ECONOMIC LIBERALISM is about means to ends, the end being to increase aggregate utility of consumers (social welfare). Starting with the premise that individual consumers are able to maximize their utility or preferences (rational man) and that it is socially desirable to maximise the sum of individual utilities, economic liberals argue that this goal is best achieved if:
- property rights are firmly protected;
- decisions on what is to be produced and how it is to be produced are overwhelmingly left to private market participants and determined by the price mechanism;
- effective legislation is in place to deter monopolistic practices;
- people are rewarded in the market place according to their skills and performance;
- capital is allowed to flow freely across activities and national borders;
- governments only interfere with market processes, either through direct participation or regulation, when there is clear evidence of market failure which can be effectively rectified by governments and the method of intervention is subject to close cost-benefit scrutiny and regular review;
This conclusion is grounded in economic theory and has plenty of empirical support.
There is no doubt that, so defined, economic freedom is good for economic growth. The empirical evidence (cross-country and time series) shows a significant correlation between the economic liberal definition of economic freedom and per capita growth and employment rates. Indeed, the cross-country evidence suggests that market liberalisation in product and financial markets can continue to deliver good returns for the economy as long as there are barriers to competition. In product and financial markets, the economic gains from further liberalisation seem to be open-ended: they do not diminish as each regulatory barrier to competition is removed – subject to appropriate structural adjustment assistance and an adequate prudential, consumer safety and competition regulatory framework.
And there is plenty of evidence that economic liberalism can be fully reconciled with low levels of inequality and high levels of social mobility – so long as the methods of income and wealth redistribution are market friendly and non-distorting to economic incentives.
HARD LIBERALISM is a very different kettle of fish. It involves a strong philosophical commitment to individualism, self-reliance and personal responsibility PER SE and not just as a means to maximising consumer utility. So it broadens the concept of economic freedom beyond the economic liberal elements outlined above to include âsmall governmentâ and free labour markets.
The Heritage Foundation can for example be described as a hard liberal organisation in that it argues that the âbest performingâ country (highest in the league of countries it analyses) is the one which has the lowest taxes and scale of redistribution and which has done most to deregulate its labour market. [Deregulating labour markets is about lowering levels of government involvement in wage determination (e.g. with a very low statutory minimum wage relative to median earnings), lowering levels of worker-protection regulation (e.g. on unfair dismissals, severance payments and hiring practices), lowering unemployment benefits relative to median earnings; and lowering the role of trade unions.]
On this hard liberal (libertarian) definition, economic freedom is in clear conflict with distributional equity: economic liberal policies cannot be actively pursued without large and sustained inequality of income and opportunity.
But that is not the main point I am trying to make here. My point is that economic liberals have the theory and evidence to show that their ideas can improve economic and employment performance in the long term (with appropriate structural adjustment assistance) but the same does not appear to apply to hard liberalism.
There is no doubt that a move from a highly government-centralised and workplace-regulated economy, with very high taxes and passive welfare benefits, to one that is freer on both counts produces good economic returns for a time. BUT the correlation between per capita economic growth and either size of government or labour market deregulation disappears once a certain threshold is reached. Beyond that threshold, returns gradually diminish and soon become negative. Most developed nations (with the exception perhaps of a few continental and southern Europeans) reached this threshold a long time ago.
So by adding small government and free labour markets to their definition of economic freedom, hard liberals are departing from pure economics and entering the field of ideology: they are advocating policies for developed nations which offer no economic return and which could even be damaging to the economy – yet have big effects on the distribution of wellbeing and on equality of opportunity.
Hard liberals (libertarians) are of course just as entitled to their values as anyone else. But they cannot claim to be true economic liberals.