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. 1
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.
- 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.[↩]
Do you mean: The developed Anglophone countries and Switzerland, except perhaps Canada, may have reached this threshold some time ago. – ?
Patrick, there is virtually no correlation between size of government if you focus on a cluster of developed nations.
With labour market deregulation, the story is more complex. One needs to disaggregate labour market freedom into its four components (see my paragraph in brackets) to draw any clear inferences.
The Nordics and smaller Europeans seem to suffer no sustained economic penalties from maintaining their levels of labour market regulation (which are lighter than in France and Germany but greater than in USA and Australia). Conversely, UK and NZ have in recent years increased the level of labour market regulation (moving further away from the USA) without suffering any economic ill-effects.
On the international evidence, I believe Australia will get little economic benefit from the onslaught against trade unions and on the quality of life of workers. Nor will the economy benefit from a further erosion in unemployment benefits relative to median earnings.
However I suspect countries like Germany and France would benefit economically if they reduced their regulation of hiring and firing and, in the case of France, lowered the minimum wage relative to median earnings. As well they might get some economic returns if they imposed tougher welfare conditions to encourage the transition to work as the Nordics have done.
The first paragraph should read ‘there is no correlation between size of government and economic growth if you focus on a cluster of developed nations’.
Fred you are being inconsistent in your own terms in relegating concern with labour market deregulation to a cause that is not worthy of economic liberalism. As you’ve defined it yourself, economic liberals agree that:
“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;”
Where is the failure in freer labour markets that cannot be better addressed by transfer payments while avoiding creating employment barriers?
Also I believe this claim is NOT consistent with economic liberalism whether hard core or moderate:
“people are rewarded in the market place according to their skills and performance”
Markets can contain a degree of arbitrariness, it is a game of luck as well as skill. ‘Disproportionate’ rewards may flow to some but no one is in a position to set market prices better. The best solution is again transfer payments, not tampering with market forces.
For France it is a shoe-in. They are in the envious position of having so many low-hanging fruit they knock their heads on them every time they move. Unfortunately on the evidence to date that leaves their heads a bit funny.
Probably the lowest-hanging fruit in France is an appalling and egregiously ‘unfair’ indexing of jobless allowance to past wages! I really find that morally offensive, let alone the incentives.
I am familiar (by now!) with your position on the Nordics and small Europeans. However, whilst I am far from an expert here, my strong-ish impression is that they are all moving in ‘our’ direction.
Also, in Denmark, France, Belgium, Germany and Sweden in particular, my impressions is that the biggest issue with labour regulation is nothing to do with employment or the economy as such. Rather it is the social effects of employment and unemployment, and most of all the extreme rigidity that even mildly rigid laws can have on marginal classes, such as young men of Mahgrebin descent.
The second biggest is similarly little to do with employment per se, if everything to with the economy: pension liabilities. But we might be better to deal with that separately.
Jason, thank you for your interest.
I accept that labour market deregulation IS
Fred,
economics has been incredibly successful in becoming the language of choice for governments and the elite bureaucratic institutions in the OECD. That position brings with it that everyone wants their pet policies to be ‘proven right’ by economics. Whilst I agree with your assertion that ‘hard liberals’ (is this your term? I havent heard it before) find more in economics than that there is to find, the same holds for ‘soft liberals’. The lessons of economics do not lend themselves to the grand statements here. Its true that Fred describes the basic policy agenda of economists and that things sofar look pretty good for that policy agenda. However, has experience really proven that its best if “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”? That’s a big call. If that were true, government should for instance not easily interfere with labour mobility which it does and on the economic ground that our economy does not need some of the skills of others (which is not an externality). The few countries I can think of without effective labour entry control (Afghanistan? Somalia? South Africa?) are not exactly shining lights of economic growth.
Whilst I have some sympathy for Fred’s rejection of the economic pretences of the libertarians, I reject the notion that economic theory can prove anything as grand as claimed here. Economic theory is in my book a reflection of the lessons of economics – a codification if you like of the rules of thumb about human behaviour that appear to hold in practise. The level of abstractions in economic theory is far too high however to say it has proven anything about the real world. It helps us think about the real world and is a check on the consistency of our arguments, but it does not prove the world is as we would like to see it.
Paul, well put. I agree that economic theory and evidence is seldom conclusive and I plead guilty to being too assertive. But we must make some judgments at times or end up saying nothing.
Labour mobility is a tricky issue for economists. I believe that inter-state mobility within Australia is good for the economy and needs to be encouraged e.g. with relocation assistance (although regional development policies are also needed at times). I also believe international immigration of skilled workers is good for the recipient country (Australia) and has no great effect on income inequality. However international migration of unskilled workers does little or nothing for our economy and is socially damaging as well – so I would discourage it. Hard liberals who advocate the latter do so on ideological grounds (to hold down wages relative to profits) more than economic ones.
