Classical liberalism supported the notion that society as a whole would begin to prosper as the level of personal freedom or autonomy increased. Individuals left to their own devices to pursue their own goals, limited only by known and universally applied prohibitions against harming the same freedom for others, would produce superior results for all, rather than allowing one authority to dictate terms to everyone. John Locke (1632-1704) popularized the concept of natural rights and freedom. Human freedom meant being free from as many constraints as possible. For the following discussion liberal describes the view that humans are rational beings who should be left, as far as possible, to pursue their own purposes without compulsion or constraint. The word first appears in the English language in the 14th century and refers to free men as distinct from those who are not free.
Isaac Newton (1642-1727) discovered the natural laws of motion which provided the final piece to the puzzle to explain why the Earth revolves around the sun. Newton was aware of specific problems in the solar system that his laws did not explain which included the fact that Saturn was moving away from the sun while Jupiter was moving closer. To account for movements not able to be explained by his formula, Newton proposed the hand of God to guide the planets in various circumstances – providing long-term stability to the universe. Adam Smith’s efforts to discover the general laws of economies were directly inspired and influenced by the example of Newton’s success in discovering the natural laws of motion. Smith sought the natural law and harmony in nature in the economic sphere. Locke and Smith assumed an innate morality to support their systems of minimal government.
The Wealth of Nations (1776), Smith’s classical introduction to economics provided an ‘ethical’ rationale for the capitalist system explaining, “every individual necessarily labours to render the annual revenue of society as great as he can. He generally, indeed, neither tends to promote the public interest, nor knows how much he is promoting it… he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which is no part of his intention.” Simon-Pierre Laplace (1749-1827), a French mathematician, is recognized for his contributions to astronomy and statistics. He observed data about the actual position of planets to predict the motion of planets and was able to solve the error in Newton’s observation of planetary movement.
Friedrich Hayek (1889-1992), who admired Adam Smith and built on the ideas of his teacher Ludwig von Mises, explored the truths of the Austrian school. The Austrian school sees society as a complex of human interactions, in which prices act as signals for human behavior. The diversity of goods produced by many individuals is richer and more useful, ensuring greater and more widespread wealth than any system which attempts to control from the centre. A diversity of different attempts to predict future needs is what guarantees innovation. Market pricing transmits information about preferences and about relative scarcities. Profit is the signal which demonstrates that the entrepreneur is doing the right thing for people he cannot possibly know. Price is therefore the language of the complex or extended order of modern societies.
Hayek published his book The Road to Serfdom in 1944 with new ideas, sounding the alarm that the West was rapidly abandoning its inheritance of individualism. He claimed there was a slow process under way in which important personal liberties were being extinguished by the state. He looked backwards at the awful history of the first half of the 20th century, musing upon the nature of the enemy. With the success of his book he decided to create a movement connecting liberals scattered around the world who held positions in academic life. This society met in Mont Pelerin near Geneva in Switzerland most years since the end of World War II. They discussed the nature of liberalism and how it could be brought back from its decline. Milton Friedman was one of the attendees.
By the 1970s the Western world had to face a devastating new problem: inflation. It took a crisis to bring new ideas into government, and that was the price-inflation that followed the 1973 Arab-Israeli war. By the end of the 1970s both Ronald Reagan and Margaret Thatcher were seeking office with new liberal economic policies. These policies were adopted to deal with economies that were getting out of hand. Thatcher was elected to parliament in 1959, became leader of the Conservative party in 1975, and in election of 1979 became Prime Minister of Britain. Her administration was associated with the destruction of Britain’s traditional industries through attacks on organizations such as miner’s union, and massive privatization of social housing and public transport.
Martin Anderson (1936-2015), an economist and a special advisor to Richard Nixon 1969-1971, was instrumental in bringing into government Alan Greenspan, who like Anderson was an adherent of free-market philosopher, Ayn Rand. In 1971 Anderson joined the Hoover Institution, became the architect of Reagan’s new liberal economic policies. He identified five key elements to the policy: (1) reduce the growth of federal spending, (2) reduce taxes, (3) change and reform government regulation, (4) ensure a more stable monetary policy, (5) introduce stability – do not waver from the policy, keep it constant so that people get used to it and gain confidence in it. This policy was the basis of supply-side economics which was later rebranded trickle-down economics – linking the welfare of working-class Americans directly to the prosperity of the rich.
