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The world has always been an uncertain place, and this is no less true today. After the collapse of communism in the 1990s, there was confidence that democracy had won and the market economy had shown its superiority to government planning. This is no longer the case, with the rise of populism, a rebirth of nationalism, and a reawakened interest in socialism. Many seem to think liberalism has failed again and needs to be replaced.
But what is liberalism, and has it failed? With its August 4, 2018, issue, The Economist magazine is beginning a series of articles that will run over the coming weeks on the continuing relevancy of a variety of liberal thinkers. It prefaces the series by saying that what stands out about liberalism is that it is “pragmatic.” That is, it is a “big tent” political philosophy that can include both Austrian economist F. A. Hayek and John Maynard Keynes, libertarian Robert Nozick and a progressive philosopher such as John Rawls, and older liberal voices such as John Stuart Mill.
Sorting Out the Meaning of Liberalism
Liberalism can emphasize the efficacy of competitive markets, The Economist says, but incorporate the interventionist-welfare state. So what binds all these diverse “liberal” thinkers together, asks The Economist? Liberalism is basically defined in negative terms: first, against any concentration of power that threatens control and domination over the many by a few, whether in the marketplace, in the political arena, or in the media; second, against the “tyranny of the majority,” which would restrain the free thoughts or actions of minorities, including the individual; and, third, lack of confidence in “progress,” the idea that tomorrow can be better than both yesterday and today, which opens the door to demagogues and political opportunists pursuing power by promising to solve people’s problems if they get in control.
The Economist asks liberals not to despair, but to roll up their sleeves and find alternatives to the appeal of nationalism, authoritarianism, and populism, the challenges facing the existing market liberal order.
Liberalism’s Eclipse in the Shadow of Totalitarianism
The question of what liberalism means in the face of collectivist and statist challenges in the world is not new. One of the greatest of these challenges certainly arose in the 1920s and the 1930s, with the rise of communism in Soviet Russia, fascism in Italy, and National Socialism (Nazism) in Germany. All trends at that time seemed to suggest that supporters of these variations on the totalitarian theme were on “the right side of history.”
It appeared that the liberalism of personal freedom, limited government and rule of law, and private property with competitive free markets was in its eclipse. Freedom’s advocates were out-of-step voices from an irrelevant past. By the late 1930s, the intellectual remnants of the classical liberal tradition were attempting to understand both how this turn away from human liberty and fairly limited government had come about, and what their response should be to stem the rising tide of collectivism and to bring about a liberal revival. (See my article “The Danger of Totalitarian Planning, Past and Present.”)
Walter Lippmann’s The Good Society
One of the most notable events in that liberal quest at the time was a conference held in Paris, France, 80 years ago during August 26–30, 1938. It brought together some of the notable proponents of market-oriented liberalism in that era. It had been inspired by the publication in 1937 of Walter Lippmann’s An Inquiry Into the Principles of the Good Society.
Walter Lippmann (1889–1974) was one of the most well-known political and social commentators in the United States, through a long list of books and essays in some of America’s leading journals and magazines of opinion. While his political views had moved in a variety of directions in earlier years, The Good Society was an eloquent and persuasive restatement of the liberal case for a free society in the context of the dangers of political totalitarianism and economic collectivism in its various existing forms.
In addition, he proposed an agenda for reviving the appeal of and communicating the relevancy of the liberal tradition in the face of these threats to human liberty around the world, including the United States. He set aside the laissez-faire tradition of unregulated markets, and in its place called for interventionist policies to tame reckless and antisocial capitalism, and for introducing tempered welfare-statist policies to mitigate the type of human hardship experienced during the Great Depression.
The central idea was to resist collectivist central planning, which Lippmann said, following the arguments of such Austrian economists as Ludwig von Mises and Friedrich A. Hayek, would only bring economic chaos and the destruction of human liberty. Rational economic decision-making and complex social coordination of multitudes of people was only possible through competitive market prices to balance supply and demand and direct enterprises into the manufacture of the goods and services the consuming public desired as expressed in their demands for products, while producing them in the most cost-efficient manner.
Totalitarian Collectivism Meant the End to Liberty
Wide or total control of the economic affairs of any society by its government threatened the loss of liberty in virtually every corner of human life. When government commanded and controlled all economic activity, as was essential in a centrally planned society, every individual’s fate was in the hands of that government: where and at what you worked; access to everyday goods and services dependent upon government production decisions, and how and to whom to allocate them; political determination under the plan as to what books and newspapers to print, and what movies to produce and artistic performances to support and allow to be put on; where, when, and for what purpose to be allowed to travel domestically or abroad; and what forms of recreation and entertainment to be supplied to members of the collectivist society.
