#67 A Radical Approach To Defend Liberalism

Today's liberals are in sharp contrast to the radical thinkers of the past. Their timidity won't save liberalism and markets from the onslaught of left and right.

This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.

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I spent most of the last two months reading books that were critical of the liberal, free-market consensus. There were delightful books that broadened my understanding of the critique and the defence of classical liberalism like Radical Uncertainty (King and Kay) and Caste (Isabel Wilkerson). Of course, there was Bland Fanatics (Pankaj Mishra) whose prose was as compelling as it was lacking in logic.

To balance things a bit, I thought I will pick up Radical Markets: Uprooting Capitalism and Democracy for a Just Society by Eric Posner, a professor at the University of Chicago Law School, and Glen Weyl, a principal researcher at Microsoft. I was wrong. This is an unsettling book. It champions radical ideas to expand markets in their true sense into contentious areas like private property, electoral choices, immigration, and usage of data in the digital economy. A lot of what’s proposed sound implausible today, a fact readily acknowledged by the authors in their introduction:

“Any agenda that aspires to such sweeping changes faces enormous barriers to its adoption. Our proposals will require years of testing, improvement, and gradual scaling up before they are ready for full implementation.

Even if we don’t sell you on all our ideas, we hope this book will open your mind to a new way of imagining the economy and politics. This challenging moment, when long-held assumptions are being overturned, is ripe for radical rethinking.”

The Philosophical Radicals Of Yore

The book lays out the challenges of our times which mirror the arguments raised in the books critical of classical liberalism. Rising inequality in developed economies, stagnation of growth, increasing polarisation and conflict between far-right and far-left, de-legitimisation of global institutions of governance, and the constraints to accessing good healthcare and education are discussed as instances where features of the market like perfect competition and allocative efficiency have failed.

The liberals of the 19th and 20th centuries were ‘philosophical radicals’ who questioned institutions, shone a light on failures and sought imaginative solutions to the problems they saw around them. The liberals of today aren’t radical enough. They are still stuck in convention while thinking about these issues. The complacency of having won the ideological battle following the dismantling of the Communist regimes has blinded them to the many compromises of the market economy. This history they have written as victors is stopping them from making a clean break from the shibboleths of the past.

The authors give a succinct summary of this history:

“The next generation of liberal reformers in the late nineteenth and early twentieth centuries, individuals such as Henry George, Léon Walras, and Beatrice Webb, sought to address these problems. The effects of their handiwork, which built on the legacy of the Philosophical Radicals, remain with us today. Antitrust policies and legal support for labor unions restrained the power of monopolies. Social insurance, progressive taxation, and free compulsory education enhanced competition by expanding access to opportunity. Systems of checks and balances, protection of fundamental rights, and increasing judicial power to protect minority rights addressed the tyranny of the majority. International institutions, free trade, and human rights treaties were designed to pave the way to greater international cooperation in a liberal order.”

“Following World War II, these reforms helped usher in an unprecedented period of economic growth, declining inequality, and political consensus in wealthy countries. This great success for liberalism transformed practical politics and academic economics in similar ways. In both spheres, leaders decided that more or less perfect markets had been achieved. Ideas for further breakthroughs in expanding trade or eliminating monopoly power were largely abandoned. Economists came to believe that differences in individuals’ natural talents are the main source of inequality. They agreed that progressive taxation and welfare systems are needed to ensure a fair distribution, but that they must be limited lest they come at a cost to the size of the total economic pie.”    

Split Wide Open

This faultline widened by the 1960s. Where and how far must the state be allowed to intervene in the functioning of the market became a cleaving line between the liberals? As the authors write:

“This trade-off fragmented the liberal coalition. Those who had led the second generation of reforms coalesced into the modern political Left, known as liberals in the United States and social democrats in Europe. They prioritized equality within nations and opening of markets to domestic minorities and women, groups previously excluded from market exchange. During the 1960s and 1970s they won victories in the US Civil Rights movement and the feminist movement throughout the developed world.”

“Those liberals who prioritized free markets and efficiency over equality formed the modern political “Right” and came to be known as libertarians in the United States and neoliberals in Europe. Beyond fighting government intervention, the Right also played a crucial role in pushing for more open markets for goods and capital internationally. Their great victories came during the 1980s and 1990s, as countries sold off nationalized industries, deregulated the economy, and opened to foreign trade.”

The Current Stalemate

And this has been a problem. Instead of rethinking the core issues that have led to the raft of failures we pointed out earlier, the left and right have only used the current issues to prove the other wrong. This is a game that will have no winners. The authors suggest a new way of thinking. They don’t call it so, but we think it is one of the ways to begin defining Liberalism 2.0:

“Yet, while inequality across countries, and between dominant identity groups (white men) and other groups (women, African Americans), declined, inequality within wealthy countries expanded. Growth rates declined and never returned to their mid-century levels. With economic stagnation and rising inequality within countries—stagnequality—politics have become fractured and poisoned.

