the Barclays scandal: made in Chicago

The scandal of Barclays' manipulation of interest rates, which some suspect may end up spreading to other banks, looks set to provide us with this summer's drip-drip expose of British power elites. 2009 was the Summer of Duck Ponds, and 2011 was the Summer of Milly Dowler's Mobile Phone. And now we enter the Summer of Libor.

This one could be equally significant. It's not that the banks possess very much moral authority right now anyway, but then nor did The News of the World or MPs. As Zizek argued about wikileaks, what's distinctive about contemporary scandal is in making tacitly-assumed truths impossible to ignore. It matters greatly whether the banks were acting within the rules, but brought down by excessive exuberance, complexity and inadequate regulation, or whether they were attempting to rig the entire game in secret.

Or at least, we assume it matters, hence the moral outcry about interest-rate rigging. But what if the distinction is actually non-existent? What if rigging the game is the game? On one level, this is the end game of neoliberalism, in which the refusal to accept any notion of political-normative authority external to economic efficiency ends up undermining its very conditions of possibility. But a careful reading of Chicago School economics might suggest that this has been an integral feature of neoliberalism all along.

It's worth standing back, and remembering that there were always (roughly) two traditions of neoliberalism. From the 1930s onwards, there was a European one, which sought to inject strong legal norms into the free market system, to defend it from monopoly and the state; this was manifest in ordo-liberalism, the German 'social market' economy, Henry Simons in Chicago and the pre-Chicago Hayek. This elevated the price system to a quasi-sovereign authority, backed by law. Then,  from the 1950s onwards, there was the Chicago School one, which sought to use price theory to explain all forms of economic, social and political behaviour; Aaron Director and Ronald Coase play a key role in this tradition. This is what influenced US regulation from the 1970s onwards, and European regulation from the 1990s onwards.

As I argue in this paper (and to simplify somewhat) where the former privileged the price mechanism of the market, the latter privileged price theory of neo-classical economics. The former assumed that the state's job was to reinforce market institutions using law; the latter assumed that the state's job was to analyse existing institutions as they happen to exist, and analyse their behaviour on the psychological premise that each actor is behaving 'as if' in a market. The problem with this latter approach is that, if every individual in a highly complex institution is acting rationally in their own interest, and that this is most likely efficient given available information, there is scarcely any basis on which policy-making can insist on one institutional design over another. Efficiency is likely to emerge organically from the aggregate of individual decision-making, both in the marketplace and in the murkier world of firms (such as banks) and networks (such as elite relations and lobbying networks).

From a Chicago School perspective, faith is not being placed in the market (a position which would warrant the enforcement of market norms) but in individuals to act in a reasonable, market-like fashion. Foucault explains the transition to Chicago-style neoliberalism nicely:

it is no longer the analysis of the historical logic of processes; it is the analysis of the internal rationality, the strategic programming of individuals' activity.

A particular idiosyncratic psychology is presupposed (NB as a methodology, not an empirical anthropology!) in which individuals act in a calculated, self-interested fashion. But law and morality possess no distinctive quality within this worldview; they are simply additional forms of psychological incentive and disincentive. Hence, the very notion of 'cheating' becomes virtually meaningless. If behaviour can be proved as inefficient, then incentives need introducing to dissuade people from doing it. But constructing such proof is fiendishly difficult, especially in highly complex institutional environments. How is the regulator to demonstrate that their view on efficiency is superior to the banker's own view on what is going on? Falling into this trap is what Alan Greenspan recognised as his key mistake.

In his famous essay, The Methodology of Positive Economics, Milton Friedman introduced a neat metaphor, to defend economics from the charge of unrealism. He suggested that if capitalism were a game of billiards, that economists were like geometricians: the players could be expert at the game, without understanding anything about geometry, while economists could understand why the balls travelled at the angles they did, without being any good at the game. The key issue is that the 'outsider' and the 'insider' have radically different views on what is going on, and (what Friedman didn't say) radically different concepts of authority. As an observer, you have no right to tell me how the game 'should' be played; equally, I have no interest in how the game appears in the aggregate.

Staffed by economists, neoliberal regulators end up being like silent geometricians, watching in amazement as bankers move balls with great precision around the table towards the pockets. As long as the players are both trying to win the game and not (as per a cartel) seeking to co-operate on the outcome, then all must automatically be well. The geometrician has no view on the 'right' or 'wrong' way to hit the ball, and couldn't possibly insist that the billiard-player's hand might be in the wrong place or doing something suspicious.

This is very different from the early European neoliberal epistemology, in which the great virtue of prices was that they have an explicit, public quality that nobody can misunderstand, be they 'billiard players' or 'geometricians'. The competitor and the observer inhabit the same shared world. There is necessarily a limit to how much prices can be manipulated, if they are to sustain this political and epistemological role of social consensus-formation (it's often struck me that Ryanair's "£5 flights" which cost £85 are another example of the triumph of Chicago neoliberalism over European neoliberalism). Upholding the market requires not only a minimal level of transparency, but also of simplicity. By contrast, if 'price' is simply understood as a psychological metaphor, rather than a visible unambiguous public institution, then manipulation of actual prices becomes entirely legitimate within the overall game of wealth accumulation. And this is precisely what Barclays have been doing.

Comments

[Ian C]

Brilliant and exactly to the point - thanks.

The difference between Euro- and Chicago neoliberalism can be seen as an ethical failure. In the former, ethics at least has a chance of playing a part, in the form of law, even if this generates a very hollowed-out form of ethics ('I observed the legal requirements at all times' becomes a common statement of debased professional ethos). In the latter, ethics is simply beside the point, as you explain. Hence Bob Diamond, when asked to talk about ethical lapses in banking, always sounds like a man who is speaking in a foreign language from cue cards he barely understands.

[Trevor]

Reminds me of this one:

http://www.rollingstone.com/politics/news/the-scam-wall-street-learned-from-the-mafia-20120620