Liberalism is Misunderstood

We recently published a book about capitalism in which we approve of the free market. This evidently makes us “neoliberals”. Yet, in the same book we advocate strong measures to reduce inequality including a wealth tax and universal basic income (UBI) – a government payment to all citizens regardless of their need or circumstance. We also advocate government leadership for technological innovation to mitigate climate change and withdrawal of support for anything that may be profitable in market terms. Therefore, we are perhaps anti-market, or worse, Marxists. Then again, we also argue that economic policy should be designed to increase personal liberty. This makes us libertarians.

We reached these policy conclusions, and many others, by clearly defining liberalism. Yet, because of the cavalier use of political labels, liberalism is equivalent to socialism in America, hardline heartless right-wingers in Australia, and produces confusion in the UK where voting for the Liberal Democrats may unintentionally lead to support for a government on either end of the political spectrum. No wonder that even some self-identifying liberals in these countries do not understand liberalism! So here, we want to clarify why we are liberals, and what it should mean for economic policy be to be one.

Liberalism

Liberalism is widely misunderstood, even in the United States where it was first used as a foundation for government. The principal purpose of liberal philosophy and of what we might call “true liberalism” is to optimize personal liberty or freedom (we consider these terms identical). Freedom is greater when there are no constraints on what you are able to do or to be. It results from removing obstacles to your free choice, and preventing anyone, including government, telling you how to use your freedom.

The US Constitution does not directly increase personal freedom. Instead, it prevents government from limiting it. For example, it does not guarantee the freedom of speech that is a central requirement of liberalism. It only states that “Congress shall make no law . . .  abridging the freedom of speech, or of the press.” In other words, the government is proscribed from limiting freedom of speech, but private corporations like Facebook and Twitter are not constitutionally prohibited from doing so.

In addition to political restriction on personal freedom, in most capitalist societies there also are economic constraints. High economic inequality not only incites the natural human demand for “fairness,” but also limits the choices—and therefore the freedom—of many while grossly expanding that of a few. Unemployment or under-employment and attendant poverty limit choice and therefore reduce freedom. Meanwhile, employers dictate how a large portion of our lives are spent.

The philosopher John Rawls wrote that fairness demands equal opportunity for all to better themselves. However, recognising that some people begin with more ability to choose their lives—from natural ability or inherited wealth—Rawls argued that the least advantaged should receive more opportunities to improve their lot. Although everyone should have a right, secured by government, to “life, liberty, and the pursuit of happiness,” economic inequality grants much greater opportunity to pursue happiness to the rich than the poor. For example, free public education is one way to provide equal opportunity for all. However, wealth can always buy a better education that brings greater freedom to choose and greater economic opportunity. If the state does not provide greater opportunity to the least advantaged, inequality and low social mobility become entrenched.

It is a curious anomaly that in the US liberalism is misunderstood on both the left and right of the political spectrum. The right is incorrect that liberalism is comparable to socialism or communism as practiced in Venezuela, Cuba, or the Soviet Union. Nor can it be an excuse for the state to regulate social interactions, to demolish capitalism, or significantly reduce economic competition. However, self-styled liberals persist in attempting to use government to instruct the people on what is best for them. Too often they demand an equality of outcomes—rather than of opportunities—that could easily be mistaken for socialism. On the other hand, liberalism doesn’t mean that the state should be shrunk until it can be drowned in a bathtub. The state always has a role to play in a liberal society, not least through economic policy.

Some Liberal Economic Policies

The 1942 Beveridge report recommended “a comprehensive policy of social progress” to provide personal economic security without stifling “incentive, opportunity, [or] responsibility.” Most rich countries have pursued this worthy goal by creating a welfare state designed to protect people against bad luck. If they lose employment through no fault of their own, they receive a basic stipend to prevent penury until they find new work. If they are ill or injured, free health care treats them. This is not socialism as it does not guarantee economic outcomes. It only guarantees that workers again have an opportunity to support themselves through work. We support UBI for a similar reason: it begins to balance the power of employer and employee. Government hand-outs during the COVID pandemic were a natural experiment of UBI that allowed workers to be more selective about their work and to push for higher pay.

We accept that a free market is the most efficient way to connect producers and consumers and set prices. Yet, a free market is not necessarily socially beneficial. Without the guidance of the state, it cannot meet all the needs of society. The challenge of a warming world changing climates is a clear example of such failure. Therefore, we advocate the state steering all its generous support of innovation toward the science and technologies likely to reduce production of the industrial wastes, like CO₂, that are changing the climate.

Many reject such proposals as harming the free market. However, nowhere are markets truly free. In a third of all industries giant corporations control more than 40 per cent of sales and as few as five such companies dominate all the world’s major industries. Their economic dominance gives them political power to fashion economic rules in their favour in even the largest economies. As controllers of their markets, they need to be regulated in the public interest not freed to decide what their social responsibilities constitute.

True liberalism can help solve many present problems. Whether it is inequality, national unhappiness, the overweening power of giant corporations, or climate change, liberalism correctly understood as growing personal freedom shows that the state is critical to channel market activity to socially beneficial ends.