AN EXCERPT FROM MILTON AND ROSE FRIEDMAN
When John Blundell asked me if I would care to write a response to the article by Richard Wood, I recalled that Rose and I had written a statement about essentially the same subject as the Epilogue of our book, Two Lucky People: Memoirs, published by the University of Chicago Press in 1998. (1) What follows is a relevant excerpt from that Epilogue.
"The world at the end of our life is very different from the world in which we grew up, in some ways enormously better, in other ways, worse. Materially, the wonders of science and enterprise have enormously enriched the world though some products of science, like atomic energy, have been a mixed blessing. Few monarchs of ancient times could have lived as well as we have. In the course of our own lifetime, we have been treated to automatic washing machines, dryers and dishwashers; microwaves; radio, television, computers, cellular phones; passenger airlines, first prop, then jet; and so on and on.
"Biologically, advances in medicine have lengthened life spans. Milton has lived decades longer than his father thanks to such advances. Life expectancy in the United States is almost 50 per cent higher now than when we were born. Equally important, medical advances have lessened pain and suffering, and improved the quality of life at all ages.
"The situation is far less clear-cut in the social realm. Perhaps it is simply nostalgia, but we recall our youth as a period when there was far less concern for personal safety and safety of property. It was not unusual to leave home without locking doors; people worried less about walking about at night. One indication that this is more than nostalgia is that the fraction of the population in prison today is three times as large as it was in 1928 -- though that was the period of prohibition of alcohol and the notorious Capone gangsters.
"Physicians and hospitals did not have the amazing array of medications, tests, techniques, and equipment that they have now, but there is little doubt that there was a healthier relation among patient, physician, and hospital. The first question a patient faced was not, 'What insurance do you have?' but 'What is wrong?'.
"The income tax did not apply to most people, and was a page or two in length for those who had to file. Governments at all levels were controlling the spending of 10 to 15 per cent of the national income.
"In one sense, we are freer now than then -- there is far more tolerance for unconventional behaviour (though recall that the twenties were the era of the flapper), less anti-Semitism and less prejudice against blacks and Catholics. In another sense, we are less free. We are close to being enmeshed in that "network of petty, complicated rules that are both minute and uniform" that de Tocqueville conjectured might be the inevitable effect of an excessive drive to equality. (2) There doubtless are many causes for the loss of freedom, but surely a major cause has been the growth of government and its increasing control of our lives. Today, government, directly or indirectly, controls the spending of as much as half of our national income.
"Our central theme in public advocacy has been the promotion of human freedom. That was encouraged by our participation in the Mont Pelerin and Philadelphia Societies. It is the theme of our books, Capitalism and Freedom and Free to Choose; it underlies our opposition to rent control and general wage and price controls, our support for educational choice, privatising radio and television channels, an all-volunteer army, limitation of government spending, legalisation of drugs, privatising social security, free trade, and the deregulation of industry and private life to the fullest extent possible.
"Judged by practice, we have, despite some successes, mostly been on the losing side. Judged by ideas, we have been on the winning side. The public in the United States has increasingly recognised that government is not the universal cure for all ills, that governmental measures taken with good intentions and for good purposes often, if not typically, go astray and do harm instead of good. The growth of government has come to a halt, and seems on the verge of declining as a fraction of the economy. We are in the mainstream of thought, not as we were 50 years ago, members of the derided minority.
"So we close this book full of optimism for the future. Our children and grandchildren will live in a country that continues to advance rapidly in material and biological well-being, and that gives its citizens ever wider freedom to follow their own values and tastes, so long as they do not interfere with the ability of others to do the same."
Milton and Rose D. Friedman, October 1998
ENDNOTES
1. Milton and Rose D. Friedman, Two Lucky People: Memoirs, Chicago: University of Chicago Press, 1998.
2. Alexis de Tocqueville, Democracy in America, Anchor Books edition, Garden City, N.Y.: Doubleday & Company, Inc., 1969, p.692.
INTRODUCTION BY NIGEL LAWSON
Like many others, I first came across Richard Wood, rather belatedly, when he delivered his outstanding series of Reith Lectures, Innocence and Design: the influence of economic ideas on policy. Yet despite that tour de force he has remained singularly little known outside his own profession. This may well be because his style, while admirably lucid, is unusually fair-minded, moderate, respectful of the facts, and averse to polemic -- qualities that are well displayed in this new book, whose publication turns out to be rather more appositely timed than he can have imagined when he started to write it.
After an excellent description of economic liberalism, Wood carefully charts its remarkable comeback, pretty well throughout the world, over the past 20 years, and provides a measured and convincing explanation of why this has happened. But will it continue? A committed economic (and political) liberal himself, Wood's verdict is far from the triumphalism of a Fukuyama: "Despite their substantial improvement over these past two decades", he concludes, "which appears all the more notable when seen in historical perspective, the fortunes of economic liberalism during the opening decades of the new century remain clouded and in doubt." (p. 94).
Wood gives two principal reasons for the political fragility of economic liberalism. The first, which he characterises as its chronic weakness, is that "economic liberalism as such has no solid basis of general support". That is not to say that there is public support for full-blooded collectivism, either. It is rather that the general public, at all levels, continues to subscribe to what Wood in his Reith Lectures somewhat dismissively christened "do-it-yourself economics": a ragbag of intuitively persuasive fallacies (such as that economic competition is predominantly between states), usefully summarised in this book, all of which have a distinctly interventionist flavour.
