The Whigs of 19th Century Britain were notorious for applying free market economic doctrine beyond the point at which it became invalid, thus causing the Irish potato famine and the gradual hollowing out of British industry, hobbled by unilateral free trade. The controversial sale of Peninsular and Oriental Steam Navigation Company (P&O) to the state owned Dubai Ports is just one recent example that suggests that Whiggery remains an economic danger, however dead its political party.

To the George W. Bush administration, opposition to the Dubai Ports deal appears illegitimate, grounded in unpleasant racism, xenophobia or religious prejudice. The United Arab Emirates (of which Dubai is a part) are an ally in the Global War on Terror, therefore decisions on corporate sales should be carried out on a “level playing field” basis, since any buyer without clear criminal or terrorist connections has an equal right to participate in a capitalist enterprise with any other buyer. That’s the way the free market works.

In this case, the pure Adam Smith theory of equal competitive bidding for assets falls down in two areas. First, Dubai Ports is a government company. It is therefore able to raise money from the taxpayers of Dubai if it gets into difficulties, and it has little or no incentive for optimal efficiency such as operates in the private sector. There is little purpose in privatizing port operations to increase efficiency if you then sell them to someone else’s government. In the pure free market, governments do not own operating companies. There is thus no reason why the free market “level playing field” doctrine should be applied to a government purchaser, whose attempts at acquisition are themselves in principle illegitimate. As an additional wrinkle, this transaction also breaks with free market theory by Dubai Ports’ financing method, a $2.5 billion “sukuk,” compliant with sharia law, available only to Islamic companies, and enabling Dubai Ports to tap the enormous stagnant swamp of Middle Eastern oil money at below-market rates.

Second, the free market theory assumes that all actors are economic, it does not take account of terrorist groups acting from non-economic motivations, nor of the costs of protecting against those terrorists, nor of the differences between potential purchasers in their ability to avoid terrorist-sympathizer employees. To take an extreme example, Bin Laden Construction, Osama’s family company, is a perfectly legitimate private sector company domiciled in a U.S. ally, Saudi Arabia (and currently building the tallest skyscraper in Dubai) yet I presume even Bush would not sublet vital infrastructure to Bin Laden Construction.

It is reasonable when “profiling” aircraft passengers to take account of the fact that Middle Eastern-appearing youths are more likely to be terrorists than Nordic grannies. In the same way it is reasonable to suppose that a company domiciled in Abu Dhabi, home of some of the September 11 hijackers and (because it’s a financial center) entrepot for much Al Qaeda financing is less secure against terrorist conspiracies than a company from a country without Middle Eastern connections. There may be ways to protect adequately against this problem, but they will cost more money, and the incremental financial and psychological costs of allowing Dubai Ports to run U.S. port facilities, beyond the out of pocket costs to Dubai Ports, should be fully taken into account.

Flatly blocking the sale of P&O to Dubai Ports itself imposes costs, particularly since P&O is not a U.S. company, so it sets yet another precedent for the U.S. regulatory imperialism which Europeans find so objectionable. In the old days, when merchant banking was oligarchic, the best solution would have been for the British and U.S. governments to have been consulted at a very early stage in the proceedings, and to have steered the bankers advising P&O in its sale towards another bidder. In the Whiggish “free-market” world in which we now live, that is no longer possible; banks are not free by law to reject any bidder for a publicly held company with the necessary cash and any objections to the sale can only be made by the heavy hand of government diktat. It does not make things easier.

Free market economics was introduced to Britain by the great Tory governments of 1783-1830, headed by William Pitt and Robert, Lord Liverpool. Both men made active use of their economic advisors – Adam Smith and David Ricardo, respectively – but were quick to adopt policies contradicting free market theory when practical considerations dictated. Exporting textile know-how or machinery (the high technology of its day) was a criminal offense under Liverpool, for example.

The Whigs, like their Liberal, social democrat and liberal Democrat successors on the left of the political spectrum, believed in the perfectability of man and clung to the teachings of a number of treatises showing how this could be achieved. Unlike later leftists who relied on Maynard Keynes, Sidney Webb or Karl Marx, or 17th century Puritans who sought authority from the Bible, the Whigs sought inspiration from free market economics and from the utilitarianism of Jeremy Bentham. This produced the 1834 Poor Law and the horrors of the Victorian “workhouse”, and the famines in Ireland in 1846-48 and Orissa, India in 1866, in both of which cases famine relief was refused because it was thought to interfere with the free market.

Whiggish economics also inspired the 1846 Repeal of the Corn Laws, rushed into law to deal with the Irish famine, which did nothing to help Ireland (the Irish potato growers wiped out by the blight had no money to purchase corn, however free from tariffs.) Repeal not only destroyed traditional British agriculture, once the American Midwest trade routes opened in the 1870s (which the Whigs had intended, since farmers were Tory) but in the long run, entirely unintended by the Whigs, it also destroyed British industrial supremacy, since exchange rates were fixed by the Gold Standard and other countries built up competitors behind tariff walls. In the United States, economic Whiggery played little role in the 19th Century (the U.S. Whig party had little or nothing ideologically in common with their contemporary British Whigs), but arrived in U.S. politics through the Progressives, who devoted great attention to correcting the deviations of the U.S. economy from the theoretical free market model.

