Classical Liberalism / Economic Liberalism Mark Pack

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Classical Liberalism / Economic Liberalism

Mark Pack

Welcome to the weekly series about the political philosophy behind the Liberal Democrats. Rather than being a survey of current policies, it's more a look at some of the underpinning thoughts and concepts.

The content draws very heavily on an excellent pamphlet edited by Duncan Brack for the Liberal Democrat History Group and by contributors to the group's (now sadly out of print) Dictionary of Liberal Thought. If you aren't familiar with the group's work, particularly the website and quarterly Journal of Liberal History, I'd highly recommend taking a look.

If you like elements of the emails that follow, most likely Duncan and colleagues deserve the credit. For the bits you don't like, the brickbats should come my way. Introduction Politics rest on beliefs. Political parties that operate without a philosophical framework stand for little more than transitory personality and populism. But beliefs themselves must have roots; they must rest on thought – and they must be continually defined, tested and debated rather than simply inherited unquestioningly.

Liberalism, the tradition of political thought on which the Liberal Democrat philosophy rests, possesses a rich history, stretching back at least three hundred years. Over the next 14 weeks, you'll be introduced to key elements of that history and why they are still relevant today.

Initially, they'll look at the historic roots of the party, seeking to define the differences – and similarities – between economic (or classical) and social liberalism, terms which are often used to define the positions of individual Liberal Democrats. After that, we'll move on to describe some of the traditions which have been drawn into the party over time: the social democracy brought in by the SDP on merger with the Liberal Party in 1988, the New Liberalism of the early twentieth century, and the beliefs of the three groups that came together in 1859 to form the Liberal Party: Peelites, Radicals and Whigs.

The middle section of the course then looks at some of the concepts fundamental to Liberalism: freedom, equality, liberal democracy and social justice. Then the final section considers ‘approaches’: community politics, economic concepts, environmentalism and liberal internationalism offer a broad spread of the different approaches Liberals have taken to key areas of policy over time.

I hope you enjoy the information which will come in the following weeks and that it adds to your knowledge and understanding of the philosophy of liberalism.

With that, on to the first part...

Classical Liberalism / Economic Liberalism The meaning of the term ‘liberalism’ has become increasingly diffused and has been subject to many changes and interpretations over time. The terms ‘classical liberalism’ and ‘economic liberalism’ are often used by those who want to preserve the original ideas of liberalism, based on individual freedom, the rule of law and free markets; they generally support a reduction in the role of the state, particularly in economic and welfare policy.

In the course of its history, the term ‘liberalism’ has undergone many changes and reinterpretations. Those of today’s liberals (especially in the Anglo-Saxon world) who see themselves as the heirs of the ‘original’ tradition of liberalism often call themselves ‘classical liberals’ – or, nowadays, more commonly, ‘economic liberals’, a term often used to contrast or distinguish them from ‘social liberals’.

(The term ‘economic liberal’ – or ‘neo-liberal’ – is also sometimes used to describe the economic and trade liberalisation policies of the ‘Washington consensus’ promoted in particular by the International Monetary Fund, involving a withdrawal of state involvement in the economy and a reduction in trade barriers. This is not the meaning employed here.)

Classical Liberalism Neither the ‘original tradition’ of liberalism nor the term ‘classical liberalism’ can be defined with absolute precision, but there is a rough consensus. Today’s classical liberals agree that individual freedom ranks above material equality, that the state’s sphere has to be more strictly limited than it is today and that freedom is the guarantor of wealth for the people. The following political creed can be extracted from their writings:

Freedom is the leading principle of liberal politics. Freedom means individual liberty or self-determination under the rule of law in the sense of what Isaiah Berlin called negative freedom, i.e. the absence of obstacles, barriers or constraints. The state has to be limited in order to protect individual liberty, the rule of law and the functioning of the market economy. Thus, constitutionalism (often based on constitutional economics) is high on the classical liberal agenda. This constitutionalism aims at a new framework for policy-making that makes it more difficult to widen the scope of state action, e.g. by introducing a rigid ‘competitive federalism’ with strong tax competition that puts pressure on politicians to lower taxes. Free markets and free trade are more efficient than any form of state planning and interventionism. The welfare state has to be scaled down, or at least reconstituted, to make it work better. While a few classical liberals (such as Robert Nozick) are ‘minarchists’ who see internal and external security as the only legitimate tasks of the government, the majority is more pragmatic in its approach. They mostly try to limit public spending to a sustainable level, to privatise sub-systems of the welfare state or to introduce more market-compatible mechanisms into the system. An example of the latter would be Milton Friedman’s proposal of a negative income tax that would gradually replace all other welfare and assistance programmes, thereby making the social policy system more efficient and simple.