All of these things and almost everything else a human being would want to live and be happy depended upon what those in political power deemed socially useful and necessary as reflected in the content of the central plan. The collectivist economy was the ultimate monopoly, with no escape from its tight and terrible grip. The government was master; the individual was the servant and even the slave. The comprehensively planned society was a prison society with the citizens as the inmates.
Nor was any of this an exaggeration when the centrally planned society in practice was observed every day in Soviet Russia, Nazi Germany, and fascist Italy. This was the reality that horrified these market-oriented liberals of the 1930s.
The Walter Lippmann Colloquium
So in those final days of August 1938, a group of friends of freedom gathered in Paris to discuss the failures and future of the open and free liberal society in the shadow of totalitarianism over much of Europe east of the Rhine. The French liberal economist and social philosopher Louis Rougier organized the conference. (On Louis Rougier’s contributions to liberal political and economic thought, see my article “The Political and Economic Mystiques of State Power.”)
Among the attendees were Raymond Aron, Louis Baudin, John B. Condliffe, Friedrich Hayek, Michael Heilperin, Walter Lippmann, Etienne Mantoux, Ludwig von Mises, Michael Polanyi, Stefan Possony, Wilhelm Röpke, Jacque Rueff, Alexander Rüstow, and Alfred Schutz. While some of their names may no longer be well-known today, in the 1930s they were among the leading advocates of market-oriented liberalism in Europe.
The proceedings of their discussions and debates at the various sessions of the conference were published later in the autumn of 1938 in French under the title Colloquium Walter Lippmann. The conference has often been referred to as an intellectual watershed that helped inspire the post–World War II revival of political and economic liberalism as seen in the formation of the Mont Pelerin Society in April 1947 under the leadership of Friedrich A. Hayek.
But only now, 80 years after these political and economic liberals met, have the proceedings in English appeared. In fact, two translations of the conference, translated and edited by different scholars, have now been published under the title Walter Lippmann Colloquium. (A notable difference is that one sells for $119 and the other for $12.)
The sessions asked: Was the decline of liberalism due to problems within the philosophy itself? How did the decline in liberalism relate to the war economy, to economic nationalism, and to the “social question” of welfare-state safety nets? What were the psychological, sociological, political, and ideological causes of liberalism’s eclipse? What should a new agenda for liberalism be? And finally, what were the political and practical problems facing a revival of liberalism?
Monopoly: Caused by Markets or Government?
On the first question, as to whether liberalism’s decline was due to factors relating to liberalism’s own response to economic developments, there was a wide consensus that modern industrial society had seen a tendency for a concentration of manufacturing and economic control that was unconducive to a more open and competitive economy.
But what was the cause of the concentration? Here opinions differed. Some attendees considered this was often due to “natural” forces at work not harmful to economic freedom; others reasoned that this called for government intervention to limit it; and still others saw any tendency for monopolization or cartelization as being due to government interventions that fostered it or even forced businesses in this direction.
In this instance, Ludwig von Mises was among those most vocal in finding the hand of government intervention in any such tendencies, the answer for which was getting government out of this intervening business and letting markets operate freely, including in the international arena with freedom of trade.
The War Economy: Markets or Planning?
In everyone’s mind at the conference was the coming of a new world war started by Nazi Germany. This new war was not a matter of if, but only of when. Did a war economy with the needed economic mobilization mean the end to a liberal market economy? Interestingly, many of the discussants argued, it need not. Central planning for war would end economic freedom and weaken the efficiency of fighting a war. But if governments raised the needed funds through taxation and borrowing, but primarily left the reallocation of resources and manpower for the war effort to market prices and profit opportunities, a successful war could be fought against the totalitarian nations and preserve the vibrancy of private sector incentives and productivity.
Economic Nationalism: Cultural Tendency or Political Opportunism?
The rise of economic nationalism confused the participants. The harmful consequences of it — trade barriers, foreign exchange controls, subsidies to stimulate domestic production of goods that could be bought less expensively from abroad, sacrifices of personal freedom and standards of living — were all agreed upon. But why it emerged was controversial. Was it fears about foreign influences, was it the presumed negative effects of foreign competition on domestic industry and employment, or was it misguided rationales for domestic protectionism and interventionism due to wrongheaded thinking and special interest pandering? The session ended with no answer, but only agreement on economic nationalism’s harmful effects.
Social Problems and the Interventionist State
The experience of the Great Depression had already left its mark on people’s thinking by the end of the 1930s. Two issues arose in this session’s discussion: the instability the business cycle imposed on people’s lives and livelihood; and whether even a liberal society needs to ensure minimal standards of living for all under some forms of social welfare programs.
