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Dear Ed,

Welcome to the next instalment in the weekly series about Liberal Democrat political philosophy. This week it is free trade - a political issue that used to dominate British politics and is now once again of increasing importance - and also Keynesiansim and laissez-faire - two key economic approaches.

I hope you find it interesting and useful - and if you do, by all means let other people know that they too can sign up for the series

The content draws very heavily on an excellent pamphlet edited by Duncan Brack for the Liberal Democrat History Group and by contributors to the group's (now sadly out of print) Dictionary of Liberal Thought. In particular for this week's email, Ed Randall and Robert Falkner.

If you aren't familiar with the group's work, particularly the website and quarterly Journal of Liberal History, I'd highly recommend taking a look.

If you like elements of the emails that follow, most likely Duncan and colleagues deserve the credit. For the bits you don't like, the brickbats should come my way.

Best wishes,

Mark
 

Free trade

The cause of free trade, the removal of barriers to international trade in goods and services, played an important part in British politics in the nineteenth and early twentieth centuries. For much of its life, the fortunes of the Liberal Party were closely tied to the strength of popular feeling for free trade.

The theory of free trade was developed by the liberal economists Adam Smith and David Ricardo in opposition to the mercantilist orthodoxy prevalent since the sixteenth century. Mercantilists held that the total volume of world trade was fixed, and it was therefore in nations’ interests to dominate as great a share as possible, partly by tariffs (import duties) aimed at discouraging imports and partly by military action and colonial ventures designed to gain control of overseas markets. In contrast, Smith argued that free markets – international as well as domestic – would promote enterprise and growth, pointing to the trade-based prosperity of the ancient civilisations of Greece and Rome, and, in more recent times, of Bengal and China.

Ricardo took up Smith’s concept of the specialisation of labour and developed the theory of comparative advantage, the idea that nations can maximise their output and wealth by specialising in the production of goods at which they are relatively most efficient, trading with other countries to realise the gains from such specialisation. Again in contrast to the prevailing orthodoxy, Ricardo held that even the unilateral removal of trade barriers by only one trading partner would benefit both parties.

In the early nineteenth century, the theory suggested that Britain should concentrate on manufactured goods, selling them abroad to purchase food. Also, as Smith had pointed out, the country with the largest volume of world trade would naturally benefit most from open markets – and until the 1880s, Britain was that country. Furthermore, it had to trade to survive – it did not produce sufficient food to feed its rapidly growing population.

These arguments reached the political scene with the campaign to abolish the Corn Laws (the high duties on the import of grain established after the Napoleonic Wars in order to protect British agriculture from foreign competition) spearheaded by the Anti-Corn Law League in the 1840s. Manchester, the centre of the cotton industry, whose products were denied access to overseas markets because of continental grain-growers’ inability to export to Britain, became the headquarters of the League, and the radical liberals Richard Cobden and John Bright were its leaders. The term ‘Manchester School’, coined by Benjamin Disraeli in 1846 to describe the League’s leaders, came in time to stand for a free-trade classical liberal agenda which influenced liberals throughout Europe.

The League achieved its aim in 1846 when the Tory Prime Minister Robert Peel abolished the Corn Laws, splitting the Conservative Party and helping to drive some of his supporters (including William Gladstone) towards the Liberals in the process. After Gladstone’s budget of 1860, only sixteen dutiable articles remained in the British tariff, compared to more than a thousand in 1852. The subsequent growth in British exports, particularly of manufactured products, formed the basis of the long mid-Victorian economic boom.

As lower tariffs meant cheaper food, together with higher employment and bigger profits in manufacturing, the doctrine of free trade appealed to the growing manufacturing and business interests, precisely those groups most attracted to the nascent Liberal Party – and was opposed by the predominantly Tory land-owners whose estates produced the grain. Liberals, however, always saw much more than economic justification for open markets. Abolishing protection for agriculture was part of the process of tearing down the remnants of the feudal order and putting an end to the special treatment enjoyed by the land-owners. Cobden and the League argued, by extension, for an end to special treatment for any industry; commercial success should be the outcome of hard work and natural talent alone, not the protection of vested interests. The campaign for free trade formed an important part of the liberal assault on economic, and therefore political, privilege.

The removal of tariff barriers also had benefits on the international scene. Liberals looked to free trade as the agency which would promote internationalism and end war. "For the disbanding of great armies and the promotion of peace", wrote Bright, "I rely on the abolition of tariffs, on the brotherhood of the nations resulting from free trade in the products of industry"’ Trade promoted interdependence and a sense of international community, building links between peoples and nations and rendering conflict less likely.

