In his recent book The Creation and Destruction of Value, Princeton University’s Harold James observes that the 2008 financial crisis resulted in more than the devastation of economic value. It also facilitated a collapse of values in the sense of people’s faith in particular ideas, institutions, and practices. Among these, few would question that economic Liberalism’s credibility was significantly undermined.
As time passes, more people may recognize that the financial crisis owed much to factors that had little to do with markets as such. As several scholars illustrated in the 2009 monograph Verdict on the Crash, the causes included regulations that encouraged irresponsible behavior by banks, imprudent central bank policies, not to mention outright collusion between politicians and government-sponsored enterprises such as Fannie Mae and Freddie Mac.
Unfortunately for promoters of free markets, knowledge of these facts will take time to counter the widespread perception that economic liberalism—manifested in financial liberalization, privatization, deregulation, and increased competition—contributed significantly to the 2008 crisis.
In the meantime, those committed to economic liberalism have a chance to rethink and reformulate the case for markets. Certainly the efficiency arguments for economic freedom will be revisited, refined, and rearticulated. But it’s also an opportunity for economic liberals to reexamine what is often a weakness in their position—the principled case for markets.
As David Henderson comments in The Changing Fortunes of Economic Liberalism (2001), economic liberals have encountered several recurring problems in advancing their views. First, unlike socialist and nationalist movements, economic liberalism has never acquired mass support. Second, Liberalism requires counter-intuitive reasoning (such as the notion that free markets create economic order) that isn’t easy to grasp and which doesn’t lend itself to sloganeering. Third, economic liberalism threatens many established interests. These include over-mighty unions, guilds, politicians who use welfare programs to create tame electoral constituencies, and businesses who like corporate welfare and resent competition.
Another obstacle, however, faced by economic liberals are the difficulties they often experience in making arguments not based primarily on efficiency and utility. Even the most econometric economist would probably admit that man does not live by efficiency or utility alone. Yet the number of economic liberals willing to stray outside this territory when arguing for markets remains small. The truth is that economic liberalism has long been largely detached from “thick” conceptions of human flourishing and too often unnecessarily associated with rather flimsy notions of the good.
One reason for this is that free marketers have invested enormous intellectual energy in policy debates. Policy engagement was critical to the successful economic reforms that saved many Western countries from the stagflation into which they collapsed in the 1970s. But the cost may have been neglect of the deeper arguments that intellectually nourish the very same policy positions.
This does not fully explain, however, why many economic liberals are tongue-tied at best when it comes to principled defenses of markets or, in some cases, positively hostile to such reasoning. Surveying the literature on this subject, one most commonly encounters unapologetically utilitarian arguments. In crude terms, these amount to the following: free markets maximize economic utility; hence they are morally superior to inefficient non-market arrangements.
Examining the historical record, there’s no question that economic liberalization has helped lift ever-increasing numbers of people from poverty. Millions of contemporary Indians and Chinese can attest to this. Some conservatives—especially those presently exploring non-socialist alternatives to markets—are far too quick to dismiss these realities. Nevertheless, if humans are creatures with more than material interests and aspirations, then economic utility-maximization arguments are necessary but insufficient in building a normative defense of markets.
More thoughtful economic liberals have long recognized this. Some, such as John Stuart Mill (who eventually moved away from economic liberalism), tried to ground economic liberalism upon a type of utilitarianism. But as scholars from a host of different philosophical schools have noted, all forms of utilitarianism are deeply flawed because they assume the impossible: that humans can somehow foresee and weigh all the known and unknown consequences of particular actions or rules.
Then there are appeals to “progress.” This was central, for example, to Friedrich Hayek’s case for economic liberty. Progress, Hayek maintains, does not normally occur through people seeking to resolve problems in a coerced or collective manner. Progress comes when individuals freely act upon their abilities and particular knowledge of their unique circumstances while pursuing their own chosen purposes.
That Hayek makes an important point about economic development is not in question. Yet Hayek has surprisingly little to say about the content of progress. In his famous Constitution of Liberty (1960), he concedes that progress “in the sense of the cumulative growth of knowledge and power over nature, [progress] is a term that says little about whether the new state will give us more satisfaction than the old.” Such a question, Hayek comments, is “probably unanswerable.” But for Hayek, this is irrelevant. More important is “successful striving for what at each moment seems attainable,” or “movement for movement’s sake.”
