An Economist Looks at Europe
APRIL 4, 2016
The Erosion of Political Economy and the Retreat from Freedom
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Classical liberalism is being attacked on many fronts. Its individualism is seen as fundamentally alien to the social nature of man. Differences of income and wealth are said to show that equality before the law and other formal liberties are pure sham. The natural love of one's country is confused with a chauvinistic rejection of foreign ways. No limits are recognized to the democratic vote. And even basic, economic freedom, the domain where the beneficial effects of liberty can be more readily felt, is treated with suspicion or downright rejected.
More fundamentally, classical liberalism is presented as a narrow economic ideology of doubtful scientific validity, lacking political and philosophical depth. This travesty is symbolized by the moniker of 'neo-liberalism' widely used to disparage the party of freedom. It may turn out that in the end, 'neo-liberal' comes to be accepted as the rightful name of liberals of a more coherent kind than the American variety. Indeed, William Coleman has flaunted the banner of 'neo-liberalism' to signify that market economics is the mainstay of any liberalism worth its salt. Though I might be ready to be called 'neo-liberal' if that shocks lukewarm social-liberals out of their dogmatic slumber, I prefer the name of 'classical liberal' because it recalls the illustrious pedigree and wide compass of our philosophy.
Reducing classical liberalism to economics, especially of the emasculated kind cultivated by the technicians of the economics profession would make the task of those critics too easy. One need only attend to the list of 'market failures' which today's economists lengthen day by day. Let me name only a few of these. At the top of the roll of infamy is money and finance, whose recent breakdown is attributed to unbridled laissez-faire and uncontrolled greed, though it was principally due to mismanagement by central banks and regulators, who now impudently demand ever larger powers. Next in line is climate change—formerly global warming—for whose catastrophic consequences the free market has no remedy, so they can only be avoided by a world-wide political agreement to prohibit the use of fossil fuels and to subsidize clean energy. Then there is the idea that competition left to its own devices will result in widespread oligopoly, demanding the untiring vigilance of anti-trust authorities. The mantra of the day is that the rich are getting richer and the poor poorer, a trend only to be remedied by extortionate taxation. Finally, it is taken as evident that the free market is incapable of delivering indispensable social services, from health and pensions to education and full employment. It sometimes seems that the professional economists who sedulously devise remedies for these flaws are the principal source of skepticism regarding the efficiency and fairness of capitalism.
I have never avoided a close examination of the functioning of markets and democracies. After all, the motto of my alma mater, the London School of Economics, is Rerum cognoscere causas, 'Discover causes'. I have never proposed that malfunctions of the economy should not be scrutinized, abuses never corrected, communal needs not addressed. We do not live in the best of all possible worlds. What I do say is that the reaction to these possible defects should not bear an implicit condemnation of economic freedom and an immediate call for some authority 'to do something about it'. Often such heedless activism makes things worse, when there always is mileage to be got from free competition and institutional evolution.
Indeed, economic analysis is woefully shortsighted when not grounded on a solid basis of liberal political philosophy. And conversely, political philosophy will be buffeted by the currents and crosswinds of mere fashion if it is not kept on course by the keel of economics. I therefore propose that we revive political economy, as a joint effort of liberal philosophy and economic research to rescue classical liberalism from its present parlous state. Political economy takes into account both the regularities discovered and policies proposed in the narrower field of economics and the teachings of political philosophy when considering the wider consequences for society, present and future, of such discoveries and proposals. Political economy as a joint effort of political and social philosophy with economics should be the outworks, so to speak, of the citadel of freedom.
The founding of the Mont Pelerin Society
"The question immediately poses itself how it is that during the last century and a half the economics profession appears to have progressively given up the philosophy of freedom that was its hallmark during the classical period."
The question immediately poses itself how it is that during the last century and a half the economics profession appears to have progressively given up the philosophy of freedom that was its hallmark during the classical period. During World War II Friedrich Hayek had published The Road to Serfdom (1944), a clarion call to warn the public of the danger posed by collectivist thought from the inside of the Allied nations ostensibly fighting for freedom. Countering the slide into collectivism and the attrition of liberalism became a paramount preoccupation of his, so that in 1947 he organized a gathering of a group of economists, historians, philosophers and other students of political affairs in the Swiss village of Mont Pelerin. Those pilgrims of liberty concluded their meeting by founding a society named after the village where they had met. The Official Statement of Aims of this Mont Pelerin Society gives an indication of the breadth of their intent. There was a point the original pilgrims of the MPS did not need to make in their Statement: they took it as given that the free market was best. Instead they concentrated on other points where the liberal philosophy was in need of repair. The Statement began with the need to analyze and explain the crisis of the time by bringing home "its essential moral and economic origins"—note the 'moral'. They went on to demand a redefinition of the functions of the state in a liberal order, including the establishment of minimum living standards "not inimical to initiative and the functioning of the market". A question of much importance for them was the repair of the rule of law, badly eroded during the 1930s. They also expressed the need for an international order "conducive to peace and liberty [and...] harmonious international economic relations". However, among those aims I want to underline another one of Hayek's preoccupations reflected in that Statement: the urgency to combat "the misuse of history for the furtherance of creeds hostile to liberty". He thought it important to reverse the growing disinterest of the profession for matters historical, both regarding economic history (the history of man's great escape from hunger, premature death, slavery, and ignorance); and intellectual history (the development of the doctrine of individualism in its economic and political dimensions).
