1 Introduction
Neoliberalism as a shared mental model
Ravi K. Roy, Arthur T. Denzau, and Thomas D. Willett
Introduction
This book is about events and ideas and their interrelationships. Its focus is on the dramatic shifts in economic policy across the globe brought about by the greater recognition by governments of economic realities as seen through the lens of mainstream economic analysis. The most visible of the “victories” for mainstream economics and the market-oriented policies that it recommends are the fall of the command-and-control system of the former Soviet Union and the rapid shift toward greater use of the market in China. But the shifts are more widespread than this. Many governments of the left on many continents have adopted more market-oriented approaches and given greater weight to longer-run macroeconomic stability in their policies. Tony Blair in the UK, Bill Clinton in the United States, and Lula in Brazil are prominent examples.
Two points emphasized by many of our contributors, however, are that the same events can be interpreted quite differently by different people and that market-oriented policies – or neoliberalism, as they are often called – can have quite different meanings to different observers and in different national contexts. Experience has clearly shown that the total victory of the market predicted by some after the fall of the former Soviet Union was greatly overstated. This view not only overlooked the likelihood of continuing opposition from many quarters but also failed to understand the conditions necessary for markets to work well. To economists who specialize in political economy and the new institutional economics, it was not surprising that in countries without a tradition of effective property rights and democratic accountability, privatization sometimes looked more like thievery than like the well-functioning competitive markets of economists’ blackboards. Without social and political stability and many other aspects of social and institutional infrastructure, no economic system will work well. As John Kay (2004) has stressed in his recent book on Culture and Prosperity, there are many varieties within the general class of market-oriented economic systems, and there is no solid evidence that one particular version always works best in terms of either economic performance or social equity.
Discussions of different economic systems often quickly turn into discussions of ideology, sometimes in the form of how one’s opponents’ blindly-held ideologies keep them from seeing the obvious truth of one’s own point of view. In the writings on the economic reforms that have swept the globe over the past three decades we find many examples of such assertions combined with a tendency to equate all of the opposition with their most extreme members. Just as some market triumphalists saw almost any government intervention as a return to a command-and-control system, the advocates of middle-of-the-road market-oriented policies that critics associated with the Washington Consensus as being part and parcel with the most extreme forms of laissez-faire ideology.
A reading of the outpouring of literature makes clear that there are those who have such strong commitments to particular views that it is virtually impossible for arguments or events to influence their views. And somewhere there may be someone who is completely open-minded. Between the extremes lie most of us. Values and biases can slip in almost anywhere, and even with tremendous soul-searching, few if any of us are likely to be aware of all of our biases. But being aware of this problem is still a big help even if we cannot hope to attain perfection. Generally others are much better at perceiving our biases than we are ourselves. Thus we wanted to make sure that this volume contained contributions from leading scholars with a wide range of theoretical orientations and political leanings as well as giving us coverage across a broad range of countries and regions.
Studying neoliberalism as a shared mental model
This volume has several purposes. One is to emphasize that differences in theories, paradigms, and mental models are key variables in explaining disagreements about what economic policies should be pursued and which should be ignored. This volume therefore, aims to provide a refinement of interest-based and rational choice approaches. Given how much effort economists put into debating the “correctness” of different economic theories, it is surprising how little attention is paid by the economics profession to the role that differences in positive views can have on policy debates. In policy discussions, debates about right versus wrong views are still much more prevalent than attention to the role of uncertainty about what is the correct model.
A second purpose is to explore how Arthur T. Denzau and Douglass C. North’s Shared Mental Models framework (1994) can help us better understand distinct neoliberal experiments across regions and nations. This volume examines the relevance of neoliberalism as a shared mental model and its various related strands (examined as a subset of mental models) in shaping the political economies of various states and regions in an era of globalization. Neoliberalism as a shared mental model refers to the spread of market-oriented ideas across the globe that has been occurring over the past three decades. The contributors to this volume collectively demonstrate that while these ideas have had an important effect in shaping global economic reform, this importance has varied greatly across countries and regions. Additionally, in cases where neoliberal ideas have been influential, they have not always been successful. We should emphasize that our arguments regarding the potency of ideas in this volume lie in their influence in shaping choices and not necessarily in their leading to successful outcomes. There is a variety of market-oriented systems that fall under the general category of neoliberalism. There are thus a number of distinct, but related neoliberalisms. Unfortunately, most writings on the topic have often ignored these distinctions, often painting all neoliberals monochromatically. This volume seeks to address the complexity of the neoliberal debate.