While some commentators believe that stagnequality is the result of broad economic and demographic forces that are beyond people’s control, we believe that it is the result of a failure of ideas. The economic wisdom of left and right did not cut to the core of the tensions in the basic structure of capitalism and democracy.

The ideological and military victories of World War II and the Cold War, accompanied by economic and political achievements of the second half of the twentieth century, thus bred arrogance, which led to complacency and internal division. The radical reformers of the nineteenth and early twentieth centuries became the squabbling technocrats of today.”

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The Importance Of Radical Thinking

This is a philosophical argument we have often made in this newsletter. We often provide both a view and counter-view on subjects in many of our editions. They are our small attempts to stoke a debate about these vexing issues that synthesise the capabilities of the market, society and the state. Posner & Weyl go back to the texts and the legacy of the philosophical radicals to offer audacious solutions to these issues. Like we mentioned, the solutions aren’t what you should be taking away from the book. They will need a lot of iterations and refining. The book should be discussed in the realm of ideas of political philosophy it is trying to resuscitate.

Market fundamentalism has led us to where we are today. The true radical liberals of the past would have questioned this blind faith. They would have asked for reform of social institutions that have failed while pursuing this fundamentalism. Their radicalism would have led us back to the true definition of the markets and the solutions derived from this revival.     

Reconciling The Extremes?

I have tried to provide a simplified version of the philosophical argument here.

Prior to the age of enlightenment, people lived in small, close-knit communities which had its own code of behaviour. This code (often religion) provided the moral basis for action, shame, co-operation and punishment. Individual self-interest wasn’t the foundation of such a society. People lived to this code to pursue the common good. What we consider market failures today like externalities or public goods were addressed by this code. The small size of the ‘moral economy’ meant there wasn’t any kind of market power dominance. The problem of ‘moral economies’ show up when societies expand because of trade or spread of sovereign power of empires. The ability to have all the information about individual actions and regulate them decreases. This ‘coordination problem’ is what Adam Smith and other economic thinkers that followed him tried to solve. Smith’s counterintuitive answer to this was self-interest. As Smith wrote:

“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”

This was a difficult notion to reconcile for most people. It remains so. But in a large, networked world with millions of people involved in economic activities, it is a system that provides the best societal outcome. As Posner & Weyl write:

“A modern market economy—which combines government support for trade (contract and property law) along with government protection against abuses (tort law and regulation)—generates value far beyond the capabilities of a moral economy. Because of these limitations, moral economies can feel constraining and antiquated when confronted with large-scale market societies. Unable to account for the needs of those far away, they may become hostile to outsiders and intolerant of internal diversity, fearing it will erode group values.”   

Now, this view of Smith, Locke and others who followed them into the Austrian school of economics is what’s termed methodological individualism. They believed the only reality that you can observe and understand is the individual action and therefore his consciousness. So, the idea of the society has to emerge from the individual.

What’s often forgotten is there was a French school of philosophers who argued for methodological collectivism during the same time. Rousseau and his ‘general will’ of the society and Montesquieu’s belief that there was a consciousness that was above the individual consciousness were collectivist ideas. Durkheim further expanded on this with his notion of ‘collective conscience’. He argued as civilisations mature, they will have to contend with this consciousness to solve for more complex issues they will confront. This is unavoidable. And here we are like he predicted. Classical liberalism is in a face-off against collectivism and neo-fascism today. This (methodological collectivism) is a useful strand of enlightenment thinking to bear in mind as we discuss the ideas for a revamped liberalism.      

Anyway, as the market economy grew with the industrial revolution, the counter to it soon emerged in the form of Marx. The Marxists saw the control of means of production by a few, who then employed workers, as a form of wage slavery. State ownership of means of production and central planning were offered as alternatives. The experience of Soviet Union proved this central authority that could account for tastes and preferences of millions of individuals was flawed. It led to the tyranny of the collective with disastrous consequences for those societies.

Learning From The Past

Posner & Weyl suggest we need to go back to the original way of thinking practised by ‘philosophical radicals’. They weren’t wedded to market fundamentalism. Faced with today’s issues, they would think on radical terms. They would pursue market solutions that could reconcile collectivism with individualism and moral economy with a market economy. Or, as Henry George, the American economist whose ideas are featured prominently in this book, had said – “to unite the truth perceived by the school of Smith and Ricardo to the truth perceived by the school of Proudhon and Lasalle.” This is ambitious and in their audacious solutions to ownership of property, voting, immigration, the perils of institutional investment in companies and data as labour the authors live up to the promise of such radicalism. It is a wonderful book of ideas.

p.s: I haven’t covered the specifics of the solutions offered in the book here. I might do it in another post. There’s a wonderful interview of Glen Weyl that covers these solutions and the underlying radical thoughts in detail here.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Website] Radical Markets website that has all the resources about the book and its central arguments.

2. [Article] A profile of Henry George whose ideology is difficult to categorise in current times.

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