As Wood demonstrates with a few well-chosen quotations, DIYE is particularly well entrenched at the highest levels of the European Community; but it is prevalent everywhere. He seems to believe that this is at least partly because there is no well-supported political party in any major country which explicitly stands first and foremost for classical liberalism. I have some reservations about this. In the first place, while strictly (and unsurprisingly) true, the profound strain of scepticism, about human nature and government alike, which lies at the heart of British Conservatism, clearly provides the soil in which economic liberalism is likely to flourish, as it did during the 1980s in particular. And in the second place, I would feel more secure if economic liberalism were part of the consensus or common ground between the political parties, as it was throughout most of the last century and if "new Labour" is to mean anything should become again, than if it were to remain the unique creed of one of them.
The second reason for fearing that the worldwide trend in favour of economic liberalism, which has been such a feature of the past 20 years, may not persist, is of course the financial and economic turmoil that has engulfed many of the emerging countries of the world and now threatens the rest.
Economic liberalism was the established orthodoxy, in both the United Kingdom and the United States, and to a considerable extent in Continental Europe too, throughout the 19th century and right up to the First World War. The result was a century and more of outstanding economic, technological, political and civic development. It was not until the apparent malfunctioning of the capitalist free market economy in the 1920s and even more the 1930s, marked in particular by unprecedented levels of unemployment, that politicians came to believe that the future lay with collectivism and large-scale government intervention in the economy.
But the cure turned out to be worse than the disease. The 20th-century experiment with big interventionist government turned out at best to be a severe disappointment, and at worst a major disaster. Hence the comeback of economic liberalism over the past 20 years.
Are we now about to see yet another swing of the pendulum? Rationally, it is hard to see why we should. The major source of weakness in the world economy today, Japan, the world's second largest economy, is in difficulty for a number of reasons, but none of them has anything to do with the unregulated nature of international capital markets (Japan has been a consistent capital exporter) or any other free market phenomena. The collapse of the much smaller and therefore much less important "tiger" economies of East Asia is a different story; but even here, when a ship almost sinks in a heavy storm, does one seek a remedy in trying to prevent storm conditions, which are bound to arise from time to time, or in making the vessel properly seaworthy?
During the 1930s it was understandable that many people felt that capitalism was in terminal crisis. In the light of subsequent history, there are no grounds for believing this today. During the 1930s it was understandable that many felt that collectivism and interventionism might be the way ahead. Given the disaster of the collectivist and interventionist experiment that ensued, it is hard to see how anyone can rationally believe this today.
Nonetheless, if our leaders are so foolish as to allow the present difficulties to lead to a world slump, economic liberalism might indeed be snuffed out once again, to the great cost of the peoples of the world. But there is no reason why they should be so foolish. For while there is no averting a downturn, we know now how to prevent a collapse -- even if the world's bankers still have a few lessons to learn in how to assess the true risks of derivatives.
At the end of the day, there are just four simple rules. First, the soundness of, and confidence in, the major banking systems of the world need to be maintained, should it become necessary, in the way Bagehot set out more than a century ago. Second, the world's leading monetary authorities need to demonstrate, as they did in the wake of black Monday in 1987, that they stand shoulder to shoulder in the face of the common threat. Third, they need to stand ready, again should it become necessary, to use monetary policy to prevent a decline in the money supply. And fourth, the governments of the world need to maintain open markets for international trade, come what may. Just stick to these four rules and, however rough the going gets, there will be no world depression.
Lord Lawson of Blaby, October 1998
AUTHOR'S PREFACE
This essay started life as a talk given to the Economic Freedom of the World conference held in Berlin in October 1997, and I have kept the personal flavour of the presentation then. As compared with the talk, the present text is greatly extended and enlarged. Even so, it is no more than a sketch, since it covers a leading aspect of the evolution of economic policies across the world over the past two decades.
I would like to thank John Blundell for suggesting that I should turn the original talk into a published essay, and Colin Robinson for watching over the process of evolution into a document longer than either of us had anticipated.
In first revising the talk, I received discerning comments on the text from two former OECD Secretariat colleagues, Jørgen Elmeskov and Michael Klein, and help with some of the data from Neena Sapra. At the second stage, in preparing the revised draft for publication, I benefited greatly from comments and suggestions from David Briggs, Jørgen Elmeskov, Helen Hughes, Michael Irwin, Eric Jones, Roger Kerr, Wilfrid Legg, Pierre Poret, David Robertson, Maurice Scott and Bryce Wilkinson. Finally, I revised the ordering of the text substantially in response to suggestions from both Colin Robinson and Milton Friedman. My thanks are due to all.
The work of preparing the Berlin talk was carried out in Paris, where I visited the Groupe d'Economie Mondiale directed by Professor Patrick Messerlin at the Fondation Nationale des Sciences Politiques. Extensive revision was undertaken while I was likewise a visitor, first at the Melbourne Business School, where Professor John Rose is Director, then at the Centre for the Practice of International Trade headed by Professor David Robertson, and later at the New Zealand Business Roundtable of which Roger Kerr is Executive Director. I am grateful to all three institutions and their respective heads for the facilities and encouragement which they kindly provided.