The last British cabinet minister to call himself a Whig was Spencer, eighth Duke of Devonshire, who resigned from the Cabinet in 1903 over proposals to introduce an Imperial Preference scheme to level the playing field against France, Germany and the United States, all of which had high tariffs. However Winston Churchill had Whiggish tendencies, demonstrated in 1925 when he returned Britain to the Gold Standard at the pre-war parity, while vehemently opposing the modest (around 10 percent) tariff that alone would have made that parity sustainable without lengthy and unpleasant deflation. In the 1980s, Margaret Thatcher also demonstrated a latent Whiggery, notably in the Financial Services Act of 1986, which “leveled the playing field” against foreign competition in the City of London and thereby wiped out the British merchant banks, the leaders in financial market innovation for 200 years. Chancellor of the Exchequer Kenneth Clarke, too, demonstrated a flash of Whiggery in 1995, when he decided that his previously wholly undetectable free market principles required him to prevent the rescue of Barings.

As the above fairly recent examples demonstrate, in both Britain and the United States, while political Whiggery may be dead, economic Whiggery remains very much alive, causing the theoretical free market model to distort policy at inappropriate times. Some examples:

• Under the free market economic model, natural resources such as oil are the property of the people under whose land they are situated. The local government, as representative of those people, therefore has the right to the revenues from those resources. Since most governments outside the United States, Europe and parts of Asia are both unrepresentative and dishonest (if not outright repressive) this has allowed oil revenues to be used to fund some of the world’s most unpleasant regimes, as well as terrorism. The solution is to set up a trust fund arrangement similar to that used in Alaska or Singapore, by which oil revenues are paid by a neutral body directly to the people, without passing through the grubby hands of government. In Iraq, this could have been done. Administration Whiggery prevented it.
• The free market economic model includes David Ricardo’s Doctrine of Comparative Advantage, by which production can be outsourced to cheap labor countries to the advantage of both parties. This Doctrine does not recognize the changes wrought by modern communications; cheap labor providers are today no longer content providing cheap labor, but instead seek to climb the value chain and take over the business as a whole, including the high value added portions that Ricardo thought would remain in the high wage country. In today’s world, peasants won’t stay peasants; we need to abandon Whiggery and recognize this.
• On December 4, 1996, Fed Chairman Alan Greenspan denounced “irrational exuberance” in the stock market but then did nothing about it, since free market doctrine told him that the Fed should not interfere in the market’s setting of security prices. That doctrine, however, was created under the Gold Standard, when the monetary authorities were limited in their ability to create liquidity. By refusing to take account of asset prices, and creating M3 liquidity at a rate exceeding the economy’s growth for over a decade, Greenspan created huge and damaging bubbles first in the stock market and then in the U.S. housing market, and distorted world trade and investment flows to an extent that will take at least a decade to unwind. Free market doctrine depended on money supply being anchored to a fixed quantity; it never contemplated the endless creation of money illusion by populist central bankers.
• Free market economic theory states that international migration should also be free, since Gross World Product is thereby maximized. This does not take account of two factors: first, that we do not have a world government (which would in reality be completely unaccountable and thoroughly pernicious) but are governed by national governments who are responsible for the welfare only of their own electorate, not of outsiders. Second, unlimited immigration into rich countries drives down those countries’ wages at the bottom end to Malthusian levels, thus drastically increasing inequality and damaging the fabric of democracy itself. Whiggish calls for “amnesty” of illegal immigrants, like the penny-pinching of a Dickensian workhouse master, are based on free market rhetoric, but ignore the unpleasant realities of life as a high school dropout or even high school graduate.

Outside the economic sphere, there is a further Whiggery, which exalts the ideal of “liberal government” (or, today, democracy) above all else. In the 19th century, the Whigs exalted the likes of Louis Kossuth, unpleasant left-nationalist revolutionaries against the benign and stable Austria-Hungary. In Woodrow Wilson’s time they redrew the map of Europe according to abstract principles, thus causing several nasty future wars and much economic misery. Today they impose democracy willy nilly, causing the election of terrorists in Palestine and what appears to be ungovernable anarchy in Iraq. But that is NOT Bear’s Lair territory.

The free market system is attractive (so is democracy, for that matter.) However mankind has not yet been perfected, and nor has the free market system. Indeed, with big government and fiat money creation we are considerably further from a true free market than were the Whigs themselves. Recognizing the imperfections of mankind and man-made institutions, and designing policy around those imperfections, is an essential tool of statesmanship.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.