Here the fear was that “the masses” would no longer tolerate the insecurity of unemployment and uncertain income that a relatively laissez-faire economy threatened them with. Ludwig von Mises and the French economists Jacques Rueff and Louis Baudin, especially, emphasized that any such instabilities and uncertainty were due to monetary mismanagement that set in motion the business cycle, and various government interventions that prevented or delayed readjustment of prices and wages needed for re-coordinating production and employment in the post-boom period.
But other participants, including the noted international trade economist John B. Condliffe and Walter Lippmann, were more concerned that these problems were inherent in the market and believed some activist government policies were needed to alleviate the hardships of economy-wide fluctuations. There was also a general consensus that in a modern liberal society, a minimal standard of living could and should be ensured to all. Friedrich Hayek’s concern was that any such government-guaranteed income floor should be less than could be earned from gainful employment, so as not to create perverse incentives concerning work versus welfare dependency.
The Free Market Society vs. Traditional Community
One of the most heated sessions concerned the psychological, sociological, political, and ideological factors behind the decline in the traditional (classical) liberalism. Alexander Rüstow presented a detailed argument that people are more than economic animals; they are social and cultural beings who need more than material comfort, which is all that classical liberalism offered in the 19th century.
Rüstow argued that people need cultural roots as well as meaning derived from communities and hierarchies providing order and security. Classical liberalism challenged and undermined this all with the development of urban industrialized life. The balance and harmony of rural small communities that cradled people and provided orientation and meaning had been undermined.
For Rüstow, this was a primary reason for the appeal of German National Socialism, with its harking back to and offering of “blood and soil,” a rootedness in place for the disoriented and socially detached individual under laissez-faire capitalism. Either liberalism would find a substitute for what Nazism offered to frightened proletarians through interventionist checks on liberalism’s secular materialism, or totalitarianism would be the future for Europe.
Michael Polanyi and Ludwig von Mises challenged Rüstow in this interpretation. Polanyi argued that the populist and totalitarian movements that were destroying liberalism and its humanistic values were due to ignorance of economic principles about how markets actually worked, which created the false impression that capitalism was causing a societal decay.
What Nazism represented, Polanyi said, was a repudiation of reason and the surrender of the mind to ideas inculcated with “barbaric violence”: “We are living in a state of mental derangement.”
The Invisible Hand, Economic Freedom, and Democracy
The economic ignorance emerged from the fact that the invisible hand guiding the market is, well, invisible, Polanyi stated. Individuals only see their own actions in market surroundings of which they are a part but about which they have little understanding. They lack a fuller appreciation of their connectedness and role in the society and the division of labor in the market order. This, Polanyi reasoned, highlighted the essential importance of economic education for people to have a greater sense that life in the market system does have wider meaning for individuals and their place in society, and for undermining the appeal of totalitarianism’s call for collectivist community. Said Polanyi:
The totalitarians have given their people economic conscience by destroying their liberty. Liberalism should ensure economic conscience by enlightenment. The people must understand the functioning of economic life [in the market economy]. Economic education would create a popular force.… But above all, economic education would dispel the cloud that at present is hiding the ‘invisible hand’ and would open to the eyes of the people the great cooperation represented by the life of the market, where they participate without any moral conscience of the role they play there.
Mises responded to Rüstow’s analysis by insisting that it was necessary to dispel the myth of an idyllic and happy life in the pre-industrial countryside. Life was harsh, work was from sunrise to sunset in all weather, and poverty and potential famine confronted almost everyone:
One cannot see anything other than a simple romantic prejudice in the claim that men had more joy in their work in the pre-capitalist era than do the workers in the age of modern industry. I believe that Mr. Rüstow himself gives in to the romantic spirit when he claims that the peasant is more satisfied than the [industrial] worker. It is an undeniable fact that in the last one hundred years millions of men have abandoned agricultural occupations for industrial work, which certainly cannot be considered a proof of the greater satisfaction that agricultural activity has given them.
In his reply, Rüstow said:
Let me add that when Mr. von Hayek doubts that the scale of life values defended by me is reconcilable with the position of traditional liberalism, he is certainly correct… Consequently we look for the way out in a fundamental renewal of liberalism” among the lines of greater government interventionism proposed by Walter Lippmann in his, The Good Society. After all, if those in the communist, fascist and Nazi camps “haven’t listened to Moses and the prophets – Adam Smith and Ricardo – how will they believe Mr. von Mises”?
Clearly, discourse was heated at times in these sessions, peppered with bitter sarcasm.