All this is very judgmental of course. But there is a reasonable literature to back up these conclusions and one must be brave at times.
By the way, ‘hard liberalism’ is a term I invented in my 1998 book “Australia at the Crossroads”. It never took on but I still like it.
Fred Argy wrote:
Not me. This is just another bit of rubbish corporate welfare. It does nothing to help the market to identify which industries are really competitive and should survive. Companies bleating about poor quality workforces in the wrong places but unwilling to invest in their employees need to be weeded out – Keating might have branded them spivs.
Fred,
One of the arguments in favour of unskilled migration that I have heard is that it provides a supply of labour willing to undertake jobs that fewer and fewer people in develoing countries are willing to do. Both parties to this transaction benefit. The migrants get higher wages and a better standard of living than they otherwise would. The people who employ them get jobs done that may previously have been priced out of the market. Furthermore, the migrants countries of origin may benefit through money that the migrants send back to their families.
That should be fewer and fewer people in developed countries in my previous comment on this thread (number 10).
Fred
BUT the correlation between per capita economic growth and either size of government or labour market deregulation disappears once a certain threshold is reached
What’s the evidence for this? Which countries are you referring to?
pommygranate, you ask a legitimate question.
I arrived at my conclusion by (a) reading the extensive literature (b) observing the growth performance of ‘middle freedom’ countries and comparing it with the performance of the USA (most liberated) and (c) by putting together a scatter diagram of all the countries listed by the Heritage Foundation.
I was planning to go and do some elaborate correlation coefficients of my own when, lo and behold I found someone who had already done it viz. Jim Caserta. Including the full range of countries covered by the Heritage Foundation he comes up with a correlation coefficient between labour freedom and per capita incomes of 0.23 compared with coefficients of property rights 0,75, financial freedom 0.48 and investment freedom of 0.54. (Caserta finds a negative correlation between per capita incomes and fiscal size of government).
The Heritage Foundation does not deny these results but refuses to weight some of its ten components of freedom differently from others. It argues that its freedom index is “not designed to explain per capita growth
You seem to be interchanging “hard liberal” for “libertarian”, is this so?
If so, then I would argue that libertarians who favour open borders do so because freedom of movement for workers regardless of skill is an enhancement of liberty. Unfortunately, in the current welfare state paradigm, open borders would be suicidal for the nation state.
Corporate profits have absolutely nothing to do with it. Some libertarians are actually quite hostile to many corporations, primarily because they extract benefit out of the current political and regulatory system through rent seeking. Personally I even have some ideological problems with limited liability, but recognise its legitimacy from a utilitarian perspective.
Brendan, yes hard liberalism is virtually synonmous with libertarianism, and yes your ideological explanation of why libertarians favour open borders (i.e. to enhance liberty) is much more plausible than mine (profits).
So why the implied accusation that libertarians are yes men for big business?
The whole “explain libertarian agenda by profit motive” is not a fair assessment of libertarian philosophy. Liberty in itself is to be valued intrinsically, and from liberty wealth will be generated through the voluntary exchange of goods, services and ideas. Profit is merely one side of the equation that sees all the material and immaterial wealth that enhance our daily lives, and is not a libertarian end in itself.
Brendan,
I can’t speak for Fred but in my case I note a lot of people who are very keen on liberty are keener on economic than on other kinds of liberty. They don’t say so, they just act like that is the case. Of course if you’re not like that then you have every reason to be offended, but there are plenty who are. Just as I could mount a similar argument that lots of people on the left who claim to ‘care’ don’t much. But those are the ideological clothes they feel more comfortable in. And truth be told we’re all at least just a little like that I think.
Brendan, we seem to be straying a little. Let me rehearse the key arguments I have put.
In my initial post, I stressed that libertarianism was less about maximising consumer utility (which is the focus of economic liberalism) and more about maximising individual freedom per se but that libertarians were as entitled to their values as anyone else.
In comment no 13 when specifically discussing cross-border labour mobility, I speculated that perhaps some of the advocates of freer entry of unskilled workers might be motivated by a desire to “hold down wages relative to profits”. I was not generalising about libertarian ideas in general.
In comment no. 15 I agreed with you that the motivation of many libertarians in supporting freer entry of unskilled workers was more likely to be to boost freedom per se.
It follows from the above that I do NOT believe libertarians as a group are “yes-men for big business”. Some may well be (as Nicholas points out) but I do not believe it is intrinsic to libertarianism. So why are we still debating this point?
Fred
Thanks for explaining so clearly a distinction I didn’t know of but which caused some vague underlying dissonance when considering “Liberal” Party policies. But strangely enough the US Republicans hate both liberals and “libertarians”, who are almost as bad as libertines.
I suppose the schizoid American psyche can be explained as a never-ending conflict between the personal and economic freedoms of libertarianism and the self-loathing of the (now secular) personally proscriptive Calvinism of the pioneers.