Classical liberalism, however, is not such a coherent body of thought as it sometimes appears to be, partly because the ‘original’ liberal tradition was also one of considerable diversity. Although more sceptical of state coercion than the New Liberals in general, the old liberals held widely differing views about the state’s responsibilities. For instance, even radicals such as Richard Cobden and the British free traders believed in state-financed schools, while others (their French counterparts such as Frédéric Bastiat, for example) abhorred the idea. There were also divisions over the theoretical basis of liberalism; liberal theorists included advocates of natural-rights theory (John Locke), utilitarianism (Jeremy Bentham), romanticism (Wilhelm von Humboldt), Catholicism (Lord Acton) and evolutionism (Herbert Spencer).

Modern classical liberalism reflects this pluralism. Hence amongst their ranks can be found viewpoints as varied as contractarians (e.g. Robert Nozick), utilitarians (e.g. Ludwig von Mises), critical rationalists (e.g. Karl Popper) and positivists (e.g. Milton Friedman). While all of them are generally critical of socialism and the welfare state, there is a great variety of opinions about the extent of the ‘roll-back of the state’ – often depending on how radical or pragmatic the chosen approach is (and the size and behaviour of states at their times of writing).

Why is the adjective ‘classical’ necessary? The reason is historical. As Hayek remarked in 1973:

But though the last quarter of the nineteenth century saw already much internal criticism of liberal doctrines within the liberal camp and though the Liberal Party was beginning to lose support to the new labour movement, the predominance of liberal ideas in Great Britain lasted well into the twentieth century and succeeded in defeating a revival of protectionist demands, though the Liberal Party could not avoid a progressive infiltration by interventionist and imperialist elements. Perhaps the government of H. Campbell Bannerman (1905) should be regarded as the last liberal government of the old type, while under his successor, H. H. Asquith, new experiments in social policy were undertaken which were only doubtfully compatible with the older liberal principles.

This change from ‘old’ liberalism to the new social or interventionist type of liberalism was not confined to Britain. In America, for instance, where the term ‘liberalism’ was hardly used in the nineteenth century, the word ‘liberal’ became more or less synonymous with leftist or social democratic statism, with an over-reaching welfare state.

In Europe, where liberalism has been associated with a long-standing tradition of political thought and practice since the early nineteenth century, the term has undergone changes in meaning and interpretation. Especially in the later decades of the nineteenth century, theorists and politicians such as Friedrich Naumann in Germany broke with certain liberal ideas about the limits of state power and called for a more interventionist and redistributionist agenda in order to solve the ‘social question’. This ‘New Liberalism’ or ‘social liberalism’ often advocated a closer relationship with the new labour unions and emerging socialist parties.

Not all liberals, however, followed that trend. The extension of coercive power, the fiscal irresponsibility and the inability of the welfare state to preserve its own economic basis always found critics within the liberal movement, who often called themselves classical liberals. Hayek’s book The Road to Serfdom (1944) gave much of the impetus for the revival of classical liberal ideas in Britain. Anti-market interventionism, he argued, would erode not only economic freedom but other civil freedoms too in the long run; and the basis of wealth and progress would similarly be undermined. At the time he was swimming against the tide, as socialism and social democracy of all sorts formed the political mainstream. This has changed since.

The crisis of the welfare state that began in the 1970s reinforced that tendency. As it became harder to ignore the economic problems market solutions became more and more an intellectually and politically acceptable trend. No longer was it the domain of a few maverick intellectuals; in the 1980s and 1990s it underpinned the practical reform agenda of many governments around the world. Since then, classical liberals would argue that the revival of their approach has played a role in reforming welfare states and restoring economic prospects in many countries, including Britain and New Zealand; and that countries that resisted the trend, like most of continental Europe, tended to suffer from low growth rates and high unemployment. The global financial crisis of 2007–09, caused at least in part by the ‘light-touch’ oversight of the banking system pursued by deregulatory governments, may have undermined this confidence in the classical liberal approach; or it may have reinforced it, through the cutbacks in public expenditure and the shrinking of the state that has followed in most developed economies.

