The Bear’s Lair: Nail that word’s feet to the floor!

Establishment journals such as the Economist and the Financial Times, and the participants in this week’s Davos rock festival have recently been decrying defeats for “liberalism” in the votes for Brexit and Donald Trump. Naturally, we are expected to sympathize: after all, what right-thinking person could object to liberalism? There is just one problem: the liberalism they defend bears almost no relationship to the mid-19th Century philosophy of free markets. The word has been allowed to migrate too far; let’s nail it down.

The general principle of economic liberalism, that governments should allow free markets to determine prices and resource allocation, was propounded by Adam Smith and well understood by 1800, at least in Britain. Even then, Alexander Hamilton opposed the principle, in favor of protecting U.S. infant industries. While Britain’s prime minister Robert, Lord Liverpool generally supported the principle, he believed that it was economic suicide to apply it unilaterally. In his great Corn Laws speech of 1815, he said: “It is unnecessary for me to tell your lordships, that the actual state of the world is very different from what it must be before any nation in particular could rely on this line of policy.”

The imposition of unilateral economic liberalism, and its extension to other areas of policy such as human rights, free migration and so forth, was carried out by the Whig/Liberal governments of 1846-74, who in the process gave Britain a thoroughly unbalanced tax system, a permanent disadvantage in heavy manufacturing and an agricultural depression that lasted until World War II. In the United States, pure Cobdenite liberalism was never really adopted; by the time the siren song of protectionism was resisted, the government had already expanded to the point where pure Cobdenite liberalism was impossible.

Adam Smith and David Ricardo provided a watertight explanation of how a liberal free-market model would work. They did not however guarantee that if there were flaws in the application of the model, it would still work. Even in Liverpool’s time, he was very well aware that unilateral tariff disarmament would allow protectionist states to hollow out Britain’s industry. In agriculture, his father Charles Jenkinson, first Earl of Liverpool, President of the Board of Trade in 1786-1804, had pointed out in October 1800 that government assistance would be required to feed the population in years of extreme dearth, since the price mechanism would cause prices to become impossible for the poor to pay. Thus, excessive reliance on Smith’s model in such circumstances would cause death by famine.

Excessive reliance on Smith’s model by the Whig government of Lord John Russell did indeed cause deaths by famine in Ireland fifty years later. The Economist, founded in 1843 to propagandize for the repeal of Liverpool’s Corn Laws (which alleviated Ireland’s food shortage by giving it a flourishing corn-growing sector it had previously lacked) failed to perceive this error.

We have however moved a great deal further from Smith’s liberal model in the twentieth century, even as its acolytes continue to refer to the current bastardized system as “liberal.” For a start, once nations moved off the Gold Standard, they came to rely on central banks setting interest rates according to their own ideas of optimal policy, which might deviate substantially from the free market equilibrium. In the 1930s, fiat central banking was a proximate cause of the Great Depression; it was also a cause of the inflation of the 1970s and has also been the cause of the productivity blight of the last several years, which has extended to all countries with “funny money” monetary policies. An economic system in which interest rates are set by government fiat is not in any meaningful sense a true free market.

There are other, even more important deviations from classical liberalism in today’s “liberalism.” In the Smithian model, government was small. Nineteenth Century government, generally absorbing no more than 10% of GDP (although in Britain temporarily swelling to 20% of GDP at the end of the Napoleonic Wars) did not distort resource allocation patterns much, outside the armaments sector. However, in today’s world, where governments absorbing 40% of GDP are considered relatively “free-market,” the resource distortion from this gigantic lump of non-market-determined demand is much more serious. In the United States, the distortion is made worse by the non-profit sector, which absorbs another 6% of GDP or so and equally allocates demand by political preference. The government share of a modern economy is not in any sense liberal, it is socialist, and by permitting so large a non-market, politically allocated share in the economy, even encouraging it, the Financial Times, the Economist and the Davos crowd have deviated sharply from classical liberalism.