A third purpose is to serve as a catalyst for a continuing dialogue among economists, political scientists and other social scientists who study the role of ideas in shaping state policy. It is an interesting phenomenon that mainstream economists seldom use the term liberalism, neoliberalism or globalization. (They prefer terms such as classical and neoclassical.) It is largely non-economists, especially political scientists, who use these terms. And while writers on international relations such as Gilpin (1987) would most likely treat the term in a neutral sense, it is most commonly used in policy debate, especially in the United Kingdom and Latin America, to portray economic reforms in those countries in a negative light. Many advocates both for and against neoliberalism have been guilty of characterizing their opponents’ views in the most extreme terms and associating them with the most extreme positions. Such uncharitable characterizations obstruct a genuine and productive dialog about this critical topic. This volume seeks to move beyond the emotional rhetoric that has unfortunately dominated both the scholastic and political debate on neoliberalism and global market-oriented reform.
Shared mental models and rational choice
A key aspect of Denzau-North’s Shared Mental Models framework concerns refinements of rational choice theory. The work on ideas and political economy is a highly fertile area of academic and policy research that will reveal many truths about human behavior that purely rational choice studies have been unable to uncover. This stems mainly from the fact that “rationalist” views are sometimes greatly oversimplified. They frequently assume that everyone knows the true model of the economy and that there is broad agreement on how the world works. Goldstein and Keohane (1993) argue that “utility” itself is ultimately realized through a set of ideas and beliefs of what furthers one’s interest and what does not. This is not to suggest, of course, that interests are irrelevant; indeed interests are vital to understanding behavior. Rather, our argument is simply that ideas are an integral component in determining how individuals and groups come to understand what their interests are in the first place, and how best to further them (Denzau and North, 1994: 1). Denzau and North argue that rational behavior is itself determined by the information and knowledge one possesses when making decisions. In some cases a person’s or group’s self-interest is so obvious that it may seem pedantic to argue that these interests are perceived through ideas or mental models. Often, however, one’s interests are not so clearly apparent and differing mental models would lead to quite different perceptions of interests (such as patent protection, or different perceptions about military deterrence).
Denzau and North (1994) argue that mental models are systematic sets of ideas, and related principles that individuals use to interpret the world around them. They involve internal mental constructions, as well as the interpretations and meanings of terms, data, and other forms of information governing a particular subject matter. Even policymakers who disparage theoretical analysis typically rely on implicit mental models to help them make causal connections or draw causal inferences about how the economy works. Mental models help them make predictions about what policy strategies and tools might work under certain sets of circumstances as well as provide policymakers with an interpretative lens of the policy environment in which they operate. In A Brief Tour of the Human Consciousness, V.S. Ramachandran (2004) provides a relevant quote:
Our brains are essentially model-making machines. We need to construct useful, virtual reality simulations of the world that we can act on. Within the simulation, we need also to construct models of other people’s minds, because we primates are intensely social creatures . . . we need to do this so that we can predict their behavior.
(p. 105)
Mental models thus help actors discern what their interests are as well as which strategies are desirable and which are not. Shared mental models involve shared meanings and understandings of a subject matter. These shared interpretations and meanings are conveyed through shared language, rhetoric, terms, symbols, analogies, and material referents. They involve intersubjectively-accepted mental constructions that individuals may use to develop shared interpretations of the world around them and the developments that occur in it.
Neoliberalism as both a set of distinct but related mental models and a shared mental model
The chapters in this volume apply Denzau and North’s Shared Mental Models framework (1994) to help us examine distinct neoliberal experiments across regions and nations. The concept of shared mental models is quite wide, and encompasses other more specific notions of ideas. For example, Kuhn’s (1970) notion of a paradigm represents a consensus among a group of scientists on a set of examplar questions and basic approaches to answering them. Paradigms are a class of shared mental models. Although Kuhn used “paradigm” in several different ways, all are intended to be mental models that are shared among a group of people. Similarly, Sowell’s (2002) notion of a preanalytic vision is also a class of shared mental model. Sowell classifies visions into two categories, the constrained and the unconstrained visions. The constrained vision sees the human state as having a specific limited content, such that various utopias requiring certain types of humans to make them work are impossible. Constrained humans create institutions to further their interaction and reduce the cognitive and behavioral requirements that an unconstrained vision might require. Mainstream economic analysis adopts this constrained vision in its models of human behavior. In the unconstrained vision, humans are malleable and perfectable, leaving the notion of a human as an empty shell. These visions are clearly shared mental models, although not all shared mental models are necessarily visions or paradigms.
The neoliberal shared mental model has been expressed in the various experiments with market-oriented ideas including the adaptations and innovations that often occur in their application in real political contexts. How market or neoliberal ideas are interpreted as well as applied are informed by these contexts. Distinct market-oriented experiments have been informed (to varying degrees) by a common set of ideas that can be collectively defined as a neoliberal shared mental model. These ideas are consistent with Sowell’s constrained vision, and have often been explicitly tied to an economic paradigm of market-generated growth. Precise understandings of what Neoliberalism is and how it should be applied tend to vary according to the context in which the word is used. Context shapes meanings and understandings of ideas and words used to describe them. Distinct experiments with market reforms represent different manifestations of neoliberalism.