In this particular session, there also arose the question of the meaning and place of democracy in a free, liberal society. Louis Rougier insisted on the distinction between, on the one hand, “liberal democracy founded on the limitation of the powers of the State, respect for the rights of the individual and the citizen, subordination of legislative and executive power to a higher judicial authority,” just as encapsulated in the principles of the American Declaration of Independence, and, on the other hand, “socialized democracy, fatally bound to result in demagoguery and, through demagoguery to the totalitarian state.… The masses.… replace the problem of the production of wealth by a demand for its immediate redistribution.… The best purveyors of totalitarian states are the socialist demagogues.”
A Neoliberal Agenda: Markets Plus the Interventionist-Welfare State
Finally, the issue arose of what any new liberal agenda should incorporate. This was summarized by Walter Lippmann, who, while emphasizing again the essential role of the market-price mechanism, said that added to the maintenance of competitive markets and national defense should be “social insurance programs (Social Security), social services (healthcare and related programs), wider government financial support for public education, and government-funded and government-partnered scientific research. Plus, there needed to be greater government regulation of banking and finance and prevention of the concentration of industries in monopolists’ hands.
Most of the participants whose comments are recorded in this session said they “completely support without reservation [Lippmann’s] economic declaration”: “Mr. Lippmann’s plan allows us to take into account what is arguable and what may correspond to practical necessities.” “It seems that we are holding to the central point: the intervention of the State in social life.… A liberal system with State intervention … is possible … if that intervention seems absolutely necessary.” “I congratulate Mr. Lippmann on his agenda. His prescriptions are most apt.”
The Walter Lippmann Colloquium and Modern Liberalism
What, then, was the upshot of the Walter Lippmann Colloquium, and how does it relate to the controversies of today and the meaning of liberalism in our own time? What is clear is that virtually all of the participants considered a private-property-based competitive market economy the essence and heart of a functioning liberal social order. Free market capitalism secured both individual liberty and wide and growing economic prosperity for more and more members of society.
But here near unanimity broke down. There were confusion and differences of opinion as to why political and economic liberalism was in eclipse. Was its cause in deeper psychological and cultural needs for collectivist community, or was it due to economic ignorance and misunderstanding? Were market insecurities inherent under capitalism, or were they primarily due to government interventions of various sorts that prevented markets from functioning more smoothly and predictably? Were various redistributive programs and regulatory interventions compatible with a free market competitive system, or were they threats to the longer-run sustainability of a financially sound and economically stable and dynamic free society?
In a real sense, the Walter Lippmann Colloquium represents the prologue to the entire post–World War II political-economic debate over what makes up the policies and institutions of a free and liberal society. There were the defenders of the traditional liberalism of individual liberty, including those advocating widely open and unregulated free markets, with narrowly limited government not responsible for social welfare. Ludwig von Mises was the most pronounced among the latter advocates, though other participants such as Jacques Rueff seemed as sympathetic.
But it was equally clear that for most of these defenders of market-based liberalism, there was a general agreement that classical liberalism needed to be reframed with a new agenda, one that was called during the colloquium “Neo-Liberalism.”
While it is often considered today, especially by many on the political left, that neoliberalism was an unapologetic attempt to create the case for laissez-faire markets, it was actually just the opposite. The colloquium participants, with the exception of a few like Ludwig von Mises, were all searching for a “third way,” as Wilhelm Röpke later called it, a way to combine the competitive market economy with wide elements of the interventionist-welfare state as the alternative to the attractions of and dangers from totalitarian collectivism. (See my article “Neo-Liberalism: From Laissez-Faire to the Interventionist State.”)
The “crisis of liberalism” pointed to today — for instance, in the series of articles in The Economist magazine — is not the crisis of the case for the efficacy of classical liberalism and laissez-faire capitalism. Today’s “liberal” crisis is about the political corruptions and abuses, the fiscal irresponsibility of interventionist and welfare-statist spending, and the rigidities and restrictions on markets imposed by a prevailing neoliberalism that has ended up combining elements of both the politically active left and right. That is the system under which we live today.
Therefore, the real debate that needs to be undertaken is not between what is called “liberalism” in The Economist magazine and many other places, and its socialist, nationalist, and populist competitors. The vital debate needs to be over why neoliberalism cannot do otherwise than tend to create those problems of corruption and abuse, fiscal irresponsibilities, and rigidities and restrictions because they are made likely, if not inevitable, once politics is introduced into the free market system through regulatory, interventionist, and redistributive policies.
We are nearly back full circle to the types of general issues raised by those participants at the Walter Lippmann Colloquium. We need a restatement and defense of the nature and workings and desirability of a truly laissez-faire society, and the dangers of continuing with a politicized and unstable economy under interventionist-welfare statism, which might slide into an even heavier-handed collectivist government system of control and command.
[Originally Posted at the American Institute for Economic Research]