As important as its size in the economy, is government’s regulation of those parts of the economy it does not yet control. This is a relatively recent phenomenon; it is noticeable how growth finally returned to the United States in 1939 and 1940, when government did not get any smaller but the New Deal’s fanatic regulators were knocked back by Congress after the 1938 mid-term elections. Naturally, the regulators did not stay quiescent; there was a surge in regulation in the late 1960s and early 1970s, another in the early 1990s and yet another surge in regulation since 2008. The result has been a decline in productivity growth even before the era of “funny money” which, had it been avoided, would have allowed U.S. living standards to be approximately 50% higher than they are today.

Again, there is nothing classically liberal or Smithian about government regulation; it is in principle the same force that held back the economies of the Soviet bloc for so many decades. By allowing surges in regulation, the Economist, the Financial Times and the Davos crowd are being highly illiberal, increasing the state’s control over every aspect of our lives.

There are further areas of illiberalism in today’s set-up. Crony capitalist immigration rules, for example, which allow big companies to import cheap labour with few rights, thereby undercutting the living standards of the middle classes, are nothing whatever to do with liberalism. Government agencies such as US Eximbank that subsidize a few companies at the expense of taxpayers as a whole are similarly thoroughly illiberal. So are tax regulations that provide huge loopholes to the very rich in the form of “charitable” tax deductions, which can be used for nefarious “foundation” political slush funds. The drive to abolish cash, manifested by the Indian notes replacement scheme and the dreams of various central bankers and economists, is a thoroughly illiberal, freedom-destroying project. The list of such abominations is endless.

In summary, there is very little liberal, in the 19th Century Smith/Cobden/Gladstone sense of the word, about today’s U.S. or global economy. Hence the hysteria about “populist” attacks on the liberal economy is thoroughly misplaced. Indeed, genuinely liberal political forces, such as Ted Cruz in the United States, are attacked with almost as much fervour as the populists.

The populists who voted for “Brexit” wanted to end Britain’s domination by an unaccountable protectionist bureaucracy, and regain its freedom to set its own laws and build trading relationships with every country in the world. Not much illiberal here.

The populists want to reduce immigration, in particular ending illegal immigration and the crony capitalist “guest-worker” schemes that undermine wage rates. In this, they are in the spirit of nineteenth century liberalism, which believed in the primacy of law and in free markets for labour, not rigged ones.

The populists want to end the “funny money” policies that have encouraged reckless speculation, driven up asset prices and penalized the thrifty by negative real interest rates (and in some cases, negative nominal interest rates.) Again, the populists are here far more liberal than the “liberals” both in the U.S. and Britain.

The populists want to close the tax loopholes for the very rich’s charities, while opposing yet further tax rises on the productive rich. This wish looks liberal to me.

The populists want to preserve the existing social security and Medicare systems, while eliminating the budget deficit, which will impoverish their grandchildren, and the various trial-lawyer and cross-subsidy scams in the medical system. Again, a move towards nineteenth century liberalism rather than away from it.

The populists want to cut back the forest of regulation of economic life and the ability of the trial lawyers’ lobby and unelected bureaucrats to hold up much-needed projects and make infrastructure cost ten times what it should. Quintessentially a liberal project, removing obstacles to the free market that are as unjustifiable as Louis XV’s internal tolls on commerce, against which Adam Smith railed.

The populists want to end what has become nothing less than the outright scam of the global “climate change” movement, which uses a tiny and slow increase in global temperatures to impose infinite costs on everyone for no benefit to any but the regulators and control-freaks. The populists here are utterly, utterly in the spirit of nineteenth century liberalism. Smith, Cobden and even Gladstone would wholeheartedly have approved and so, from a different perspective, would Liverpool.

In the true sense of the word, the populists are reasonably close to liberal, while the Economist, the Financial Times and the Davos-ites, in cheerleading for the existing ghastly economic system, are at best not very democratic socialists and at worst tyrannical Marxists. Words need to be properly anchored to their original definition!

(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.)