Economic Liberalism and liberal parties In the British context, and particularly within the Liberal Party and Liberal Democrats, the term ‘economic liberal’ has been more commonly used than ‘classical liberal’, in particular to contrast such individuals’ views with those of social liberals, who are more willing to accept the case for state intervention as a means of promoting freedom.

In several countries, economic liberals have pointed to various ways in which the growth in the size of the state throughout the twentieth century – partly in response to the success of social liberal and social democratic approaches – has led to problems such as the increased power of bureaucracies, and the infringement on civil liberties that may entail, the tendency for elites to capture elements of state power (leading to market distortions such as subsidies), the growth of corporatism, a rising burden of taxation and so on.

Despite the resurgence of economic liberal thinking this prompted, in Britain the Liberal Party/Liberal Democrats has remained a social liberal party since the New Liberalism of the early twentieth century.

In the early 1950s a determined attempt was made by the so-called ‘radical individualists’ to return the party to its traditional commitments to free trade, minimum government and individual liberty. This was not a success, partly because the party leadership was too cautious about moving away from the prevailing Butskellite consensus, and partly because of the activities of the Radical Reform Group in countering the rightward trend. The accession of the Radical Reform Group supporter Jo Grimond to the leadership in 1955 signalled the defeat of the economic liberals; some of them drifted into the Conservative Party and others to pro-market fringe groups, while Arthur Seldon helped to set up the Institute for Economic Affairs (IEA), which became an important source of economic liberal thinking and propaganda.

The breakdown of the post-war economic consensus in the 1970s could perhaps have pushed the Liberal Party back in an economic liberal direction, but in fact the IEA found a much readier welcome for its proposals in the Conservative Party under Margaret Thatcher. The resulting association between economic liberalism and other aspects of the Thatcher style – authoritarian, nationalistic and socially reactionary – helped to keep the Liberal Party firmly in the social liberal camp. This was reinforced by the Alliance with the Social Democratic Party in the 1980s, and also by the growing influence of local councillors within the party, comfortable with using the power of the state at local level to improve their constituents’ lives. From the 1990s, although the economic policies of the Liberal Democrats – along with other political parties – have shifted back in a more pro-market direction, in its approach to an activist role for the state, particularly over public services and environmental issues, and in its taxation policy, it has remained a broadly social liberal party.

In 2004, however, this position seemed to be challenged by the publication of the avowedly economic liberal Orange Book: Reclaiming Liberalism. Its main message was clearly pro- market; its main editor, David Laws MP, complained that ‘in the decades up to the 1980s, the Liberal belief in economic Liberalism was progressively eroded by forms of soggy socialism and corporatism, which have too often been falsely perceived as a necessary corollary of social liberalism’. Laws called for the party to draw on its economic liberal heritage to address public service delivery, introducing more choice, competition and consumer power.

The Orange Book was not particularly well received within the Liberal Democrats at the time, but its broad approach arguably helped provide some of the intellectual underpinnings for the party’s direction under Nick Clegg, and its coalition with the Conservatives in 2010–15. This argument can be overstated, however; many of the policy changes under Clegg can also be seen as a sensible response to the new era of austerity following the global financial crisis, and the outcome of the 2010 election left the party with little option other than coalition.

In contrast to the UK, in most of Europe in the early twentieth century many liberal parties stayed true to their classical liberal beliefs in free markets and a limited state. Since they also in general fared badly electorally in the competition between socialist, or social democratic, and anti-socialist parties that characterised most of the century, their influence on government was accordingly limited. Most European governments did not adopt the Thatcherite economic liberal approach and, as a result, liberal parties have often been able to remain in command of this particular political niche. Nevertheless, some European liberal parties, chiefly though not exclusively in northern Europe, are avowedly social liberal in character. Some countries, including Denmark, Lithuania and the Netherlands, possess two liberal parties, one economic liberal and one social liberal.

It should be clear, however, that there is no firm divide between social liberalism and economic liberalism; rather, there is a spectrum of views and positions, depending strongly on the economic and social circumstances in a given country at a given time. What unites liberals of both tendencies – a commitment to civil liberties, human rights, open and tolerant societies, and a just international order – has usually proven stronger than what may divide them. Indeed, as Conrad Russell argued, since the roots of liberalism stretch back well before the state could exert any significant control over the levers of economic activity, arguably liberalism is not a philosophy that can be described in terms of economics – unlike, for example, socialism. Economics is important simply as a means to an end, because it affects the distribution of power in society and can thereby enlarge, or diminish, the life chances of individuals. Social and economic liberals may differ over economic means, but they do not disagree over their ends.