Richard J. Wood, October 1998
FOREWORD TO THE AUSTRALASIAN EDITION
Over the past 20 years, economic policies in a large and growing number of countries have changed course. To an extent that was almost wholly unforeseen, governments have taken steps to reduce the role of the state, and to make national economies less regulated and international trade and capital flows freer. It is this process of world-wide economic reform which is the subject of Richard Wood's short book.
In the evolution towards more market-oriented economic systems, both Australia and New Zealand have been very much involved. In both countries, there was a notable turning point when policies were given a new direction -- in Australia, at the end of 1983, and in New Zealand, from the coming to power of a Labour government in July 1984. Since then, in both cases, liberalisation has gone ahead, albeit with many limitations and in the face of strong and continuing opposition. The future role of government remains a highly topical and contentious subject on both sides of the Tasman.
We believe that Richard Wood has made a notable contribution by surveying the history of economic policies over the past two decades, and accounting for and interpreting what he terms "the uneasy trend to economic liberalism". Through placing the whole sequence of events in a broad intellectual and historical perspective, he has added a new dimension to the world debate. When we learned that his book was to be published in Britain, we conceived the idea of joining forces to issue it simultaneously in an Australian-New Zealand format: aside from a few changes, chiefly editorial, the text is the same. We are grateful to Richard for agreeing to our proposal, and pleased to sponsor this informative study.
Roger Kerr, New Zealand Business Roundtable
PART 1: THEME AND SETTING
Over the past two decades, economic policies across the world, and economic systems with them, have changed their character, their complexion. To an extent that few anticipated before the event, a large and growing array of governments have adopted measures, and in some cases whole programmes, with the intention and the effect of making their economies freer, more open and less regulated: both individually and in concert, they have taken the path of economic reform.
Admittedly, and not surprisingly, the picture is an untidy one. There remains a long list of countries in which no such shift in policies has occurred, including some where the trend has been the other way. In the reforming countries themselves, the process has typically been fitful, erratic, and subject to exceptions, limitations and local reverses, while the timing, scope and content of reform have varied greatly from case to case. But looking at the world as a whole over the past 20 years, the general direction of change is clear. On balance, national economic systems have become more market-oriented, and international transactions less subject to restrictions and discrimination. True, this was not solely due to the unconstrained actions of governments: official policies have interacted, in a mutually reinforcing process, with technical and economic factors which were to a large extent independent of them. But the main single influence on events has been a deliberate re-orientation of the economic policies of an increasing number of national states.
A FRAMEWORK FOR THE STORY
These developments have been widely interpreted as a victory for conservatism: economic reform is seen as involving, even presupposing, a shift to the right in political terms. This however is a mistaken interpretation of history. Despite the early and continuing prominence in the reform process of those eminent self-proclaimed conservatives, Margaret Thatcher and Ronald Reagan, conservatism is not the central character, the unifying theme, in this particular set of episodes. As will be seen, the reforming governments of these past 20 years have come from widely separated locations on the conventional political spectrum; and in any case, now as in earlier periods, the actual reforms did not embody conservative ideas or principles. The supposed connection with conservatism is a false trail.
More justly, the recent evolution of economic policies can be seen as the latest chapter in a continuing story which goes back at any rate to the mid-18th century, the hero of which is economic liberalism. Recent events have involved a shift, not from left to right, but in the balance between liberalism and interventionism in economic systems. Economic reform is a process of liberalisation.
How far this framework can be applied generally, to all the many countries involved, is admittedly a matter of debate. Herbert Stein, in a perceptive review of Robert Skidelsky's book, The World after Communism, says of Skidelsky's vision of a world-wide present-day trend away from collectivism towards greater freedom that it
includes as essentially similar the fall of Communism in the Soviet Union and the emergence of Thatcherism in Britain and Reaganism in the United States. Now these developments do have some things in common, just as a beheading and a haircut have something in common. But the differences are so great that to discuss them as part of the same continuum is misleading. 1
I think Stein is right in two respects. The changes in the former Soviet Union and the Western democracies were largely independent of one another, while the respective points of departure were quite different. Skidelsky writes of a shift from "collectivism" to "liberalism" which is common to both groups of countries, but the "collectivism" of Jimmy Carter, Valéry Giscard d'Estaing, Harold Wilson and Malcolm Fraser is not to be put on a par with that of Stalin, Brezhnev and Mao. In the West, reforms have brought with them a shift in emphasis within economies which were market-based before and after the event. In the former Soviet Union and in Central and Eastern Europe, a recasting of the whole system was and is involved.
All the same, there are similarities as well as differences. In the measures of liberalisation that have been adopted across the world, in former communist countries as elsewhere, there are obvious common features and aims. Despite the huge disparities between economic and political systems at the start of the various reform processes, and differences also in the content and timing of change, the element of liberalisation has been clearly present in both groups of countries, and in others too. In all these cases, the fortunes of economic liberalism have improved. It is not mistaken to see this as a world-wide tendency.