This response leaves unanswered some very important questions. Towards what are people moving? What are we becoming in the process of doing so? In many responses to such queries, one detects Mephistopheles’ retort in Goethe’s Faust: “The future creates what is moral.”
Other economic liberals have employed social evolutionary arguments to bolster their position. These may be found in some of Hayek’s works and some contemporary libertarian circles. The market, it is held, reflects a type of natural selection process with which humans are wrong to interfere.
The innovation and competition encouraged by markets does of course gradually render many technologies (e.g., typewriters) and industries obsolete. This “creative destruction” is, as Joseph Schumpeter noted, how entrepreneurship improves aspects of people’s quality of life over time. But the problem with evolutionary arguments is that they cannot provide a principled reason for anything. Moreover, if, as a matter of positive science, societies simply evolve, then evolutionarily-inclined economic liberals cannot morally object to governments “evolving” to assume increasing control over the economy. For who could claim on evolutionary grounds that there is something intrinsically wrong with ever expanding government?
If this analysis is accurate, then economic liberals need to consider non-utilitarian, non-progress-for-the-sake-of-progress, non-evolutionary, principled defenses of market economies. One such argument is that economic liberty and its associated institutions provide a bulwark against unwarranted expansions of state power and thus helps minimize undue coercion—a vital prerequisite for human flourishing, moral or otherwise.
A second is that free markets have proved remarkably successful in allowing people to tackle the problem of scarcity in a peaceful manner that encourages people to consider the economic needs and wants of others. In short, markets address an issue which, if left unresolved, will facilitate tremendous social disorder. The alternatives are command economies, economies centered on theft, or economies based on altruism. Reason and history tell us that neither command nor theft-based economies are options. Likewise Aristotle’s and Aquinas’s insights that common ownership produces social tension and that people treat privately owned things better than they treat things owned in common suggest that there are limits to altruism’s ability to serve as the primary principle of economic organization in complex societies.
These are reasonable positions that illustrate how free markets contribute to key non-economic dimensions of the common good, but economic Liberalism’s case would be further bolstered if its advocates were willing to expand their arguments about how markets facilitate moral growth. The manner in which entrepreneurship fosters and requires virtues ranging from prudence to courage is one example. Another is how free trade and exchange can promote forms of human association with intrinsic value beyond their economic dimension. One could also underscore the opportunities commercial societies provide to pursue a rich variety of moral goods in ways closed to many people in pre-commercial orders.
Some economic liberals, however, resist reasoning based on more –than material concepts of human flourishing. Sometimes this reflects a utilitarian or positivistic outlook that struggles to acknowledge human life’s non-material aspects. Other economic liberals worry that attention to the good as such opens the door to undue state coercion in the name of encouraging human moral development.
In this regard, modern advocates of economic Liberalism might consider reexamining elements of the pre-nineteenth century philosophical roots of their thought. These partly lie in the early modern natural law tradition associated with people such as Hugo Grotius and Juan de Mariana. Their market-orientated economic writings are infused with a concern for the good life. The most important philosophical tradition that undergirds the moral case for economic liberty, however, is the Scottish Enlightenment
Too often primarily interpreted through the lens of the skeptical proto-utilitarian David Hume, the Scottish Enlightenment includes figures such as Gershom Carmichael, Francis Hutcheson, Lord Kames, William Robertson, and Hugh Blair who understood and supported the economic case for commercial societies but saw no reason why this should be separated from robust accounts of the good. This is equally true of Adam Smith. Modern Smith scholars such as James R. Otteson have illustrated that the author of the Wealth of Nations was deeply concerned with humanity’s moral growth in the context of emerging market economies in ways that went beyond utility maximization.
We live in an era in which pressures to expand government intervention in the economy are enormous. Paradoxically, however, successful long-term resistance to such trends may require economic liberals to resist the temptation to invest their energies in activism. As Harold James states, “The only way of dealing with a collapse in values is to rebuild values.” This suggests that economic liberals should direct considerable attention to the difficult, long-term task of rebuilding a powerful case for economic liberalism based as much on full-bodied conceptions of the good as it is on sound economics.