How a group of economists undermined public institutions, paving the way to neoliberalism

An assumption had become a truth. The self-interested model of human behaviour, that had been developed in the Cold War to make the mathematical equations work, had now been adopted by these economists as a fundamental truth about the reality of all human social interaction.

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A group of economists in the early 70s arbitrarily adopted the self-interested model of human behaviour that had been developed in the Cold War, to explain the dysfunctionality of public institutions. This perception would become a powerful tool in the hands of the neoliberal ideology, carried by big banks and corporations, to demonize the state and dismantle any state control upon them at the expense of the societies.

In his documentary The Trap, Adam Curtis explains:

In the early 70s, the government bureaucracies in Britain began to collapse. Those around them blamed a growing economic crisis, but it was clear that something much more fundamental had gone wrong. What were supposed to be institutions to help people, had become destructive. Those around them seemed to turn against the very people they were supposed to serve.

A group of right-wing economists in America now put forward a theory that, they said, explained why this was happening. At the heart of their idea was Game Theory. They said that the fundamental reality of life and society was one of millions of people continually watching and strategising against each other, all seeking only their own advantage.

An assumption had become a truth. The self-interested model of human behaviour, that had been developed in the Cold War to make the mathematical equations work, had now been adopted by these economists as a fundamental truth about the reality of all human social interaction.

Economist and game theorist, Thomas Schelling, says:

           We were always trying to infer the intentions of the other. We were always trying to convey our intentions, either deceptively or truthfully. We were always trying to find ways to make believable promises, and sometimes to make believable threats. Threatening the Soviet Union, threatening a misbehaving animal, threatening a child, threatening a neighbour… I think what we were doing is what we call strategising. ‘What does he think that I think he thinks that I think he's going to do?’ It has to come to some kind of equilibrium. What is it that we can both recognise, is the obvious thing to do?

What this meant, the economists argued, was that the politicians and bureaucrats belief that they were working for what they called "the public good" was a complete fantasy - because to do that depended upon creating shared goals in society, based on self-sacrifice and altruism. But in a world that was really driven by millions of suspicious, self-seeking individuals, such concepts could not exist.

Out of this came a theory called "Public Choice", and a group of economists who were determined to destroy the politicians’ dream that they were working for the public interest.

Their leader was called James Buchanan.

Buchanan says:

           There's certainly no measurable concept that could meaningfully be called the public interest, because how do you weigh different interests of different groups and what they can get out of it? The public interest as a politician thinks, does not mean it exists, it's what he thinks is good for the country. And if he would come out and say that, that's one thing, but behind this hypocrisy of calling something "the public interest" as if it exists, that's what I was trying to tear down.

In 1975, Mrs Thatcher became leader of the Conservative Party. And Buchanan's ideas had a powerful influence on her, and the group of radicals gathered around her. A rightwing think-tank advising Mrs Thatcher brought James Buchanan to London for a series of seminars. And he explained starkly why the British state was failing. It was pure Game Theory: because there was no agreed version of "the public good", the bureaucrats and the politicians schemed and strategised in their own self interest, building up their power and their own empires. They claimed to be helping others. In fact it was the very opposite, and the result was economic chaos, and a breakdown of society.

As the British economy spiralled out of control, the political and bureaucratic elite who had dominated Britain since the war, found themselves under attack from both the Right and the Left. Where once they had been heroic figures who would create a new world, now they were accused of being agents of control, not freedom.

And these new theories began to spread into the public imagination. The writer who was part of the group advising Mrs Thatcher, began to write a sitcom [Yes Minister and Yes Prime Minister] that explicitly put forward the theories of Public Choice. As well as being funny, it was ideological propaganda for a political movement.