I present, in Part 2 below, a summary account of what I have termed "the uneasy trend" to economic liberalism over this recent period. In doing so, I consider how far the main conclusions of Milton and Rose Friedman in relation to long-term trends in the US, as given in the Epilogue to their memoirs that is reprinted above (pp. vii-viii) are applicable to the world in general over the past 20 years. The main emphasis here is on the events themselves -- the content, extent and sequence of reforms. In Part 3 I consider how these events are to be explained and interpreted, with a view in particular to assessing how far economic liberalism has gained in status and influence across the world, and whether the influences that have brought the shift in policies are likely to persist. In this section, therefore, the past is treated not just for its own sake but also as a guide to the future. Part 4 is more directly focused on future possibilities, though it includes some reference to the current crises in a number of East Asian countries as well as a brief review of some longer-term and more general factors, adverse and favourable, which bear on the prospects for continuing economic reform. 2 I conclude with an epilogue which places the story of liberalisation over these past two decades in a much broader historical context, going back well over a century. The remainder of Part 1 provides a background and point of departure for the main argument.
CHARACTER OF THE HERO
I use the term "liberalism" here in its European rather than its usual American sense. In standard current American usage -- to which, however, the Friedmans do not conform -- a "liberal", as opposed to a "conservative", is one who takes a generally activist view of the role of government, and who stresses the need for state-sponsored measures and programmes to realise economic goals including both prosperity and a fairer distribution of income and wealth. (3) By contrast, liberalism in the (longer-established) European sense is concerned with the realisation, enlargement and defence of individual freedom -- of liberty; and a liberal is a person whose assessment of political and economic measures or systems is chiefly based on this concern. (4)
Freedom has an economic as well as a political dimension, and this has a number of aspects. It includes the freedom of people to spend their money as they wish, and to choose their lifestyles, occupations and places of work. For both individuals and business enterprises, it entails freedom to decide how and where to invest their time and resources, and which products and services to offer for sale on what terms. It implies the freedom to enter, for mutual benefit, into non-coercive arrangements and contracts of any kind, provided that these do not restrict the liberty of others. Further and not least, it embraces the right of people and businesses to move freely within national boundaries, and to choose where to live and operate. All this enters into the conception, not only of a free society, but also of a well-functioning market economy: the two are inseparable. Freedom of action for people and enterprises makes it possible for market initiatives to be taken and responses to be made, while these in turn provide the means through which preferences that are freely chosen and freely exercised can be given effect. (5)
Freedoms of this kind are a means as well as an end, since the operation of competitive markets makes economic systems less distorted, more responsive and more dynamic. Thus two widely accepted values, prosperity and individual liberty, are not only compatible but mutually supporting: this has been part of the representative economist's view of the world ever since Adam Smith advanced so brilliantly the thesis that the wealth of nations would be furthered by what he termed "the system of natural liberty". (6)
By the same token a free economy, because of its openness to change, brings with it elements of uncertainty and insecurity for which, in more regulated systems, various forms of insulation are available, at a cost (not always apparent) to others, for specially favoured categories or interests. Competitive markets are no respecters of status, hierarchy, established positions, or preconceived notions as to what particular roles, products or activities are worth; nor do they typically offer lifetime security of employment, except where this is provided for in freely negotiated contracts. Of course, people and enterprises are able to insure themselves against risks of various kinds: this is an integral part of a market system. All the same, there is an element of trade-off between economic freedom and prosperity, on the one hand, and on the other, making some aspects of the system more predictable by accepting or imposing restrictions on change and on adaptive responses to change. Job security in the former German Democratic Republic was greater than it has become since the unification of Germany.
The extension and exercise of economic freedoms make for closer economic integration, both within and across national boundaries. Viewed from this standpoint, liberalisation is a means to removing elements of disintegration within the system. Looking back, this is well illustrated by the series of measures taken by the governments of many continental European countries, in "a shared historical transformation that lasted for over a century", to liberate the peasants from their former servile status. These actions established a new and open society "in which all men were equal before the law, had freedom of movement and occupation, and were not bound by accident of birth to fixed social orders, each with its own privileges and responsibilities": (7) closer integration and the extension of economic freedoms went together. Within national states, and in groupings of states where free cross-border migration is permitted, full economic integration can be seen as a norm of liberalism.
Integration in this sense, which results from the opening up and operation of free markets, is not to be identified with uniformity: regulations which prescribe uniform standards, or uniform terms and conditions, may be a source of disintegration, through restricting the scope for enterprise and initiative and for mutually beneficial deals and contracts. Within the European Community, for example, the abolition of tariffs and other impediments to cross-border transactions has brought closer economic integration, but the provisions of the Social Chapter are likely to have the opposite effect.
Liberalism implies restricting the powers and functions of governments, so as to give full scope for individuals, families and enterprises: hence one of its leading principles is that of limited government, in the economic domain as elsewhere. At the same time, however, and contrary to what is often supposed, the liberal blueprint reserves an honoured place for the state, in economic as well as political life. For one thing, threats to the economic freedom of individuals and enterprises may arise, not just from governments, but also from restrictive or coercive behaviour by private persons and groups; and in using their powers in order to prevent or curtail such behaviour, governments can be a means to securing freedom. Historically, the most notable instances of this are the abolition of slavery and serfdom; but the same positive aspect is still relevant today -- in particular, in the form of action to limit the abuse of market power by businesses, trade unions or professional groups. More broadly, the liberal blueprint assigns to governments an indispensable strategic role in establishing and maintaining a framework in which markets can function effectively, in particular through the definition and enforcement of property rights, and in making possible the provision of goods and services, such as national defence, which are collectively rather than individually consumed. This role is subject to continuous rethinking and revision as economic systems evolve, often in unforeseen ways, and new issues and problems arise: the recent crises in a number of East Asian countries, and the question of what lessons are to be drawn from them, provide a topical example which will be considered in Part 4 below. In countries such as Russia and the Ukraine today, the primary task is in fact to establish forms of government and an apparatus of public administration, together with norms and incentives for official and business behaviour, which will make it possible for the role of the state to be performed effectively. Liberalism is not anarchism, nor is it to be identified with unqualified laissez-faire.