Under the patronage of Ronald Reagan the liberal revival enjoyed some successes. To counter the Keynesian state planning to address unemployment, Milton Friedman developed the counter-notion of a ‘natural rate of unemployment’. That is the rate to which an economy naturally reverts unless it receives greater and greater fiscal stimuli and, in consequence, rapid and ever increasing inflation. Under Federal Reserve Chairman, Paul Volcker there was severe tightening of the interest rates. People were soon paying in excess of 15% on mortgages. The peak of the mild recession occurred November – December 1982, when the nation-wide unemployment rate was 10.8%, highest since the Great Depression. This bitter medicine cured the rampant inflation in the US.
The tax cuts came in 1981, Reagan’s first year in office. The tax results came up short of measuring up to the supply-side rhetoric. For starters, the tax cuts busted the federal budget. The federal deficit ballooned from 2.7% of GDP in 1980 to 6% of GDP in 1983, the largest peacetime deficit in history, and was still 5% of GDP in 1986. Tax revenues did pick up, especially after the 1983 payroll tax increase kicked in, reducing the deficit somewhat. Worse yet, most low-income taxpayers missed out on the Reagan tax cuts. The bottom 40% of households paid out more of their income in federal taxes in 1988 than they had in 1980. Increases in the payroll taxes that finance Social Security and Medicare, which made up a far higher portion of their federal tax bill than income taxes, swamped what little benefit these taxpayers received from lower income tax rates. In true trickle-down economics, the benefits of productivity and innovation would be shared fairly by all stakeholders, not just the select few with authority to dictate compensation and how the profits of a company are distributed.1
Milton Friedman explained the failure during the first term to reduce the size of government, “It is easier to bring that understanding to the world of ideas than it is to translate into the world of practice.”2 The problem shifted from reducing the size of government to a redistribution problem that came with the welfare state. After the 1984 Ronald Reagan landslide election, his second term set in earnest to dismantle the welfare state following the principles outlined in Charles Murray’s 1984 book, Losing Ground, described by the New York Times Review of Books as a “persuasive . . . new variation on Social Darwinism.” Charles Murray is a political scientist who is presently a scholar at the American Enterprise Institute (AEI). AEI is a conservative think tank founded in 1943 to promote the advancement of free market economics. AEI supported a 1980 study on the emerging ‘social cost’ arguments against smoking in support of the tobacco industry, and more recently supports various studies that cast doubt on global warming.
Albert Einstein proposed his general theory of relativity in 1915. Eddington’s observations and photographs during a solar eclipse on the African island of Príncipe in 1919 effectively confirmed Einstein’s predictions of a slight shift in starlight caused by the gravitational field of the Sun – exactly the results predicted. Hayek’s work involved recruiting more believers in liberalism to the cause. Hayek claimed that economic theories can, “never be verified or falsified by reference of facts”3. Friedman interpreted his version of trickle-down economics to the politicians. It became a fundamentalist (i.e. “must not and hence can not be questioned”) belief: the benefits of trickle-down economics of tax cuts for the rich create well-paying jobs for the middle class. The theory has a function – serving the interest of financial capital and globalized elites in the redistribution of wealth upward.
Decision-makers on Wall Street with extreme individualism and a sense of entitlement chose not to apply critical thinking, but to intentionally take advantage of people, which led to the meltdown of the economy in 2008. Many in the middle class saw their comfortable retirement, their home equity, and their dreams destroyed. With rising financial integration, world economic growth has lessened in the last three years. The threat to individual freedom and opportunities to pursue one’s goals today comes not from political oppression, but from economic failure. Because of growing disillusionment and anger students and workers are voting for leaders outside the mainstream party candidates during the 2016 presidential primary elections – the consequence of being left behind by soaring inequality and the failure of government to deliver.
1 Miller, John. Ronald Reagan’s Legacy. http://dollarsandsense.org/archives/2004/0704miller.html
2 Graham, David and Peter Clarke. (1986) The New Enlightenment: the rebirth of liberalism. MacMillan London p. 1-30.
3 A Critique of the Austrian School of Economics. http://www.huppi.com/kangaroo/L-aussm.htm