in principle free markets guarantee in the best possible way the freedom of the civil society. However, Adam Smith and the other main exponents of classical economic liberalism (such as Ricardo and Stuart Mill) also recognised the limits to markets and the necessity of introducing in this case systematic State interventions. The attention for positive liberty was not absent in Classical liberalism and became progressively more intense with the diffusion of liberal democracies.  The “social liberalism” underlying the building up of the welfare state and Keynesian full employment policies was correctly presented as a further step in the evolution of liberalism. The founding fathers of Neoliberalism sharply rejected social liberalism, and consequently focused on negative liberty denying the limits to markets or at least the possibility of improving on them through collective action.

The exponents of Neoliberalism claim that they aim to revive traditional liberalism but this assertion is questionable, taking into account their different attitude on fundamental issues such as positive liberty, limits to market, and democracy. In particular, let me emphasize that the neoliberal focus on the interferences of the state with citizens liberty is fully justified within a despotic regime but much more difficult to justify within a liberal democracy. In addition, the misleading conflation between classical liberalism and neoliberalism has put in the shade a series of fundamental contributions of classical liberalism on pluralism and democracy from which we have still a lot to learn.

You say that neoliberalism is financially instable. Can you sketch out your argument for that here?

Long run empirical evidence shows a tendency, started much before the emergence of neoliberalism, of market economies to becoming increasingly vulnerable to financial instability. The historical experience shows also, however, that policy authorities can significantly mitigate financial instability by imposing a few simple--but rigid and strictly enforced--rules, as it happened with success after WWII. The emergence of neoliberal policies since the late 1970s reopened the Pandora vase of financial instability as policy authorities gradually repealed the preceding rules. They adopted instead a new philosophy of regulation that proved to be inefficient if not counterproductive. The impossible task of reconciling their unfailing belief in the efficient self-regulation of financial markets with the need of mitigating and preventing its grave shortcomings made evident by financial crises produced a casuistic “hyper-regulation of self-regulation” that impractically encumbered the financial system and proved unbearable by smaller banks that play the crucial role in financing the local economies.

Chapter seven on neoliberalism and the environment is very topical. What is the relationship between neoliberalism and the environment?

The incompatibility between the neoliberal policy strategy and ecological sustainability is deeply rooted in their opposite foundations. The point of view of ecological sustainability is based on precise constraints that cannot be breached without jeopardising the health and resilience of the biosphere. (One example is the threshold of 2 C° for anthropic global warming.) These limits fixed by natural scientists can be respected only by imposing constraints to the market but the neoliberal policy strategy goes in the opposite direction of liberating the market from any sort of constraint.

Thinkers like Naomi Klein and Kate Raworth have made a strong case against the current economic paradigm, which doesn’t account for our finite resources. This idea also makes an appearance in your book. Do you have any ideas for how the finite capacity of the environment might find recognition within the economy?

The mind-set of mainstream economics prevents a thorough understanding of the deep and wide implications of finite resources on economic policy. In particular, scarcity is not conceived as an objective natural constraint but as the consequence, endogenous to markets, of the interplay between demand and supply. In this view, scarcity depends not only on the agents’ endowment of natural resources but also on their preferences, and the available technologies of exchange and production. In addition, in this view, the persistent scarcity of a natural resource would solicit substitution with alternative resources and technical change.

The sub-discipline Environmental economics is aware of the importance of the ecological issues (scarcity of resources and pollution) but relies on market-based policy instruments (green taxation and tradeable permits) that are efficient only in abstract models, and are extremely unpopular with industrialists, financiers, and taxpayers.

The alternative perspective of Ecological economics adopts instead an interdisciplinary paradigm within which the ecological issues are well understood and constructively tackled, but so far the increasing appeal of this more radical perspective extends still to a very limited audience of economists and policy makers.

I guess that the necessary recognition from mainstream economics and incumbent policy makers of the importance of the ecological problems may arrive spontaneously only after catastrophic environmental events that would open also “wide shut” eyes, but this may occur too late to save the biosphere, taking into account the inertia and irreversibility of natural processes. It is thus urgent to organise a strong pressure from the civil society on the “econocracy” dominating the world, forcing an urgent change of policy paradigm towards a sustainable trajectory.

Alessandro Vercelli, author of Crisis and Sustainability: The Delusion of Free Markets, is Professor of Economics at the University of Siena.

Crisis and Sustainability