John Stuart Mill at the watershed
It was around the middle of the 19th century, just when free trade was triumphant, that classical liberalism took a turn in the wrong direction. Though one of the foremost philosophers of liberty and a remarkable contributor to the advance of economics,John Stuart Mill (1806-1873) was instrumental in the erosion of the liberalism he so much cared for. His view of the place of the individual in society was decidedly paternalistic and elitist. When Mill lamented that the great American Republic was a society of dollar hunters given to breeding dollar hunters, he was not in the spirit of Dr. Johnson attributed saying that "seldom is a man more innocently occupied than he is engaged in making money".
Also, his proposal fundamentally to change the institution of private property was the first step down the primrose path. Mill believed he had made a most important contribution to political economy with his distinction between the laws of production and the laws of distribution. For him, the laws of production were akin to the laws of nature, in that they necessarily governed the actions of men in society: these were such as the Malthusian law of population, the declining productivity of land, the role of capital in productive activity, or comparative cost in the flows of international trade. But
[i]t is not so with the Distribution of Wealth. That is a matter of human institution solely. The things once there, mankind, individually or collectively, can do with them as they like. They can place them at the disposal of whomsoever they please, and on whatever terms. (Mill, Principles of Political Economy, Book I, Ch. I, par. II.1.2.)
In distribution, society could make its own laws.
He did not mean that the consequences of new distributional arrangements should not be examined before reforms were made, but that there was no natural limit to new experiments in distribution. He studied, and found fault with, the proposals of the various socialist groups of his time. But nonetheless he proposed deep reforms of the institution of private property. The changes he proposed were based on John Locke's justification of property by labor: one should have a right only to what one had produced with one's work. As no one had a fundamental right to accrue wealth by inheritance or by the occupation of the productive powers of Nature, he wanted to limit what one could inherit and proposed to reform property in land. He also favored cooperatives and the increasing participation of employees in the profits of the firm.
The unraveling of classical political economy
This is but an example of the growing attraction of socialism both for the general public and the politicians. Writers and artists, who rued the legion of dark satanic mills on England's green and pleasant land, also started their war on capitalism at that time. In parallel, nationalism was growing in strength, increasingly used by politicians to harness the free economy to state-creation and expansion.
The erosion of classical liberalism proceeded during the seventy years from 1875 to 1945 (or more precisely, to 1947!). The new phenomenon of industrialization demanded a theoretical effort that the classical economists did not on the whole undertake. The positivistic philosophy fostered by the Great Exhibition of 1851 and the later Exhibitions in France, Germany, and America were felt to be superficial or incomplete. The pseudo-scientific hubris of some Neo-Darwinists, who interpreted competition at the individual and racial level as the lording of the strong over the weak, rather than as a form of social cooperation, repelled the friends of humanity. And at the end of the century it became fashionable to contrast the competition of the market, 'red in tooth and claw', with the cooperation of socially harmonious society. Intellectual and political opinion increasingly inclined towards collectivism as the century proceeded. As A.V. Dicey (1905) lamented, an increasingly powerful and interfering administrative state grew in England out of the utilitarian philosophy. Whatever the reasons, by the turn of the century liberalism had changed its spots and become 'social-liberalism'.
On the Continent, the productive capacities of capitalism were put at the service of the nation states, new or old. Africa and Southeast Asia were carved up among the colonial powers. Rearmament picked up speed. Bismarck's Social Insurance System of the 1880s spawned imitations around the world. New Zealand had its Pensions Law in 1898, Australia created Old Age Pensions in 1908. In that same year of 1908 Lloyd George made a famous visit to Germany, where he was won over by the Bismarckian social reforms and on his return to England launched the People's Budget of 1909. Spain instituted a welter of social reforms in 1910. The United States was not totally free of these nationalistic and welfarist fashions. America picked up large chunks of Mexico and the whole of Cuba, Puerto Rico and the Philippines. And Teddy Roosevelt was nearly successful when he launched the idea of a nanny-State at the 1912 Convention of his newly founded Progressive Party.