The various experiments and manifestations may be regarded as distinct, though related, mental models or strands of a broad neoliberal shared mental model. Some strands emphasize certain liberal principles and policy priorities over others. These individual strands help explain the divergence in policy trajectories of the nations and regions under study in this volume. Some strands are rooted in, or at least sympathetic with, more ardent laissez-faire approaches that are associated with Hayek and the Austrian School, or the Chicago School. The leaderships of Thatcher, Reagan, and Pinochet are well-known examples. Other strands however, such as the Washington Consensus, first termed by John Williamson in 1990, shares some agreement with these approaches while disagreeing (in some cases fundamentally) with others. For example, the Washington Consensus would share broad agreement on issues such as fiscal discipline, tax reform (to lower marginal tax rates and broaden the tax base), privatization, deregulation, and securing property rights (Global Trade Negotiations Home Page, 2006: 1). Williamson however, never intended the Washington Consensus to imply policies such as capital account liberalization, monetarism, supply-side economics, or reducing the state in areas such as welfare provision or income redistribution. The Washington Consensus advocates “redirecting public expenditure priorities toward fields offering both high economic returns and the potential to improve income distribution, such as primary health care, primary education, and infrastructure” (ibid: 1). Nancy Neiman Auerbach discusses these distinctions in much greater depth in Chapter 3. And while these distinct mental models or strands may differ over the appropriate degree to which governments should intervene in markets as well as over policy priorities, and prescriptions, most share broadly similar philosophical positions regarding the superiority of the market mechanism over state intervention in sustaining growth and tend to emphasize the principles of individual and entrepreneurial economic freedom ahead of more collectivist approaches.
Contending shared mental models in political economy: liberalism and neoliberalism versus mercantalism and dirigisme
Robert Gilpin (1987) classifies political–economic systems into three broad political economy world views or what we call contending shared mental models. They are the nationalist (also called realist or modern mercantilist), Marxist, and liberal political–economic world views or shared mental models. We briefly examine them in relation to our discussion of neoliberalism.
When Adam Smith (1776) wrote his classic advocacy of the market system, The Wealth of Nations, in the eighteenth century, the dominant economic doctrine of the time in western Europe was mercantilism, which saw the state as the regulator of most economic activity with the goal of maximizing national power. Indeed, the major purpose of Smith’s writing was to challenge this mercantilist doctrine with its emphasis on national power and belief that international trade was a zero-sum game, i.e. that one party could gain only at the expense of another. As conceived by Smith, laissez faire was not meant to imply that there were no legitimate roles for government in the economy, but rather that at that time government intervention was far too intrusive and that many markets would work far better if the government would keep its hands off and “let them be.” Economic liberalism does not assume that are no conflicts of interest in a competitive market economy and that there is never a case for government intervention. What economic liberalism does argue is that unlike the Marxist and mercantilist view of economic activity as a zero-sum game (such that anyone’s gain comes only at the expense of someone else’s loss), economic activity is usually a positive-sum game. Over the years, the market economy ideas that Smith pulled together and expounded upon have had a tremendous influence on the evolution of the world economy. They are generally credited with having had a large impact on Britain’s move from protectionism toward freer trade in the nineteenth century and formed a key (albeit not total) underpinning of the rise of the United States as a global economic power.
If we fast forward to the middle of the twentieth century, we see the world economy dominated by a bitter contest between two contrasting economic doctrines or contending shared mental models, the Marxist-oriented central planning approach of the Soviet Union and its satellites versus the market-oriented economics of the western industrial nations, with the third (developing) world being pulled, bullied, and cajoled back and forth between these two poles. As Mandelbaum (2002) usefully discusses, in the contest between capitalism and Soviet-style central planning, the outcome was in an ambiguous zone in the middle part of the twentieth century. In the 1950s and 1960s, more than a few western economists thought that heavy central planning was superior.
Neoliberalism is a “new” variation on nineteenth century classical liberalism. Classical liberalism was long the core of western capitalist ideology. Since the late 1990s, activists have used the word “neoliberalism” for global market-liberalism (“capitalism”) and for free-trade policies. In this sense it is now widely used in South America. Some people use the word interchangeably with “globalization.” The point must be emphasized that there are a variety of neoliberal mental models. The neoliberal shared mental model, however, comprises the distinct applications of various classical liberal ideas in distinct political contexts across the globe. There are substantial differences between, say, the US economy and that of France or many of the newly industrializing economies of Asia. While much more market-oriented ...
