What Ever Happened to Adam Smith, Provocative Ridley Asks

By Matt Ridley

WHATEVER HAPPENED TO ADAM SMITH?

Published on: Saturday, 20 August, 2016
Economic libertarianism is no longer on offer to American voters

My Times column on economic libertarianism:

Last week both Hillary Clinton and Donald Trump set out their economic policies in set-piece speeches. Mr Trump’s, delivered in Detroit, so far as one could tell from the fractured syntax and the digressions into invective, involves a trade policy designed to punish consumers and protect producers, a recipe for recession. But Mrs Clinton’s, also delivered in Michigan, was even worse. She too wants to pursue the old mercantilist fallacy of restricting imports and helping exports, but while spending more money, unleashing a blizzard of new regulations and doubling the minimum wage.

Never have the American people been faced with such paternalist, protectionist and authoritarian pair of options.

The United States, long a beacon of economic libertarianism, is now being offered a choice between two forms of growth-killing, deficit-boosting, zero-sum, big-government economic nationalism. Long gone are the days when both Republicans and Democrats subscribed to some form of free-market economic philosophy while differing mainly over how to fight the cold war and the culture wars.

It’s true that back in the days of Barry Goldwater or Ronald Reagan, the purer forms of economic libertarianism came awkwardly packaged with social and military authoritarianism. And the likes of Richard Nixon, Jimmy Carter and Bill Clinton were only lukewarm in their support of free markets, while being more socially libertarian. But at least liberty was on the menu.

This may be why Gary Johnson, the former two-term governor of New Mexico, and his running mate William Weld, former governor of Massachusetts, are riding high on the Libertarian Party ticket. They are close to the 15% threshold in the opinion polls in several states that would force the presidential television debates to include them. Johnson wants the government out of both the bedroom (he’s pro-choice, anti-war and for drug decriminalization) and the boardroom: he wants small government and low taxes. He climbed Everest, so there is no doubting his toughness, but there is no plausible scenario in which he could win the presidency.

It is the same around the world. Economic liberty is out of fashion. There is almost no country trying the sort of free-market reforms – tax cuts, deregulation, privatisation – that so many countries achieved in the 1980s and 1990s. China and Russia, liberalised briefly in the late twentieth century, seem to be heading back to Big Brother. Brazil has seen its market reforms congeal into crony-corporatism. India and Japan are hardly paragons of small-government economic liberalism. Even here in Britain, I doubt Theresa May took Hayek’s “Road to Serfdom” to Switzerland as holiday reading.

Is Adam Smith’s influence fading? This is what the sage of Kirkcaldy said: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.”

“Laissez faire, laissez passer” is the most tolerant of all creeds. As Smith insisted, it’s the very opposite of “pro-business” or pro-inequality; the market loves to disrupt complacent cartels. Yet to listen to most of the intelligentsia, you would think that freedom to exchange goods and services – which they prefer to call by the Marxist word “capitalism” – has done terrible harm in the world and needs taming by virtuous government. Further, that small-government philosophy has been terminally discredited, not least by the financial crisis of 2008.

But the financial markets were heavily regulated cartels in the run-up to the crisis. The Insurance giant AIG, whose credit default swaps went belly up, had been, in George Gilder’s words, “supervised and pettifogged by federal, state, local, and global beadles galore, in fifty states and more than a hundred countries”. The explosion in sub-prime lending, far from being the product of deregulation, was the direct result of mandates passed by Congress to increase mortgage lending to low-income and minority people. These mandates were imposed on government–sponsored enterprises (Fannie Mae and Freddie Mac), enforced by law and encouraged by two presidents. George W. Bush added regulations to the US economy at the rate of up to 78,000 pages a year.

Show me a country suffering from too much economic freedom. Somalia? No: it has too much government – competing forms of it called warlords. Haiti? No: its red tape is the despair of investors and aid donors. Chile? It has a socialist president.

The experiment of too much economic liberty has not been tried.

There is a long list of countries that were transformed by free-market reforms: post-war Germany under Ludwig Erhard, China under Deng Xiaoping, New Zealand under Roger Douglas, America under Ronald Reagan, Britain under Margaret Thatcher, Estonia under Mart Laar, India under Manmohan Singh. South Korea, Taiwan, Vietnam, Peru… Or Peel and Gladstone’s Britain, seventeenth century Holland, the city states of Renaissance Italy, Song dynasty China, ancient Athens, Tyre and Sidon under the Phoenicians. In every case, trade did that.

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