The widely read, widely traveled, superlatively observant author of the Wealth of Nations need not be told so obvious a thing as that self-interest entered also political life....
This post is part of a larger series on the Crisis of Liberalism (recall here; here; here; (see also here, here, here, and here).
Here's a useful, undoubtedly mythical narrative about the origins of liberalism: it arose as an ameliorative project in opposition to mercantilism in the seventeenth and eighteenth century. (Yes, there were other targets, including feudalism and certain species of theocracy.) Here mercantilism is understood as a theory of state capture by interested classes who use the state to promote their own economic interests either through so-called rents, conquest (imperialism), slavery, or the tax system (or all of them). In the Wealth of Nations, Smith calls the whole violent ideology against which he hones his fire, "the Mercantile Spirit." From that vantage point, liberalism is a reformist appeal to the interests of other classes as well as enlightened self-interests of the business classes. The key conceptual move is to turn zero-sum logic into a win-win agenda that promotes, as a political program, a moral vision (the good society) that is all about the expansion of individual freedoms (note the plural). Depending on one's taste one may well come to privilege particular features of the liberal program (free trade, rule of law, individual choice, harm reduction, mutual respect, free press, free speech, elections, separation of powers, freedom of religion, etc.)
Notice that the mythical narrative presupposes the existence of states with non-trivial capacities and societies with complex division of labor and different perspectives on their interests. (This narrative is not identical to ones one finds circulating among some kinds of libertarians.) Notice, too, that what is commonly called capitalism is neutral between liberalism and mercantalism. So, for example, many (recall) of the ills that Marx (and Engels) diagnose in capitalism, are, from the vantage point of a liberal, really ills of mercantile variant thereof (e.g., "the executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie.") This is one reason why, for example, social democracy (which borrows from liberalism and Marxism) is conceptually possible.
Now, one historical (stylized) fact is that the very success of liberalism can give rise to forces that make a worse form mercantilism possible. This is really the story of the first wave of liberalism during the 19th century and its collapse in World War I (recall). And this has generated throughout the development of liberalism other important intellectual and institutional innovations, including ideas about anti-trust (to prevent concentrated market power), the progressive tax rate (to prevent concentrated economic power), the promotion of meritocracy in government hiring, the development of international law, and, alongside many attempts at liberalizing the economy, the mobility of people (open borders, etc.), the development of many international institutions (so characteristic of the second wave of liberalism).
Notice that the mythical narrative now reveals, which was also true at first, that sometimes liberalism entails strengthening the state institutions and their functioning, even attacking (to use a useful term coined by Samuel Bagg) concentrated powers in the private sector (or, as Gorden Arlen reminds me, 'sinister interests') and sometimes entailed strengthening the forces of civil society, including of businesses and religions. (Jacob T. Levy has nicely articulated a more sophisticated version of the tactical vacillation in (recall) his book Rationalism, Pluralism & Freedom.)
At any given time, the ameliorative, mitigating spirit of liberalism demands from us imperfect judgments about what the greatest/most urgent dangers are and what the right way to respond to them might be (see Peter Boettke on that very challenge today). At no point does liberalism expect to destroy the spirit of mercantilism because this would require a reform of human nature and (as anarchists urge) the total abolition of the political power of the state.
What liberalism then also requires is a theory of how politics operates (which can constrain the judgment). As Stigler notes, the very idea of state capture presupposes that people are self-interested and know what they are doing when they influence or have power. One may say then that the diagnostic use of public choice economics is co-extensive with the history of liberalism. (Of course, public choice insights were known to critics of democracy and liberal ideas before liberalism was invented.) This was obscured a bit in the long period when utilitarianism was dominant because it often presupposed philanthropic legislators. Alongside his paper on Smith, in 1971 Stigler published a piece on the nature of rent-seeking, "The Theory of Economic Regulation" on the demand and supply of regulation that itself became wildly influential (this morning it had over 12,000 citations). For those who wish to amuse themselves, they can compare Stigler's two brief essays (the Smith one and the one on rents) and note that they include the same kind of examples and the same rhetoric against the mistakes of economists.
Now, sometimes liberalism is tempted -- and this Stigler diagnoses -- by two other theories of politics (which are opposed even if the same side of the coin because they tend to black-box politics): one suggests that in politics unreason rules. I think one finds this attitude in some Hayekians, but, as Stigler notes correctly, one can find traces of it going back to Smith (even if I think Stigler misreads some of his own examples). On this view, politics is simply unpredictable and corrosive to any rational ideals (or both)--it often is accompanied by the idea to keep one's distance from politics and reduction of state power. The other [black-box theory] is one that implies that good normative ideas are automatically implemented [by benevolent and truth apt legislators] and then executed by a rule following bureaucracy. As Stigler notes nobody would assent to holding such a theory explicitly, but a lot of policy advice assumes it in practice.
As an aside, part of the inside-baseball joke of the closing line of the quoted passage by Stigler is not just that economists are volunteering themselves as a particular class of (rent-seeking) job-seekers, the impartial and truth-apt commissioner, who is not to be found in his models, but that Smith -- the apostle of free trade -- himself ended up as a high customs commissioner to the British Crown.
Short of revolution (which liberals tend to abhor), Stigler advocates a different (fourth) understanding of policy. It requires not just the diagnostic features of public choice, but also knowledge of "the political forces which confine and direct policy." This requires knowledge of the sort that empirical political science and sociology can supply. So, from this perspective, any policy advice must include a constituency or coalition that can promote the policy effectively (and have a grasp of the ways bureaucracies may react to them). Recent political philosophy can treat these as belonging to a certain class of feasibility constraints. Obviously, the promise is that this may increase the chances of uptake; it also makes all policy proposals much more status-quo friendly. Sometimes the concession to feasibility makes liberalism appear as a handmaiden to conservatism even if the path is honorable.
What Stigler refuses to countenance, and I think here he underestimates Smith, is that morality itself can be mobilized.+ In addition, alongside most readers of Smith, he misses the role systematic theory has in shaping long-term policy.
Let me wrap up. When liberal solutions to the problem of mercantile spirit (rent-seeking, state violence, etc.) themselves generate worse problems than the one they were aiming to solve then liberalism runs the risk of collapsing and becomes unattractive if not unpersuasive to the young. As regular readers know I think we have reached such a stage in the wake of the great financial crisis. The very survival of the financial system was taken to require great handouts to the rich and powerful. Few believe, when listening to self-described libertarian billionaires plotting interplanetary escape, that capitalism can solve the environmental/climate challenges ahead. It is no wonder that the spirit of mercantilism with its embrace of national state sponsored violence against immigrants and trade barriers with its fondness for grand building projects (etc.), has grown so bold since. But since that is the very ground of the existence of liberalism this is no reason for despair; it's our permanent challenge.
+A few years later, writing with Becker, he can easily accommodate the point by treating pursuit of morality as just another way of maximizing utility.
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