The Locke Luminary Vol. I, No. 1 (Summer 1998) Part 2
Edited by Amanda J. Owens, Director of Legal Studies, and Dr. Charles K. Rowley, General Director
Classical Liberalism and Post-Communism
by Norman Barry, University of Buckingham
The collapse of communism has, superficially, brought a new respect for the free market and a welcome skepticism about the role of government. Throughout the world there is less confidence in governments' ability to create wealth, to distribute it fairly and to guarantee to each citizen a level of welfare which had traditionally been demanded by fashionable theories of social justice.
In a manner suggested by F. A. Hayek, the message of the free enterprise system is being spread more by the "imitation" of successful regimes of countries previously attached to central planning, than from a rational understanding of the logic of the market's allocative mechanism.
This has meant that, despite the distaste for socialism, the particular form of market capitalism celebrated by prominent classical liberal Western writers - the individualistic Anglo-American model, in which basically anonymous traders produce a satisfactory allocation of resources through the operation of the invisible hand - has not been fully appreciated. In this arrangement social well-being is a product not of any one person's intention but is the outcome of spontaneous forces which successfully co-ordinate the activities of dispersed agents each of whom is motivated by self-interest. As Adam Smith once famously put it, "I have never known much good done by those who affect to trade for the public good."
Yet attempts to promote the public good by less coercive forms of design continue in the guise of market economics - but in defiance of the lessons of public choice theory. Thus, erstwhile defenders of socialism are now suggesting that the market can be used to bring about ends once thought to be achievable only by planning. Hence, communitarianism, the "social market economy" and varieties of business ethics are now thought to be legitimate goals to be pursued within the context of a nominally capitalist order. Other market systems, notably those of Germany, Japan and the member states of the European Union (except Britain's) are now looked upon as alternatives to the Anglo-American system precisely because they seem to be founded on less individualistic economic principles.
In these alternatives to Anglo-American capitalism, profit and returns to shareholders are not the only measures of success for an economy. The new rival models of capitalism are driven by both economic and ethical considerations. Germany and Japan are thought to be more efficient in that they are able to take into account long-term objectives whereas the Anglo-American model, governed as it is by the stock market's evaluation of economic prospects, produces short-termism and the neglect of investment which does not generate a more or less immediate return. The greater role played by bank financing is thought to generate the required long-term "rationality." And the participation of banks in the ownership and management of companies is thought to be a better method of ensuring accountability and efficiency than the threat of a takeover. In Germany, trade unions have a formal, though limited, role in management through their representation on supervisory boards.
At the ethical level it is claimed that these economies take account of communal considerations in the allocation of resources and that "socially-minded" companies mitigate the adverse effects industrial organization might otherwise have on localities and on particular groups. These reasons explain the hostility to the takeover method that Germany and Japan regularly evince. Furthermore, an industrial enterprise is apparently not owned exclusively by its shareholders but is somehow the property of "stakeholders," these are not just shareholders but also workers, suppliers and members of the community in which it is situated: they ought to have an equal role in its decision-making process. However, commercial reality cannot be completely eliminated, for even in Germany the owners of a company have the final say in important strategic decisions.
In fact, if it were taken as seriously as some of its advocates would like, stakeholder capitalism would be a serious threat to property rights. And the doctrine has damaging implications for both personal liberty and economic efficiency. For under it decision-making would be a result of bargaining between groups and the responsibility of individual agents difficult to determine. The firm would begin to resemble parliaments subject to the influence of pressure groups.
The role of the state is much greater in the provision of welfare in these countries than is the case in the Anglo-American model. A community's responsibility to the deprived is not limited to a guarantee of extra-market provision to those unable to cope but incorporates and integrates every citizen into society by the collective supply and consumption of health care, pensions, education and many other welfare goods which could be provided by the market. These facilities are available to all citizens regardless of income. Such interventions are thought to reduce the level of inequality that is said to characterize an unhampered market. It is true that the U.S. and Britain have institutional welfare states but they are not as extensive (especially in the U.S.) as in Europe. But it has been shown repeatedly that nationalized welfare does not produce equality but a redistribution to the better off who are adept at using welfare systems for their own advantage.
Despite the emotional appeal of the more collectivist versions of market capitalism it is by no means clear that the Anglo-American model is likely to be displaced. In the economic sphere dissatisfaction with the rigidities of the German and Japanese systems is becoming apparent to the participants, if not to anti-capitalist commentators in the U.S. and Britain. Anglo-American capitalism is remarkably flexible and it more easily responds to change than does the stakeholder model; which explains the lower levels of unemployment in America and Britain compared to mainland Europe. The rival models impose legal and moral obligations on economic transactors which have little economic rationale. For example, Japanese corporations keep in employment large numbers of people who are technically not productive. These arrangements would be highly insecure if corporations there were not protected from takeovers.
In Germany, the original ideals of the social market economy (as envisaged by people like Ropke and Eucken, and, of course, the architect of West Germany's economic miracle, Ludwig Erhard) gradually have been transformed into a mild form of socialism. Public spending has increased from less than 30% of GDP in the early 1960s to above 50% now. Much of this has been on social welfare. It has produced a form of dependency which would have been anathema to the German liberals of the immediate post-war period. Furthermore, the inexorable rise in non-wage labor costs has caused the flight of German capital to less burdensome overseas markets. Thus, despite the claims of critics of Anglo-American economics, capital does tend to move to where the returns are highest.
It is also not the case that ethical standards of business are especially lower on Wall Street and in the City of London than in other regimes. While there have undoubtedly been scandals in the U.S. and Britain, which have inspired the discipline of business ethics, they are not unknown in Japan or Germany. Indeed, the secrecy which characterizes the more closely-held corporations outside the Anglo-American business world is antithetical to a proper business ethics; this should promote openness, accountability, and respect for general rules. It is quite likely that European systems of corporate governance would not satisfy the strict disclosure rules of American commercial law. Indeed, shareholders in both Japan and Europe are the victims of "opportunism" on the part of managements.
Although there is a variety in the specific forms that capitalism takes, a free market system embodies a certain kind of generic moral code wherever it is found. This code includes respect for property, the inviolability of contract and the sanctity of the person. If these constraints on individualism are honored then the exercise of natural liberty will produce (spontaneously) efficient and moral economic orders. Thus competition, jurisdictional as well as economic, will itself be decisive in the creation and maintenance of economic and social systems.
However, in the social philosophy of the post-communist world there has been an attempt to construct a particular model of capitalism: one that severely attenuates the competitive features of the system celebrated by classical liberals from Smith to Hayek. The practical implications of this theorizing are now clearly visible in the imposition of uniform regulations in the European Union, and in the seemingly inexorable rise in welfare spending in all nominally capitalist states. Contemporary market developments are indicating that the proposed alternatives to the Anglo-American model are coming under serious strain but the response of governments (and nominally liberal writers) to this phenomenon has been to try to prevent the full exercise of economic freedom - a liberty which might well demonstrate the ultimate infeasibility of the social market, the Japanese system of corporate governance and the ambitious projects of business ethics.
Prof. Norman Barry is Professor of Political Science at the University of Buckingham, United Kingdom.© The Locke Institute 1998
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