Thursday, January 10, 2008

Free markets and their discontents (or Adam Smith versus Tim Farron)

This Saturday I’m bound for the Liberal Democrat Manifesto conference at the LSE, and as part of my preparation I have been trying to read Reinventing the State, edited by Duncan Brack, Richard Grayson and David Howarth, which was billed last autumn as a sort of riposte to the Orange Book.

I have to confess to finding such things heavy-going. Collections of essays by practicing politicians are rarely an exciting read, usually pulling their punches. Although the Orange Book was spun (and counter-spun) as a statement of intent by those wishing to move the party to the right, it was actually quite a dull read, with only a couple of chapters saying anything that might frighten the horses.

A copy of Reinventing the State has been sitting pristine and unopened on my bookshelf for some months, a testimony to my inner battle between support for Lib Dems thinking and writing about policy and finding at any given time that other reading matter is a little bit more appealing. To force my way through it, I have deliberately chosen the section on economics, and in particular the chapters by Paul Holmes and Tim Farron, partly because they are those that I am most likely to disagree with. In doing so I think I have learned something about the Lib Dems and economic policy, although not quite what the authors intended.

Paul Holmes’s chapter is entitled ‘The limits of the market’. In some ways it suggests to me that my own views and his are not so far apart as I thought. Holmes accepts the argument of Francis Fukuyama that the free market has ‘succeeded in producing unprecedented levels of material prosperity’. But his entire article appears predicated on the assumption that there are people in the political mainstream (possibly in the Liberal Democrats) who believe that there are no limits to market forces and that all aspects of human society can be left safely to the free market.

I doubt, however, whether there are any Liberal Democrats, even David Laws, Andy Mayer et al, who would not accept the notion of market failure and support the need for state intervention in order to achieve social or political objectives. There may well be disagreement about exactly when and how the state should intervene: as provider or enabler, for example; and about how public services should be held to account: by more power to local councils or more choice for citizens or both. But I doubt whether anyone who believed absolutely in an unfettered free market would think of joining the Lib Dems, and I don’t know of anyone in the party who fits that category. It seems to me that the ‘Beveridge-ist’ argument within the party is aimed at fighting an ‘economic liberal’ phantom – a caricature that doesn’t really exist.

This is confirmed by the comments of both Holmes and Farron about that godfather of free markets, Adam Smith. Holmes describes Smith as believing that ‘the market rules unchallenged’. Farron is more forthright still, commenting:

Adam Smith was a great economist and Mrs Thatcher’s hero. His strong belief was in the inbuilt checks and balances within the free market and that any imperfections in the market would always be rectified by the ‘invisible hand’. This is of course a load of old guff.

To which he then adds:

Smith was right to observe that the market needs a hand, but it has to be the highly visible hand of the community or state.

It’s hard to know exactly what to make of this. Some might say that Farron has here cut through Adam Smith’s sophisticated argument with a devastating five-word rebuttal. If only the Sage of Westmoreland and Lonsdale had been around 200 years ago then the Wealth of Nations would have achieved a deserved place in the dustbin of history and the world would be better off for it.

Alternatively one might point out that Adam Smith did acknowledge the existence of market failure and the need for the state to intervene. He argued in favour of state activity for the purposes of national defence, provision of a system of justice and investment in public infrastructure. We should also remember that Smith argued in favour of higher wages for the poor and for universal education. He wrote in what was essentially a pre-capitalist era and that his arguments in favour of free markets were to a great extent directed at tackling monopolies, special privileges and attempts by merchants and employers to keep wages low and prices high.

It is for these reasons that Smith’s legacy is contested and can be an inspiration as much to the liberal centre-left as to the Thatcherite right. One is left wondering whether Farron has actually read anything by Adam Smith or even bothered to consult a standard reference book to find out what he actually wrote. Once again, we are dealing with a caricature of free market arguments, based on a misunderstanding of their origins. And yet Holmes, if not Farron, does acknowledge that the free market does bring benefits to society.

Why this need to set up a free market straw man to be knocked down? I think the reason is that the dominant political discourse over the past century has been between the collectivist, socialist left and the capitalist right. Thatcherites and Reaganites stole the rhetoric (although not necessarily the reality) of the free market. Since most, if not all, economically successful societies in the past century have been based on some form of market economy, there is little alternative for a serious political party than to support the free market. Yet it is tainted as a ‘right-wing’ notion and we are a left-of-centre party. So our support for market economics is in some eyes a rather embarrassing fact, something to be mentioned reluctantly, if at all, before passing on to other things. Those who talk too loudly and enthusiastically about the free market are to be regarded with suspicion – as neo-Thatcherites.

