Economic Liberalism’s Uncertain Future

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Reprinted from Law & Liberty

In October 2022, two events underscored just how far economic liberalism’s sway in politics across the world has declined since its period of relative influence between 1979 and 2008.

One was former Conservative Prime Minister Liz Truss’s swift defenestration from No.10 Downing Street by her own party following her failed effort to introduce some mild supply-side reforms into an ailing British economy. The second was Xi Jinping’s re-election for a third term as Chinese Communist Party General Secretary. Since 2012, a hallmark of Xi’s rule has been a steady winding-back of the limited and selective liberalization of China’s economy that commenced in 1978.

Many other indications of economic liberalism’s fading impact are observable. Whether it is the Biden Administration’s continuation of the Trump Administration’s protectionist policies or left-populism’s resurgence throughout Latin America, all signs show that we are light-years away from the Reagan-Thatcher era. Certainly, the enthusiastic free market rhetoric of those decades exceeded the more modest achievements. Yet interventionists of all stripes were unquestionably on defense through the 1980s and 1990s.

Never an Easy Road

In one sense, market liberalism’s present weakness represents a return to normal. In his monograph, The Changing Fortunes of Economic Liberalism: Yesterday, Today and Tomorrow (1998), the British academic economist and senior Treasury official David Henderson (1927-2018) pointed out that ever since basic market liberal principles acquired decisive intellectual form with Adam Smith’s The Wealth of Nations, there had “been no consistent trend toward liberal economic policies.”

Between the late-1840s and early-1880s, Henderson observed, economic liberalism developed somewhat of an ascendancy in Western elite opinion and a degree of mass support in countries like Britain. But even before 1914, that trend was receding. Welfare states began to be established in countries like Germany. Other European nations and their colonies started re-embracing protectionist arrangements. From then on, interventionist trends accelerated, spurred forward by two world wars, government reactions to the Depression, and the fundamental rethinking of economics associated with John Maynard Keynes.

At the time of his monograph’s publication, Henderson noted the trend toward economic liberalization which had commenced in the mid-1970s. But, he added, market liberalism still confronted formidable obstacles.

First, despite positive shifts in what Henderson called “informed opinion”—civil servants, central bankers, politicians, etc.—toward market liberalism, profound opposition endured in much of the economic profession, large swathes of the left, some conservatives, and intellectuals in general. Recall, for example, the massive opposition from economists and many Tory MPs and even Cabinet ministers to Margaret Thatcher’s monetarist approach to inflation in 1981.

Second, what Henderson called “Do-It-Yourself-Economics” (DIYE) in his 1985 BBC Reith Lectures continued to shape informed opinion. Time and again, Henderson wrote, his work in national and international economic agencies resulted in encounters with politicians and officials who held mercantilist economic views without even knowing it. Among the same group, Henderson detected an “unreflective centralism” (a default presumption that government officials must direct much of the economy) and what he called “essentialism:” the tendency to think that countries should strive for self-sufficiency in an ever-growing number of economic sectors to maintain their security.

Third, Henderson stressed, economic liberalism in the 20th century’s closing decade had not shaken off a “chronic weakness.” “In most if not all countries,” he stated, “majority opinion remains hostile to the idea of what is termed ‘leaving it to the market,’ and ready still to accept and endorse a much wider role for government than economic liberals would wish to see.”

Real existing socialism may have lost credibility, but market liberalism’s limited success in shifting informed opinion was, according to Henderson, even more restricted at a mass level. Expectations that the state should intervene extensively in the economy remained persistent. For however many people claimed to dislike bureaucrats and regulators or railed against high taxes and entitlement programs, Henderson emphasized how easy it remained to mobilize mass opposition against market liberalization policies.

Back on Defense

In many respects, the situation facing market liberals today is dire. DIYE economics is rife on the left and has been spreading rapidly throughout the right since 2015. Unreflective centralism has metastasized in the form of renewed interest in industrial policy, despite its demonstrated track record of failure. Likewise, essentialism is back, with pressures mounting to “re-shore” as many American business operations as possible or to turn every trade question into a national security imperative. Some conservatives have even called for autarky, apparently unaware of how damaging such policies were for countries that embraced them.

This is further complicated by the proliferation of claims by interventionists that are, to put it mildly, highly contestable. We have been informed, for example, that Adam Smith only applied his free trade principles to domestic investment. That’s simply untrue. Other conservatives tell us that the New Deal was a marvelous thing, despite the mountains of evidence assembled by economic historians indicating that it did not in fact get America out of the Great Depression. As no less than FDR’s Treasury Secretary, Henry Morgenthau, stated on May 6, 1939, “We are spending more than we have ever spent before and it does not work. . . . I say after eight years of this Administration we have just as much unemployment as when we started. . . . And an enormous debt to boot!”

Yet other conservatives (echoing arguments made by progressives almost 15 years ago) insist that we can learn many things from Chinese state-capitalism. This flies in the face of growing evidence (which Beijing is trying to hide) that the wheels are falling off that particular wagon.

But while such propositions are easily rebutted, they have acquired considerable traction for several reasons. They provide, for instance, support for what some people want to hear: that economic salvation via the state is possible, despite the many indications to the contrary. In other cases, they create rationales for those whose primary goal in life is the acquisition of power, either for its own sake, or because they believe that technocrats can overcome complicated social challenges through top-down economic tinkering. Once such mythologies permeate public discourse, ousting them is very difficult.