The upheaval of World War I deepened the reaction against classical liberalism. Soviet Communism and Italian Fascism became respectable in many quarters of Europe. In America, Franklin Delano Roosevelt, elected President in 1932, bought back Progressivism and barefacedly called his program "liberal," when it was fundamentally contrary to what had been taught by classical liberals from Adam Smith to Frederic Bastiat.
After WWII the 'miraculous' recovery of West Germany and Italy gave capitalist economics a respite, in contrast with the parlous results of semi-planned Britain and France. The ruination that met the eye when the Berlin wall was pulled down gave free economics another lease of life. But in the 21st c. the tide is again turning against economic liberty. At present private property and laissez-faire are made to carry the burden of proof; markets and corporations are under constant scrutiny; legal means to avoid taxation are considered less than respectable; the size of government has expanded to the point where no more surplus can be extracted from taxpayers, present or future; public action has become discretionary rather than rule-based; and more generally, the belief has spread that the individual is not to be trusted with his own life and decisions.
For more ideas and information, see Pedro Schwartz, Ideas Matter. Library of Economics and Liberty, May 5, 2014.
Ideas matter. It is no mere coincidence that the retreat from freedom coincides with the dismal science coming under increasing suspicion. A century of social change and theoretical criticism has put economic liberalism on the defensive and has led to the ideological rejection of the economic point of view among droves of well-meaning people. Part of the blame for this demotion must be laid at the door of economists themselves, who have shown growing political and social agnosticism and today see economics as a kit of technical tools and not as a central part of the liberal world-view. The economic conception of human nature is considered unrealistic, economic growth is seen as prodigal, any and all inequality denounced as unjust. Clearly, a reformulation of the system of economic freedom, holding out no concessions to the enemies of the market, is urgent. The thesis of this series of essays is that only a return of the tenets of the great classical economists will help undo the damage caused to liberalism by a century of faltering conviction. In my next column, I will explore the continued onslaught against the market economy in the first half of the 20th century, the macro assault beginning with John Maynard Keynes, and the micro with Arthur Pigou.
Coleman, William (2013): "What Was 'New' About Neo-Liberalism" (Economic Affairs, Volume 33, Issue 1, pages 78-92. February).
Dicey, Albert Venn (1917): Lectures on the Relation between Law and Public Opinion in Nineteenth Century England. Liberty Fund Edition, 2008.
Freeden, Michael (2015): Liberalism. A Very Short Introduction. Oxford University Press.
Hay, James (1975): The Origins of the Liberal Welfare Reforms, 1906-1914. The Economic History Society. MacMillan, Basingstoke.
Hayek, Friedrich, ed. (1935): Collectivist Economic Planning. Critical Studies on the Possibilities of Socialism. Augustus M. Kelley, New Jersey.
Jones, Daniel Steadman (2014): Masters of the Universe. Hayek, Friedman and the Birth of Neoliberal Politics. Princeton University.
Kirzner, Israel (1989): Discovery, Capitalism and Distributive Justice. Basil Blackwell, Oxford.
Lipsey, R.G. and Lancaster, R.K. (1956): "The General Theory of the Second Best", Review of Economic Studies, 24, 1, pgs. 11-32.
Mill, John Stuart (1848): Principles of Political Economy with Some of Their Applications to Social Philosophy. Collected Works II and III. Toronto University.
—— (1859): On Liberty. Collected Works XVIII, pgs. 213-310. Toronto University.
—— (1861): Considerations on Representative Government. Collected Works XIX, pgs. 371-573.
Mirowski, Daniel and Plehwe, Dieter (2009): Road from Mont Pelerin. The Making of the Neoliberal Thought Collective. Harvard University.
Schwartz, Pedro (1972): The New Political Economy of J.S. Mill. Duke University Press.
—— (1979): Second Best without Tears. Working Paper nr. 1979-4, Instituto de Econom'a de Mercado. Madrid.
Senior, Nassau William (1850): Political Economy. Richard Griffin. Glasgow.
Smith, Adam (1759): The Theory of Moral Sentiments. The Glasgow Edition of the Works and Correspondence of Adam Smith. Clarendon Press, Oxford.
—— (1776): An Enquiry into the Nature and Causes of the Wealth of Nations. The Glasgow Edition of the Works and Correspondence of Adam Smith. Clarendon Press, Oxford.
Stigler, George J. (1965): "The Nature and Role of Originality in Scientific Progress", in Essays in the History of Economics, pgs. 1-15. University of Chicago Press.