Free trade remained an article of liberal faith for decades, even after British pre-eminence in world markets began to wane in the 1870s. As the trade balance grew steadily worse, pressure for protectionism mounted, most notably from the former radical leader Joseph Chamberlain. But free trade had too great a grip on the national mind, and Chamberlain’s Imperial Preference campaign (protectionism for domestic industry and preferences for the self-governing dominions), launched in 1903, split the Conservative/Unionist Party and reunited the Liberals after their post-Gladstonian divisions. Businessmen and manufacturers, fearing a trade war, returned to the Liberal fold they had deserted over the previous twenty years, and working-class support grew at the prospect of dearer food. Liberal candidates habitually appeared on election platforms with two loaves of bread, contrasting the Liberal ‘big loaf’ with the Tory ‘little loaf’ which would follow the imposition of grain duties. Coupled with the other failures of Balfour’s ministry, the result was the Liberal landslide election victory of 1906.

The cause of free trade was to perform much the same function in 1923, when the Liberal Party, split between its Asquith and Lloyd George wings after wartime divisions, was reunited by Conservative Prime Minister Baldwin’s sudden conversion to tariff reform and his decision to call an election on the issue. The result was an interruption of the inter-war decline in Liberal fortunes, with an increase in seats, though not enough to escape its third-party status.

The Liberal faith in free trade, however, wavered under the strains of the Great Depression. The downwards spiral of ever-higher tariffs and ever-lower trade that overtook the world in the wake of Wall Street’s Great Crash of 1929 was impossible for any single country to resist. The coalition National Government’s introduction of a general tariff in February 1932 produced the "Agreement to Differ" under which the Liberal leader Herbert Samuel and his colleagues were permitted to remain in government even while opposing its policy; but the Ottawa Agreements entrenching protection within the Empire finally forced them out in September, ending the last peacetime participation in UK government by the Liberal Party until 2010. Sir John Simon’s Liberal National faction endorsed protection, stayed in government and eventually merged with the Conservatives.

The cause of free trade and the Liberal Party both seemed to be doomed. An opinion survey in 1942 showed that the only Liberal policy the public could identify was free trade, but that the vast majority had no idea what the party stood for; like free trade itself, it seemed a relic of a bygone age. The end of the Second World War, however, brought comprehensive change, with the creation of new international institutions aimed at avoiding a repeat of the disastrous trade wars of the 1930s. The liberal John Maynard Keynes was partly responsible for the plans for an International Trade Organisation alongside the World Bank and International Monetary Fund. Although the proposal was vetoed by the US, its ‘provisional’ substitute – the General Agreement on Tariffs and Trade (GATT) – was able, over the following forty years, to coordinate successive rounds of tariff reductions and its own transformation, in 1995, into the World Trade Organisation.

The moral argument for trade was still powerful; the 1959 Liberal manifesto ended with the slogan: "exchange goods, not bombs". In 1956 the Liberals became the first party to argue for British participation in the European Common Market: the Cobdenite vision of trade building links between peoples was an important factor, overriding concerns over potential European protectionism against the rest of the world. Liberal parties throughout Europe share this vision, however much they may be divided over the details of economic and social policy.

In more recent times, Liberal Democrats have expressed concern over some of the negative aspects of globalisation, including the elevation of trade liberalisation over other goals of international policy, such as environmental protection, and the growth in inequalities of wealth between developed nations and the poorest countries. The central belief in the freedom to exchange goods and services across international borders has remained, however, not just for the economic benefits, but for wider reasons: the extension of opportunity to every individual, every enterprise and every country, no matter how small; and the building of relationships between peoples and nations, pulling communities together rather than driving them apart.

All this has then been given its most recent twist by the referendum on Britain's membership of the European Union, with the question of trade relations securing - at least after the referendum - a degree of political scrutiny and public attention it had not had for a long time.

Further reading  

Keynesianism

A school of economic thought inspired by the work of John Maynard Keynes, especially his General Theory of Employment, Interest and Money. Keynes’ challenge to the ideas underpinning classical and neo-classical economics, and in particular to the proposition that market economies would always find an equilibrium consistent with the highest possible level of economic output, became the foundation for macroeconomics, and Keynesian ideas came to underpin the economic policy of Western governments for the three decades following the Second World War.

In the General Theory, first published in 1936, John Maynard Keynes challenged the majority of his peers in the economics profession, who had steadfastly rejected his notion that there was any need for a branch of economics that distinguished between the behaviour of individual economic actors and the operation of the economy as a whole.

Keynesians generally support the following three propositions: (a) aggregate demand plays a central role in determining the level of real output; (b) economies can remain for a long period in a state where there is substantial under-utilisation of both capital and labour; and (c) government, principally though not exclusively through its fiscal policies, can influence aggregate demand and thus help bring about significant reductions in unemployment. Or in other words, economies can benefit from substantial government intervention in order to address market failures.

Keynesianism came to dominate economic policy-making after 1945 when the reflationary actions of the US government, principally designed to boost the production of munitions and weapons, appeared to confirm Keynes’ theoretical arguments about the fundamental importance of government taking the initiative in overcoming failures in aggregate demand. The general acceptance of the three Keynesian propositions seemed to have been confirmed when Richard Nixon observed that, "we are all Keynesians now".

However, critics of Keynesianism, most notably the American economist Milton Friedman, began a counter-revolution in economic thought that attracted political leaders and economic policy-makers from the mid-1970s onwards, including James Callaghan and Margaret Thatcher in Britain, whose statements and policy decisions appeared to reject all or part of Keynesianism.