This positive view of the state is consistent with the principle of limited government, for "to limit the scope of an institution is not to reject it. Such limitation is calculated rather to strengthen it". (8) Today as in the past, the authority of the state is weakened, rather than enhanced, when policies are decided with a view simply to placating particular interest groups, or when governments assume detailed commitments and responsibilities which they cannot effectively maintain. A captive state, or an overextended one, is not a strong state.
Liberalism is individualist, in that it defines the interests of national states, and the scope and purposes of government, with reference to the individuals who are subject to them: it is the welfare of people that counts. This however -- and again, contrary to what is often suggested -- does not imply that people act only from selfish motives, nor that activities aside from market transactions are of little account. Again, it does not entail hostility towards co-operation, nor a failure to recognise the existence and value of institutions other than markets and states. "The argument for liberty is not an argument against organisation", while "The endeavour to achieve certain results by co-operation and organisation is as much a part of competition as individual efforts". (9) It is only in so far as legally constituted groups and organisations act in such a way as to limit the freedom of others that their role is put in question. Subject to this, the principle of economic freedom clearly implies letting people decide for themselves the modes of action, whether individual or collective, that within the law will best suit their interests and obligations. Alongside it, the related principle of limited government clearly points away from centralisation and towards a readiness to make use of various levels of public administration. In both spheres, private and public, the liberal approach is pluralist. It opens the way to competition, variety and experiment in the choice and design of institutions. (10)
As with other such labels, economic liberalism is best thought of, not as a detailed creed or programme, but rather as a set of ideas and principles within which there may be many differences of view, a broad church sheltering a range of doctrines and beliefs. (11) The main single area of difference concerns the extent to which the redistribution of income and wealth should be viewed as an objective of government policy. One school of liberal thinking "is appalled by the gross inequalities ... in modern society", and holds that "far-reaching direct fiscal measures should be taken by budgetary taxes and expenditures to moderate the high, and to supplement the low, incomes and properties". (12) By contrast, there is the perspective of Milton Friedman, and of Hayek too, in which an egalitarian approach is explicitly rejected. In Friedman's formulation:
The egalitarian ... will defend taking from some to give to others, not as a means by which the "some" can achieve an objective they want to achieve, but on grounds of "justice". At this point, equality comes sharply into conflict with freedom; one must choose. One cannot be both an egalitarian, in this sense, and a liberal. (13)
It is true that, although philosophically there is a wide gap here, the extent of disagreement with respect to actual policies may not be great. Both egalitarians and non-egalitarians within the liberal camp want to minimise the degree to which redistributive measures impede the functioning of markets. More positively, both Friedman and Hayek, along with most of those who share their position, agree with the egalitarians on the need to guarantee some form of basic provision for all. Thus Friedman, though he would prefer a state of affairs in which this was made possible by private charity alone, has endorsed as a second-best the idea of a negative income tax as a means to ensuring a minimum money income for every citizen, while Hayek always accepted the principle of collective action to provide "an assured minimum income ... to all those who, for any reason, are not able to earn in the market an adequate maintenance". (14) All the same, there are underlying differences here which cannot be papered over.
Questions of distribution and justice aside, there is a long list of other issues on which professed economic liberals may take different positions: current examples are the case for anti-trust policies, the design of prudential regulations for financial markets and institutions, the merits of different exchange rate régimes, the uses of international economic cooperation, and (though this is less actively debated) the legalisation of drugs. (15) Both the issues themselves and the arguments relating to them are subject to continual reshaping as a result of new developments on the economic and political scene: the most recent instance of this is the current world-wide debate on the possible need for closer regulation of banks and financial markets and of international short-term capital flows -- or more broadly, for international co-operative action to contain the risks of contagious financial instability or world-wide deflation.
Given the differences of opinion among liberals, their shared recognition of a central and positive role for government, and the need in any case to re-examine this role as circumstances change, the fortunes of economic liberalism are not always and necessarily to be identified with what Margaret Thatcher termed "rolling back the frontiers of the state". All the same, such a rolling back has been the dominant aspect of this recent phase of economic reform, simply because of the extent to which interventionism prevailed in most countries of the world at the time that the present story begins, towards the end of the 1970s.
BACKGROUND AND POINT OF DEPARTURE
From the end of the Second World War to the close of the 1970s -- and indeed, until well into the 1980s -- the summary history of economic policies across the world can be presented in terms of three groups of countries. The first group is made up of what I term the core OECD countries -- that is, the 24 countries which throughout these past 20 years, and indeed before then, were members of the Organisation for Economic Co-operation and Development. (16) The second and numerically largest group consists of the developing countries including China, while the third comprises the former communist countries of Central and Eastern Europe and what was then the Soviet Union.