—— (1965): "Perfect Competition Historically Contemplated", in Essays in the History of Economics, pgs. 235-67. University of Chicago Press.
Walras, Léon (1874, 1926) Éléments d'économie politique pure. Translated by William Jaffé in 1954. Royal Economic Society.
Warsh, David (2015): "A New Magnifier", one of the monthly articles of Economic Principals. Available online at http://www.economicprincipals.com/issues/2015.08.02/1783.html. Retrieved 16i16.
The appellation of 'neo-liberal' is currently used to asperse the Mont Pelerin Society, founded by Friedrich Hayek in 1947 to reinstate individual and political freedom as a leading principle of human society. Thus, Daniel Steadman Jones (Princeton, 2014) in his Masters of the Universe: Hayek, Friedman and the Birth of Neoliberal Politics, holds it that a sensible return to free markets was started by politicians of the left like Jimmy Carter in the United States or James Callaghan in the United Kingdom before Margaret Thatcher and Ronald Reagan, who put capitalism at the centre of their social philosophy and so opened the floodgates to the crisis of fear and greed in which the world finds itself. Daniel Mirowski and Dieter Plehwe, in their Road from Mont Pelerin. The making of the Neoliberal Thought Collective (Harvard, 2009) write an even more biased book where they present neoliberalism as a secret conspiracy to impose capitalism on the world, along the lines of the Templars or the French Free Masons.
After all, the appellations of 'Tory' and 'Whig' originated as contemptuous nicknames for a Scottish rebel or an Irish bandit.
This had a positive and negative intent: positive was the need for a renewed cultivation of history to understand the progress of prosperity and freedom; negative, the need to criticize the travesties of the past aimed at disparaging capitalism.See for all of these points the Official Statement of Aims of the Mont Pelerin Society. Hartwell (1995), pages 41-2.
See an impressive list of Mill's contributions to economic theory in Stigler (1965).
Though the principle of justifying property by labor has enjoyed wide popularity over the centuries, it is too narrow to explain the observable features of that institution. A better principle is 'finders keepers', especially regarding the property of natural resources, of the gains from speculation and of discoveries and inventions, whose benefits are only remotely connected with labor. The 'finders keepers' principle principally justifies pure entrepreneurial profit. See Israel Kirzner (1989).
One great exception was Nassau William Senior, who, against the grain of the his fellow economists re-interpreted Thomas Robert Malthus's theory of population by limiting the decreasing returns of this model to agriculture and posited increasing returns for industry. His description from personal observation of the growing productivity of water and steam machinery in the textile industry is an early and striking description. (Senior, 1850). Karl Marx also understood the creative powers of capitalism but saw them as catastrophically limited by the institution of private property, the essence of bourgeois society.
The luminaries of Social Liberalism, as Freeden (2015) calls it, were T.H. Green, L.T. Hobhouse, and J.A. Hobson in England and John Dewey in the United States. When I first arrived in the LSE my tutor K.B. Smellie tried to bring me over to the Hegelian idealism of Green, but Popper was there to keep me on the straight and narrow.
Hay (1975) is a useful introduction to the New or Social Liberalism in the practical politics at the turn of the 19th century and the beginning of the 20th.
The Platform of the Progressive Party founded by Theodore Roosevelt for the presidential election of 1912 is eloquent evidence of the spreading of this trend to the United States. The whole document bears careful reading but I will only quote the paragraph on social insurance: "The protection of home life against the hazards of sickness, irregular employment and old age thorough the adoption of a system of social insurance adapted for American use." Theodore Roosevelt lost the election against Woodrow Wilson. Downloaded from www.PBS.org, 08i16.
The moniker of the 'dismal science' was coined by Thomas Carlyle in his polemic with J.S. Mill about the bloody repression of Governor Eyre to put down a Negro rebellion in the island of Jamaica: Carlyle resented Mill's participation in the attempt to impeach the Governor and attributed his humanitarian stance to his being a dismal economist. See The Secret History of the Dismal Science. Part I. Economics, Religion and Race in the 19th Century, by David M. Levy and Sandra J. Peart, Library of Economics and Liberty, Jan. 22, 2001.
An indication of this attitude is that Joseph Schumpeter called his great history of thought a History of Economic Analysis, that is to say, a history of the discovery of ideologically neutral analytical tools to be used by economists of all persuasions.
Pedro Schwartz is "Rafael del Pino" Research Professor of economics at Universidad Camilo José in Madrid. A member of the Royal Academy of Moral and Political Sciences in Madrid, he is a frequent contributor to the European media on the current financial and social scene. He currently serves as President of the Mont Pelerin Society.
For more articles by Pedro Schwartz, see the Archive.