Then there are the image problems confronting market liberals. Many people associate free trade and economic globalization with the likes of Klaus Schwab, the World Economic Forum, and the ubiquitous Davos Man who dismisses patriotism as mere tribalism. The fact that such outfits’ embrace of stakeholder capitalism, DEI, and ESG reflects a distrust of markets and commitment to more-or-less corporatist economic arrangements is, alas, irrelevant. The fact that economic liberalism seems intrinsically linked in many people’s minds with these individuals and organizations is political poison for market liberals.

To these difficulties, we must add a disconcerting fact. Western democracies are increasingly trapped in something akin to the soft despotism that Alexis de Tocqueville warned against in Democracy in America. There are many interest groups, rent seekers, and members of the general population who will resist even the slightest deregulation or retraction of government spending because they recognize that it will introduce unwelcome change into their lives. Plenty of politicians promise these lobbies and sections of the population “no change”—or even more privileges or entitlements—provided, of course, they reciprocate with financial contributions and reliable votes.

Exacerbating this problem has been many governments’ propensity to rely on easy money policies and heavy deficit spending to paper over the subsequent and growing fiscal gaps. The rotten fruits of this are now manifesting themselves everywhere in the Western world. This will make implementing pro-market reforms politically difficult (as Truss discovered) and more painful than they might otherwise have been.

What’s a Market Liberal to Do?

By now, readers may be asking, “If this is true, how should market liberals respond?”

Any answer to such questions should involve the recognition that there are no turnkey or silver-bullet solutions that will magically reverse present trends. No doubt, that is disconcerting to those who worry about their grandchildren growing up in a world in which economic freedom and constitutionally limited government are being voided of significance. Nonetheless, this tough truth must be said, if only for the sake of realism and expectations-management.

Second, many things already being done—engaging policy debates, popularizing free market ideas, growing economic liberalism’s social media presence, etc.—should be continued and magnified. But if there is one thing that must change, it is this: more priority needs to be given to deeper formation in market-liberal ideas. Indeed, this should precede any embarkment upon activism in market-liberal causes.

Aristotle was onto something when he cautioned about entering public life and conversations without adequate grounding in sound ideas as well as more experience of the world. Yes, that can be frustrating for young people anxious to make a difference sooner rather than later. And the sheer urgency of the challenges surely doesn’t allow for the decades of preparation that Aristotle considered necessary. That said, the “bench” of market liberalism needs to be wider and deeper than it presently is. If market liberals limit themselves to economic defenses of markets, they will struggle to refute philosophical, sociological, and historical critiques of market processes and institutions, and thus find themselves, by definition, on perpetual defense.

In short, formation in the case for economic liberalism should include but go beyond economics. Market liberalism has always been defined by rigorous economics. If anything, the public square requires more of that today, given DIYE’s sheer pervasiveness throughout society. Going forward, however, market liberals will need greater knowledge of other fields. This especially concerns history (and not simply economic history) and political economy: the judicious integration of the empirical and technical knowledge yielded by economics with normative concerns for moral and philosophical truth.   

Many of the most potent attacks on market liberalism today are being made on historical, philosophical, and ethical grounds. Whether it is an attempt to put a shiny gloss on the New Deal, “creatively reinterpret” the Wealth of Nations along protectionist lines, conjure up visions of shadowy global neo-liberal conspiracies, rehabilitate mercantilist follies, or caricature market liberals as utilitarian robots, all these endeavors take the case against market liberalism far beyond economics. Ergo, market liberals need to counter their opponents on these terrains.

In doing so, market liberals would be following the example of some of the greatest economic liberals. Appeals to economic efficiency and effectiveness were central to Smith’s case for markets. Yet his Wealth of Nations also reflected the wider civilizational agenda associated with the Scottish Enlightenment: one that sought to end legal privileges for the politically well-connected and create opportunities for millions stuck in crushing poverty, while simultaneously promoting freedom as well as commercial, classical, and religious virtues in the commercially orientated societies then emerging in the Anglo-American world.

Contemporary market liberalism has many individuals engaged in the important work of policy development and advocacy. Yet it desperately needs more people like the historian Amity Shlaes or the philosopher James R. Otteson. Such individuals combine their academic specialties with deep appreciation of market economics. But the market liberal cause also needs more of an even rarer commodity: economists with the breadth and depth of knowledge that gives them the capacity to mix it up with historians and philosophers peddling left-populist or economic nationalist narratives—and to do so on their opponents’ intellectual turf. Such individuals additionally require the capacity to address often very different audiences: experts and non-experts; the secular and the religious; the business leader tempted by the ESG agenda and pushed by woke management consultants to turn her company into something akin to an NGO; or the homemaker who’s considering voting for the latest politician promising economic nirvana through state intervention.

These are big asks in a world in which hyper-specialization is the scholarly norm, and where all of us are more at ease talking to some groups rather than others. But such intellectual depth and versatility will serve market liberalism well. For whenever a Black Swan-like event creates opportunities to shift opinion in market-friendly directions, or when that rare politician appears who combines an appreciation of market ideas with the political skills to advance commensurate policies, we need market-orientated scholars able to repulse the attacks of dirigistes in ways that go beyond the language of supply and demand. Put simply, market liberalism needs many more people capable of doing what the economist Wilhelm Röpke did to promote and defend the German economy’s liberalization in 1948, or what Milton Friedman and Michael Novak did to support Ronald Reagan’s economic agenda in America in the 1980s.

Granted, such individuals and combinations of knowledge and skills are rare. They also take time to develop. Nor will they suffice to reverse the wave against economic liberalism currently sweeping the world. The Truss fiasco illustrated how much market liberals need to lift their game at every level if they are to combat the ongoing slide toward state capitalism. However, without more of the serious formation that I have in mind, and more of the individuals who embody it, I fear that the long-term prospects for market liberalism are grim indeed.

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