In the latter case, there is not much of a background story to tell. Despite a few experiments in reform here and there, the governments of the communist countries retained their commitment to the ultimate goal of a marketless, fully-planned economy, while in practice their economic systems remained highly regulated and controlled. In the other two groups of countries, however, the balance between liberalism and interventionism changed significantly, over these three decades or more, in ways that differed over different areas of policy as well as across frontiers.
Contrasting Views of the Years following World War II
For the core OECD countries, a general assessment for the period as a whole depends on how divergent tendencies within them are to be compared and weighed. This is illustrated in the contrasting views of history taken by two distinguished economists within the liberal camp. Terence Hutchison, in an essay first published in 1979, argued that
So persistent, and seemingly ineluctable, has been the expansion of the role of government in so many economically advanced, democratic countries, that it is difficult to cite any case from such countries where a significant rolling back of the interventionist tide has been achieved, except after major wars. Even here, the role of government has usually been reduced only as compared with the all-pervasive control and regulation of wartime, and not nearly pushed back to the previous peacetime level. (17)
By contrast, Gottfried Haberler, writing some years later but referring to the same sequence of events, took the view that, while at the end of the Second World War "faith in capitalism and free markets was at an all-time low", the eclipse of economic liberalism was short-lived. A turning point came with the radical economic reforms of 1948 in West Germany, soon followed by similar measures in some neighbouring European countries. Subsequently, this momentum was broadly maintained: "There has been some backsliding in a few countries, but by and large economic liberalism has progressed in the western world." (18)
These assessments conflict because the authors are implicitly focusing on different aspects of economic policy. Hutchison's sombre verdict takes too little account of the remarkable extent to which the core OECD countries generally, and the European members in particular, liberalised cross-border transactions over the years from 1947 onwards. Here there were four main elements. First, the elaborate structures of quota restrictions on imports which the European countries had built up were largely dismantled during the late 1940s and early 1950s, while most Japanese import quotas were likewise removed over the 1960s. Second, there were dramatic advances towards free trade within Western Europe, chiefly through the formation of the European Economic Community and the European Free Trade Area. Third, all the OECD countries, apart from Australia, New Zealand and Turkey, accepted and applied the multilaterally agreed reductions in tariffs that emerged from successive negotiating rounds in the General Agreement on Tariffs and Trade (the GATT). Fourth, by the end of the 1950s almost all these countries had introduced current account convertibility of their currencies; and in 1961 they established within the OECD itself the Codes of Liberalisation of Capital Movements and Invisible Transactions as a mechanism for progressively freeing transactions under both these heads, while over time the scope of these Codes was extended. It is true that most countries retained exchange controls, and that in all of them there remained strong elements of trade protectionism which in some ways, in both Europe and North America, were actually reinforced as time went on. But over the OECD area as a whole, the record of external liberalisation was impressive and its effects wide-ranging.
On the other hand, Haberler's favourable assessment of the period may have given too little weight to counter-liberal tendencies which became clearly apparent in most OECD national economies. One of these was the extension of public ownership of business enterprises, notably through the programmes of nationalisation that were carried through in the post-war years in Britain, France and some other European countries. A second was the general and continuing rise of public expenditure, and hence taxation, in relation to GDP. (19) It is true that, strictly speaking, neither the extent of public ownership nor the ratio of public expenditure to GDP need be good measures of the degree of departure from liberal norms. In both cases, much may depend on how far they are associated with constraints on the operation of markets, and this can vary from case to case and over time. For public enterprises, practice has differed widely: at the one extreme they have been set up as government departments, with close political control and no systematic concern with profitability, while at the other, they have been allowed or instructed to act in much the same way as private businesses. (20) Again, in interpreting public expenditure ratios, allowance should ideally be made for "tax expenditures" -- that is, special tax exemptions, allowances, credits and reliefs -- which have much the same effects as grants or subsidies but do not appear as such and are harder to identify and measure: to focus on expenditures alone gives an incomplete picture of the extent of interventionism. All the same, there is a clear presumption that both privatisation and reductions in high public expenditure ratios, such as those that now prevail in most of the OECD area, will bring economic systems closer to the liberal blueprint.
Whether the economies of the core OECD countries as a group were on balance freer at the beginning of the 1970s than they had been 25 years earlier is perhaps debatable. My own view is that Haberler is closer to the mark than Hutchison; and in any case, it is too unqualified to hold, as Yergin and Stanislaw do, that "Overall, the advance of state control seemed to be inexorable", and that the changes brought in by the British Labour government of 1945 "marked the beginning of an economic and political tide that reached its peak in the 1970s". (21)
The 1970s: Liberalism in Retreat
Whatever the verdict on the post-war decades, there is no doubt that in most if not all of these countries the early and mid-1970s brought a decline in the fortunes of economic liberalism. This mainly resulted from the serious and unexpected worsening of the economic situation which occurred in virtually all the group -- with slower rates of growth in output and trade and higher rates of both inflation and unemployment. Harassed governments responded with a range of interventionist measures, which included controls on prices and wages, intergovernmental deals and state-directed programmes in energy markets, bailing out (in some cases through nationalisation) of loss-making firms and industries, increasing resort to highly illiberal forms of trade protection including in particular (so-called) voluntary export restraint agreements, closer restrictions on inward direct investment, and tighter foreign exchange controls. At the same time, there was a general failure to trim public expenditure programmes in response to the now substantially lower rates of growth: hence government spending rose further, in many cases sharply, in relation to GDP. As usual, the evolution of policies was neither straightforward nor consistent, and one could compile for the period a list of liberalising measures for most of these countries. But the trend was in the opposite direction: a shift towards interventionism came through a complex of reactions, not always fully intended or worked out in advance, to situations, problems and crises which few had foreseen.
