Why I stopped believing in Economic Liberalism

“Don’t stop… Believing…” Pardon my bad sense of humor. If you have ever read this blog, or talked to me in person, you are probably not thinking about that song right now, but rather something along the lines of “wait, stopped? When did he start believing in Economic Liberalism?”

Well, despite my criticism of privatisation and deregulation, I always had a soft spot for proponents of a free market. The reasoning is very simple: Their theories about and criticism of overproduction, mismanagement and clientilism in state-dominated economies offered powerful explanations for the weakness of many countries, be it in the socialist bloc or in capitalist countries with massive socialist policies.

Thatcher was responsible for policies that greatly damaged the social strucure of the UK; however, she was also facing a broken economy, with an inflation of up to 25 percent per year, and a, compared to the inflation, non-existant economic growth. Stagflation (stagnant economic growth combined with high inflation) caused the revival of liberal economic policies and started an era of high deregulation and privatisation, and reforms were indeed needed. Only a stagnant society can afford stagnant policies, and such a society will not last very long.

However, proponents of the market nowadays have a hard time offering solutions to real problems.

mixing up concepts

My main problem with any kind of privatisation policy is not giving away a company into private hands; that can indeed benefit people. Having a lot of bureaucracy in a de facto monopoly can not be optimal for a sector. However, and this is important, privatisation is not a goal itself; it is a tool to ensure 1) competition, 2) flexibility and 3) transparency. If you have a big provider, such as telecommunication, but that provider not only has no competitors, but it also gains a lot of state subsidies, then it will be fairly slow to adapt to a new mobile and online environment. An open market would allow for smaller companies offering cheaper, shorter contracts and more bargaining power to the consumer.

But selling said telecommunication provider to the third biggest provider globally will change nothing. It will only get rid of the state, which kind of had to care about the population. The new company still won’t face any competition, it will not be transparent, it will only be more flexible in screwing customers over and maybe negleting certain unprofitable areas when it comes to coverage.

So yes: Privatisation can be good. But only when it creates a more efficient market, not if its sole purpose is privatisation itself. Selling state property just to make some quick money (hello, Greece), will not improve anything for the public.

Similarly, deregulation is supposed to make investment easier. Sounds good, right? Complex laws that no one can understand are not good for enterprise, and they create inequalities: An existing company, with experience and enough money to hire good lawyers, will have a better time at handling regulations than a start up with limited funds and no experience.

However, again, deregulation in itself is not good. It is another tool to achieve investment. Or would you want to live in a country without any regulations, whatsoever? Imagine companies putting their waste into public water, imagine health hazards becoming a daily issue as every consumer has to find out on their own if something might cause cancer, just to avoid some trouble for companies by regulating usage of such materials.

what is really important?

Another, similar problem that alienates me from this kind of thinking: There is no way of saying what a “good” economic indicator should be. Yes, privatisation may increase GDP growth, but that growth might be based in sectors that do not create any new jobs or income for workers. So poverty could be increasing, while the GDP grows. A more current example: The UK has seen strong economic growth under the current Tory government, but a very limited increase in state income. Balancing indicators such as tax revenues, economic growth, average income and unemployment is important for any realistic politics.

Economic liberals seem to usually end up tackling this in two ways. The economic scholars might end up trying to optimize numbers. What, unemployment is down? Let’s improve the statistic! Love for such indicators, however, may cloud judgement when it comes to usefulness of these indicators. Unemployment statistics vary greatly across countries, depending on how you define unemployment and how reliable the data is. Remember: economic performance alone is not enough: It is about the greater public good, and that can only be measured by a mix of different statistics, something the data-nerd might forget while concentrating on his favorite indicator (and the real scholars will write way too complicated articles for every day politics).

The other stereotype would be the capitalist entrepeneur. While it is great to have entrepeneurial experience among politicians, it may also cloud their judgement about what the public good may be. I strongly believe that Republicans, who say that taxes are bad for the people, actually believe in that; and it is true: Companies will prosper without taxes. At least while the infrastructure is still good enough, even though the state can no longer afford to maintain is. A slight change in unemployment or inquality might not seem like much when you never experienced poverty; but for the population, this can have consequences such as having to choose between a doctor’s appointment and food.

role of the state

Not even Adam Smith thought the state would not be needed; and during his time, there was no real state to begin with. Nowadays, with the state meddling with every aspect of life, it seems ridiculous to be against it.

Yes, abolish taxes, regulations and so on: Companies will love that for a year or two. And then infrastructure will start to disappear, companies will be forced to be ruthless (even though they might not want to, but hey, if that other company uses cheap, toxic materials, we have to do, too…), and overall, economic growth cannot be maintained.

The state is responsible for some sort of redistribution (oh no, bad word!): It will collect ressources and invest them. That is a core principal of modern states and modern capitalism: ressource mobilization through nation states. If the state gives up revenue, it hopes that this revenue will be reinvested, creating economic growth. However, that only works under specific conditions. Look at the eurocrisis: If companies do not want to invest, it doesn’t matter how cheap money is, they will not do it.

However, it the state uses that money reasonably, by investing in key areas (military, new technologies such as green energy and IT, agrarian reforms), it might have a bigger impact on the economy. Similarly, welfare programmes can be good for the economy as well. First of all, these improve some indicators such as poverty. But additionally, they increase consumption. The poorest people spend the biggest share of their income without saving it. That, in turn, can increase production and so on. Yes, inflation is an issue, but that is why socialism is not the answer either; it is a mix of policies, depending on the needs and the situation.

Socialists have realised that, and tried to combine market mechanisms and social issues, having learned from the failure of socialism and their own socialist policies in the post-war era. Economic liberals, however, are still stuck in the 80s and look forward for a new Reagan or Thatcher, ignoring the problems with their policies and the historicity of their approaches.


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