This then reduces debate within the party about economic policy and public service reform fears about right-wing conspiracies. All of which is a pity, for a number of reasons. First, that as a serious party we have to be concerned with how to generate the wealth that we want to use for socially-desirable objectives. Secondly, because market economics do have a progressive as well as Conservative pedigree and Liberals are entitled to a share of the credit for their success. Most importantly, name-calling and conspiracy theories stifles debate and reduces the quality of thinking within the party about both economics and public service reform.

So let us try to find what we can agree on, which I think is something like as follows. Free markets are pretty much proven to be the best way of generating wealth and prosperity. But if left unfettered they can and do have socially damaging consequences, benefiting the better-off rather more than the poor. So there needs to be government intervention in many aspects of social policy to ameliorate and overcome market failure. In both our economic and social policy we as Liberals should prioritise improving the lot of the poor, the excluded and the disempowered in order to create a prosperous and equitable society.

If we can agree on that, as I hope most Lib Dems could, then we can debate seriously, and without name-calling, exactly how and when solutions based on the market or state intervention, decentralisation of power to local authorities or greater choice for consumers, are most appropriate in achieving Liberal objectives.


Leo said...

It seems almost as if the parliamentary party is now ashamed of the history of our party - it was Gladstone, Palmerston and the other great Liberals who fought in the Commons for Free Trade, as opposed to the protectionist policies of the Conservatives. The repeal of the Corn Laws, for example, was a landmark acheivement in the history of British liberalism.

It seems as though the party is trying to sound more left-wing than it actually is in its policies, in an attempt to win over Labour voters. Liberal economics have triumphed in the battle of ideas, so why are we now abandoning them in favour of social-democratic rhetoric about our distrust of the market?

Tristan said...

I do wonder how people can say with certainty that free markets produce negative social consequences - there's never been a truly free market system...
I also wonder how much market failure is invoked as an excuse for government action and intrusion - most market failures are quickly dealt with by entrepreneurs (in a relatively free market anyway).

In my reading of it, the history of the 20th Century (especially post war) was also a battle between the socialists on the left and the Tories on the right - socialism being the combination of liberalism and Toryism - liberal aims with Tory methods.

The Thatcher adopted some liberal methods to try and shore up Tory aims and the US conservatives reacted against socialism by trying to keep the past through toying with liberal ideas (the anti-New Dealers, the right then readopted the old methods of the right, whilst a few flirted with the old liberal ideas).

The Liberals meanwhile tried to be liberal when it was very unfashionable. It looks like it was David Steel who finally took the Liberals away from liberalism in the economic sphere.

Now we have a situation where the liberal economic ideas are perceived as entrenching privilege and harming the poor when they are ideas which aim at breaking down monopoly and privilege and helping the poor.

Gavin Kennedy said...

Farron lumbers Smith with ideas he never had, allegedly believing that “any imperfections in the market would always be rectified by the ‘invisible hand’ ” and then Farron has the cheek to describe his own version of Adam Smith as ‘a load of old guff’.

Farron’s remedy?:

‘the highly visible hand of the community or state’.

Oh, dear. I would have thought that a Liberal would be wary of proclaiming the virtues of ‘the highly visible hand of the community or state’, after the experiences of the Soviet Commissars and the Nazi Gaulieters, not to mention that ‘highly visible’ tanks of Tiananmen Square, or the ungentle hands of the Taliban.

I concur with Iain Sharpe’s assessment question:

‘One is left wondering whether Farron has actually read anything by Adam Smith or even bothered to consult a standard reference book to find out what he actually wrote.’

Andy Mayer said...

To answer your question Iain I can think of no liberal democrats who don't agree market failure exists and can be a good reason for intervention. It's hard to imagine there are many Conservatives or members of New Labour who would disagree with that either.

We have had more of a problem in the party in respect of accepting there is such a thing as state-failure, particularly at the local level. Nick's speech today I think begins to address that weakness.

It looks then as though we're moving to a more balanced position now where we consider both market and state-failures as tests for intervention and exit.

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