The Developing World
In the developing countries, generally speaking, both the prevailing official philosophy and the trend of economic policies were interventionist right through the decades following the Second World War. Outside Latin America and East Asia, almost all governments were consciously and explicitly socialist, so that the extension of public ownership and state direction, and restrictions on the freedom of action of private investors, were largely taken for granted. Almost everywhere it was believed that investment programmes should be planned from the centre, and that the development of industry required general protection against imports, together with promotion by governments of specific industries and projects. In many cases, the emergence of balance-of-payments problems led to the imposition of quantitative import restrictions, which were later retained or intensified. Strict exchange controls and close regulation of private inward direct investment were almost universal. Not only did the developing countries stand aside from the GATT agreements which brought multilateral reductions in trade barriers, but those of them who were prepared to join the GATT negotiated in the 1960s a special status which largely exempted them from the restraints and obligations that went with normal membership and were accepted, though not always fully honoured, by the core OECD countries.
There were some exceptions to this general pattern. Both Hong Kong and Singapore established trade régimes which were actually more open than those of the core OECD countries. From the early 1960s, as a result of policy changes, "Overall protection for industry was zero for Korea and low for Taiwan", (22) while Malaysia adopted a fairly open trade régime. The Indonesian economy became less highly regulated after the Sukarno régime was brought to an end in 1966. More broadly, public expenditure ratios everywhere in the group as a whole were and remained low by the standards of almost all the core OECD countries. But for the most part, although there was greater diversity among them, the economic systems of the developing countries became more regulated and less market-oriented than those of the OECD members.
As in the OECD area, economic policy régimes in most of the group became more interventionist during the early to mid-1970s -- though not for the same reasons, since generally speaking the economic situation and performance of these countries did not worsen in the same disconcerting way. There were numerous further expropriations of foreign-owned oil companies and mining operations. Protectionism and "insulationism" became more firmly entrenched, and governments collectively, in the so-called "Group of 77", put a lot of wasted diplomatic energy into arguing for the "new international economic order" programme which rested on a wholly non-liberal conception of the working of the international system. Within individual countries, there were notable counter-liberal initiatives, including large extensions of public ownership in India and the adoption of a new and highly interventionist industrial strategy in Korea. In China, these were the final years of the Cultural Revolution. Only in Chile, after the overthrow of the Allende régime in 1973, did economic policies begin to move decisively in the opposite direction.
A Low Point, then a Turn of the Tide
By the mid-to-late 1970s, therefore, the fortunes of economic liberalism across the world, in all the main country groupings, were at a low ebb. This was true not only of events, but also of ideas, perceptions and convictions. As compared with the "golden age" of 1950-73, there had been an obvious falling away in performance in the market economies of the core OECD countries, as opposed to the rest of the world including, as it then appeared, the socialist countries. This was widely taken as evidence of the basic weakness of capitalism and of market-directed economic systems.
It is from the late 1970s that signs begin to show of a new shift in the balance, a reversal of the counter-liberal tide. Although as usual in economic history there is no dramatic turning point, I would myself choose 1978 as the year of transition. Within the OECD group, member governments collectively resolved to take steps to free their oil markets. The OECD Ministerial Communiqué of that year referred to the need to raise prices of energy products to world levels, and in a special annex on "positive adjustment" it endorsed the principle of "relying as much as possible on market forces to encourage mobility of labour and capital to their most productive uses". In the US, far-reaching measures of industry deregulation were adopted, in airlines and road freight transport; and in China, the government inaugurated the historic change "to a cautious pragmatic reformism which relaxed central political control and modified the economic system profoundly". (23) In terms of personalities, the odd couple of Deng Xiaoping and Alfred Kahn (24) appear as leading (though of course unconnected) figures in the advance guard of world reformers. In May 1979, as a result of the then general election in Britain, they were joined by Margaret Thatcher, and a few months later her government announced the suspension of the United Kingdom's comprehensive and long-established system of exchange controls. These were early indications of a trend which, despite initial limitations and some further local reverses, has since been largely maintained and extended over the world as a whole.
ENDNOTES
1. Herbert Stein, "Out From Under", a review of Robert Skidelsky, The World after Communism: A Polemic for Our Times, London: Macmillan, 1995. In America the book is entitled The Road from Serfdom.
2. All these are also the themes of the recently published book by Daniel Yergin and Joseph Stanislaw, The Commanding Heights: The Battle between Government and the Marketplace That Is Remaking the Modern World, New York: Simon and Schuster, 1997, which however provides a much more extended treatment including (to quote the dust-jacket) "compelling tales of the astute politicians, brilliant thinkers, and tenacious businessmen who brought these changes about".