British economic policy-makers were confronted in the 1970s by ‘stagflation’: low or no growth accompanied by inflation. This was taken as evidence that Keynesian policies for combating unemployment could no longer be expected to work. Friedman argued that government action to boost demand in order to reduce unemployment below its ‘natural rate’ was counter-productive: it would simply raise inflation and add to inflationary expectations in economies.

The counter-revolutionary policy prescriptions offered by Friedman and his colleagues were tested (some say to destruction) in Britain, where the Conservative governments of the 1980s adopted a monetarist strategy. They failed, however, to produce either the stable monetary environment or the economic recovery that had been expected. Friedman himself declared, in June 2003, that, "use of the quantity of money as a target has not been a success … I’m not sure I would as of today push it as hard as I once did".

Keynesianism has enjoyed something of a revival since the 1980s, although it has undergone considerable development and reformulation in an effort to integrate Keynes’ theoretical ideas about the operation of the economic system as a whole with classical and neo-classical ideas about the behaviour of individual consumers and producers. In particular, many self-proclaimed Keynesians have accepted that while human beings are not perfectly rational, human behaviour sufficiently approximates rational behaviour – of the kind hypothesised by economists – so that it is possible to develop models of the economy that can handle long lags between changes in output, employment rates, inflation and interest rates. Others, often labelled post-Keynesians, such as Geoff Tily and Steve Keen, believe that Keynes’ radical challenge to academic economics has been lost in a neo-classical synthesis, abandoning his most important economic insights.

Some Keynesians have tried to take account of the growth of international trade and increasing economic interdependence in their economic theorising, and to make the case for internationally coordinated economic policy treating the whole world as a single global economic system. Whether their economic and political ambitions have any real prospect of success is arguable. Perhaps the most important element of the Keynesian legacy is the conclusion that market economies are inherently unstable and that there can be no guarantee that they will, unaided, find a balance that makes full use of the economic resources, including labour, that are available to them. What Will Hutton has described as Keynes’ "very shocking" finding – that capitalist economic systems are inherently unstable – is rightly regarded as a watershed in the development of economic thought.

Further reading  

Laissez-faire

The French words laisser faire mean ‘to let things go their own way’ or ‘to leave things alone’. In the realm of politics and economics, laissez-faire refers to economic liberalism’s general preference for individual initiative and free markets over central planning and state intervention. It is based on the belief that the economy produces the maximum well-being for individuals and society if government policy does not disturb the proper functioning of the market mechanism. Much of Keynesianism was an reaction to the laissez-faire approach.

The term laissez-faire was first used by the Physiocrats (a group of economists who argued that wealth derived from productive work, chiefly in agriculture) in the eighteenth century, to contrast their new liberal creed from the then orthodox doctrines of mercantilism that favoured an active role for the state in directing trade and industry.

In this original meaning, laissez-faire simply denotes liberalism’s general belief in the greater efficiency of free markets in guiding production and consumption through the operation of the price mechanism. In this sense, all liberals can be said to subscribe to the basic idea of a laissez-faire economy. As Adam Smith argued in his Wealth of Nations (1776), if individuals are left to pursue their own personal preferences, the market will order their interactions to promote both individual gain and the common good, as if they were guided by an ‘invisible hand’.

Laissez-faire ideas strongly resonated with nineteenth-century liberal thinkers such as Jeremy Bentham and John Stuart Mill, who emphasised the concept’s close connection with individualism and utilitarian ethics. Applied to the realm of international relations, liberals also advocated a system of laissez-faire as the best way to deter war and secure peace. Richard Cobden and others popularised the peace-through-trade idea in their campaign to repeal Britain’s Corn Laws, arguing that free trade would increase economic interdependence between societies and promote their mutual interest in world peace.

Although gaining widespread recognition in the second half of the nineteenth century, laissez-faire principles were never fully applied even in Britain. The rise of the New Liberalism at the beginning of the twentieth century gave way to a modified liberal tradition that envisaged a larger role for the state in economic and social affairs. Economic non-interventionism continued to shape governmental policy in Europe and North America but suffered a severe blow from the economic crisis of the 1920s and 1930s, which was widely blamed on inadequate governmental responses to the economic dislocations caused by the First World War. The Great Depression helped to usher in a new era of macroeconomic stabilisation and welfare policies, culminating in Roosevelt’s New Deal and the rise of the welfare state in Europe.

Ideas associated with the laissez-faire tradition in economic policy made a comeback in the 1960s and 1970s, though more in conservative than liberal circles. Led by liberal thinkers such as Friedrich Hayek and Milton Friedman, the revival of neo-liberal economics helped to undermine the Keynesian consensus in economic policy and provided the intellectual basis for the neo-liberal policy reforms under Margaret Thatcher in the UK and Ronald Reagan in the US. Laissez-faire ideas were less successful elsewhere in Europe, but have contributed significantly to the growing acceptance of privatisation and trade liberalisation policies around the world.

Further reading
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