Can neoliberalism make us embrace risk?

One of the most powerful observations of Esther Duflo and Abhijit Banerjee’s Poor Economics is that most people in the developing world don’t want to be entrepreneurs, even many of those who are self-employed. Instead, most people, if they can find it, want the security and stability of a well-paid salaried job, ideally working for the government. Duflo and Banerjee’s point is meant to tone down some of the exuberance around microfinance in developing countries – but as they observe, this risk aversion is common in rich economies, too. It’s a thought that has stayed with me since I read the book, and I think it reflects a general phenomenon. For all the ideological dominance of free market capitalism, we still live in societies where people are fearful, sceptical and uncomfortable with the behaviours such a system demands, and particularly the uncertainty these entails.

We can see this on the supply side with the ructions over free migration (witness the ongoing crises of the EU around migration) and free trade (witness Donald Tump’s popular touting of trade restrictions). Around the world, workers demand protection of their jobs from the competition and threat of the market.

Perhaps less clearly, we can see this on the demand side too. In a number of markets, we are increasingly encouraged to behave as consumers for products that carry a great amount of uncertainty. A few examples:

  • In planning for retirement, individuals are increasingly required to make what Chris Dillow calls “impossible decisions”: trying to anticipate exactly how much they’ll need in old age, with the certainty of a solid state pension and defined benefit plans increasingly under threat.
  • University students are increasingly expected to act as investors, shopping around for the best return. With greater variation in fees between institutions, there is greater pressure to secure value for money. Yet as Martin Wolf points out “By definition, students cannot understand what they are buying: that is what makes them students. The value of what they obtain is likely to become evident over many years.”
  • Governments seek ever more competitive energy markets, seeking greater ‘engagement’ from consumers to sift good deals from bad. Yet full engagement in the energy market invariably involves gambling – one of the major decisions consumers face is the choice between a fixed or variable tariff, essentially requiring them to take a punt on whether (notoriously volatile) energy markets will rise or fall.

What all these domains have in common is that they force consumers to confront and bear the cost of risk: the possibility that they will live longer than they anticipate, that their degree will land them less money than they hope, that energy prices will move in a different direction to their prediction. This might explain why many consumers are so unwilling to engage with them, at least in the way that they ‘rationally’ ought to.

Those in favour of these reforms can plausibly argue that it is a good thing that people are forced to take on responsibility for such important areas of their life, rather than leaving it to the benevolence of paternalistic policymakers. That may be so (though I have my doubts), but it doesn’t address the fact that people accept this responsibility so reluctantly. Free market capitalism is supposed to be the system that goes with the grain of ‘human nature’. Yet in trying to make us love risk, neoliberalism is as perfectionist as any creed.

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