3. For some American authors, it is a concern with fairness and equality that forms the defining characteristic of a "liberal". An example is Paul Krugman: "I am a liberal -- that is, I believe in a society that taxes the well-off and uses the proceeds to help the poor and unlucky." (Paul Krugman, Peddling Prosperity: Economic sense and nonsense in the age of diminished expectations, New York: Norton, 1993.)
4. There are three main references here, all of which deal with liberalism in general and economic liberalism in particular. First, there is F.A. Hayek's great treatise, The Constitution of Liberty, London: Routledge & Kegan Paul, 1960; second, Milton Friedman's Capitalism and Freedom, Chicago: Chicago University Press, 1962; and third and more recent, Samuel Brittan's A Restatement of Economic Liberalism, Basingstoke and London: Macmillan, 1988. The historical evolution of economic liberalism, both as doctrine and practice, is brilliantly treated in Joseph Schumpeter's History of Economic Analysis, London and New York: Oxford University Press, 1954.
5. There is a useful listing of economic freedoms, set in the wider context of freedom in general, in Fritz Machlup's essay, "Liberalism and the Choice of Freedoms", which forms a chapter in Roads to Freedom: Essays in Honour of Friedrich A. von Hayek, edited by Erich Streissler, London: Routledge & Kegan Paul, 1969.
6. The relationship between economic freedom and economic progress is explored further in the Annex (below, pp. 95-100).
7. Jerome Blum, The End of the Old Order in Rural Europe, Princeton, NJ: Princeton University Press, 1978, pp. 8 and 377.
8. Eli Heckscher, Mercantilism, London: Allen and Unwin, 1955; Vol II, pp. 326-27. Heckscher makes the point that historically, in the early part of the 19th century, the reforms brought in by liberalism extended to government and public administration, with the aim of raising standards and enlarging the capacity of governments to act to good effect.
9. Both quotations here are from Hayek, The Constitution of Liberty, op. cit., p. 37.
10. Critics of economic liberalism are apt to present it in crudely distorted terms. A recent instance is to be found in a book by an American geographer which refers to "... currently fashionable neo-conservative policy advocacies, with their glorification of privatised, atomistic competitive social relations and their signal and irrational aversion to anything that points in the direction of collective choice in economic matters". (Allen J. Scott, Regions and the World Economy: The Coming Shape of Global Production, Competition and Political Order, New York: Oxford University Press, 1998, p. 162).
11. The point is developed well by Samuel Brittan, A Restatement of Economic Liberalism, op. cit., pp. 75-77.
12. The quotations are from James Meade, The Intelligent Radical's Guide to Economic Policy, London: Allen and Unwin, 1975.
13. M. Friedman, Capitalism and Freedom, op. cit., p. 163. Hayek made the same point in The Constitution of Liberty (p. 402): "The liberal ... is not an egalitarian". By contrast, James Meade described himself (in the work just cited, p. 68) as "an incurable egalitarian".
14. F.A. Hayek, Law, Legislation and Liberty, Vol. 2, The Mirage of Social Justice, London: Routledge & Kegan Paul, 1979, p. 87. To my mind this formula opens the door to a possibly wide range of discretionary redistributive measures, since it is not the case that a more or less uniform class of "deserving poor" can readily be identified and made subject to standard forms and conditions of assistance. Hayek's wording glosses over what has always been, and remains, a major problem for liberalism.
15. This last question is considered in Richard Stevenson, Winning the War on Drugs: To Legalise or Not?, Hobart Paper No. 124, London: Institute of Economic Affairs, 1994.
16. From the early 1970s up to 1994, the membership of the OECD remained unchanged at 24 countries, while the question of new accessions was not on the agenda. This "core" membership comprised 19 European countries -- the 15 countries that are now members of the European Community, plus Iceland, Norway, Switzerland and Turkey -- together with the USA, Canada, Japan, Australia and New Zealand. Since 1994 five more countries -- Mexico, the Czech Republic, Poland, Hungary and the Republic of Korea -- have been admitted to membership.
17. Terence Hutchison, The Politics and Philosophy of Economics, Oxford: Blackwell, 1981, p. 160; the italics are in the original. The text goes on: "To these generalisations the Social-Market Economy of the German Federal Republic has provided the outstanding exception."
18. Gottfried Haberler, International Trade and Economic Development, San Francisco: International Center for Economic Growth, 1988, pp. 2 and 3.
19. Evidence on the long-run growth of public expenditures, and an assessment of its effects, is to be found in Vito Tanzi and Ludger Schuknecht, "The Growth of Government and the Reform of the State in Industrial Countries", IMF Working Paper 95/130.
20. In Britain, for example, systematic attempts were made in the 1960s, notably through the White Papers of 1961 and 1967, to make nationalised industries more commercially oriented and less subject to discretionary pressures from governments. Despite what proved to be their limitations as such, these were moves towards liberalisation.
21. Yergin and Stanislaw, The Commanding Heights, op. cit., pp. 11 and 21.
22. Ian M.D. Little, Economic Development: Theory, Policy and International Relations, New York: Basic Books, 1982, p. 141.
23. Angus Maddison, Chinese Economic Performance in the Long Run, Paris: OECD Development Centre, 1998, p.55.
24. Kahn, a professor of economics, was then Secretary of Transportation in the US, in the Democratic administration headed by President Carter. He was a moving force in deregulation in the US.
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