Political thought can be classified in many different ways, having regard to ones attitudes to economic freedom, the environment, personal morality (abortion, gay rights etc), welfare, income inequality, inequality of opportunity, etc. Trying to build them all into a comprehensive categorisation of political thinkers in Australia is too complex for me. In this posting, I want to simply focus on attitudes to economic freedom and distinguish between the political stances of libertarians, economic liberals and social liberals.
In this piece, I am NOT trying to start a debate on the relative merits of the three schools of thought (although I have my views of course). I am only trying to define them. A fuller discussion of the concepts and how they apply to the vexed issue of labour market freedom can be found in the forthcoming (July/August) issue of Australian Quarterly and this piece draws heavily on it.
Meaning of economic freedom
Economic freedom is about the degree to which individuals are able to pursue their own socio-economic interests in the market place. The oft-used index of economic freedom is calculated by reference to the security of property rights; the openness of the economy to external trade; levels of business regulation (how easy it is for entrepreneurs to start a business); levels of regulation of investment and credit markets; the extent of regulation of labour markets (how much freedom managers have in setting pay structures and in hiring and firing); and the size of government (scale of government expenditure, progressiveness of taxes and extent of government ownership).
Views of libertarians
Libertarian thinkers believe that governments should seek to maximise a countrys economic freedom (in all its varied dimensions). They accept in principle that free markets do not work perfectly and can lead to excesses such as environmental pollution, economic instability and personal hardship which hurt third parties. But and this is crucial – they are deeply distrustful of the ability of governments to deliver remedies, stressing the pervasiveness and relative severity of government failure. They therefore start with a strong presumption against government intervention in markets and in favour of individual choice.
Libertarians justify their stance on two distinct grounds. One is that individual liberty is a paramount virtue in itself and should override other virtues such as equality or fairness. This value-based, philosophical case is often supported by an economic case that individual freedom produces optimal outcomes for output and employment. But the overriding concern of libertarians is individual liberty, so they are willing to support measures which enhance economic freedom even if these offer little or no economic gain or even involve an economic sacrifice. That is, they are driven much more by ideology (values) than economics.
Views of economic liberals
Economic liberals are a quite different kettle of fish. Their focus (at least when they are wearing their professional hats) is on efficiency and aggregate economic wellbeing. A reform is desirable if it expands national resources or helps get more out of existing resources.
In deciding whether a reform increases aggregate economic wellbeing, they assume (subject to the usual provisos about availability of information and third party effects) that individual consumers are the best judges of their interest, that they are able to successfully maximize their utility or preferences (rational man), that the extra utility from each extra dollar consumed is roughly the same irrespective of household income and that GDP is a good rough measure of the sum of individual utilities. These assumptions are of course over-simplifications but they are seen by economists as a sufficient approximation to reality that they do not fundamentally destroy the credibility of their overall analysis.
Given their approach to reform, economic liberals are like libertarians in two respects: they start with a presumption in favour of individual choice and they are not too fussed about the ultimate distribution effects of the reform, so long as it is potentially feasible for losers to be compensated by winners and still leave the winners better off, they are not concerned about actual distribution outcomes.
However economic liberals also differ from libertarians in two key respects:
they do not see an expansion of economic freedom as desirable per se: an expansion of freedom only wins their support if it meets the economic test i.e. if it is confidently expected to yield significant net economic benefits; and
they are much less cynical and distrustful of the ability of governments to correct market failure.
disagreement between economic liberals and libertarians is greater for some kinds of economic freedom such as competition barriers and financial deregulation) but less so on small government low levels of government expenditure and taxes. The reason is simple: neither economic theory nor empirical evidence point firmly to any optimal size of government from an economic viewpoint: when examining proposals which seek to reduce the size of government, economic liberals look at each proposal on its merit to see if it meets their economic test.
Similarly, the gap between libertarians and economic liberals is most starkly evident with labour market freedom. Here too, as with small government, economics potentially clashes with ideology. Libertarians advocate labour market deregulation because it widens individual choice and this is seen as desirable for its own sake. On the other hand, economic liberals support deregulation of the labour market only where it is expected to produce economic benefits.
Views of social liberals
Social liberals, like economic liberals, seek to advance economic efficiency – but not exclusively. In assessing the merits of a proposed reform, they give equal weight to objectives such as its effects on income and wealth inequality, on the quality of the living and working environment and on intergenerational and intra-generational income and educational mobility. Like libertarians, they are ideologically driven – but with a very different set of values. [This does not mean that economic liberals are ideologically neutral: it is just that their values are more hidden.]
Take for example the distribution effects of a reform. Economic liberals abstract from these effects by focusing only on GDP outcomes (which are taken to approximate aggregate utility). If these effects are positive, it is assumed that winners will be potentially able to compensate losers and still remain themselves better off. With winners and losers presumed to have similar marginal utilities, there is no need for actual compensation. However social liberals start with the assumption that an extra dollar is worth more to a poor person than a rich person, so the distribution effects are important in their own right and need to be considered in the evaluation process even when there are aggregate benefits for GDP. They are therefore willing to sympathetically consider alternative policy packages which deliver a more neutral or progressive distribution outcome, even if the alternative packages are unable to achieve the same efficiency and employment gains as the freedom option. Such an approach is unacceptable to economic liberals as it may involve a sacrifice of economic efficiency. And as must of necessity involve higher taxation (at least for a period), it is anathema to most libertarians.
I view myself as a social liberal but this is not the place to discuss why.