September 2008
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Month September 2008

Liberalism, Capitalism, and the Bailout Plan

The historical parallels between today’s financial crisis and the breakdown of banks and credit markets in 1933 are difficult to escape, from where we sit today.  Unlike the autumn of 1932, however, the "old order" is not spent and broken, but continues to urge continuation of the failed policies which led us to the current position.  House Republicans today, unlike 1932-33, are working against the extraordinary measures required in order to stabilize the financial basis of our economy.  But in both cases, the rhetoric is the same:  a bailout plan indicates that Democrats and the Administration lack faith in free markets and leap eagerly toward socialism at the first sign of crisis. 

Such rhetoric is misguided at best, and downright duplicitous at worst.  But it arises because we’re a month away from Election Day, and Congress is listening to constituents who oppose "bailing out Wall Street."  I leave it to others, far better equipped than I, to defend the bailout bill itself.  I simply note that I support the bill and additional measures needed to ensure that we do not doom ourselves to repeat history simply because we don’t remember the lessons of 1932-1933 clearly enough. 

Instead, my goal here is to examine the basics of the "free markets" argument used by Senator Bunning and others.  Far from creeping socialism, today’s bailout plan is action in the best traditions of a commercial republic and market liberalism, as brought into the 20th century by Franklin Roosevelt’s New Deal.

Among the most persistent narratives in modern politics is the idea that liberalism lost its way in the early 20th century, betrayed its roots and principles, and was supplanted by the welfare state philosophy that now bears its name. "True liberals," as the narrative runs, decry the socialism of the New Deal, and keep the flame of limited government, free markets, and individual liberty alive as libertarians and small-government conservatives. Variants of this story drove the tax revolts of the late 1970’s and the "Reagan Revolution," as well as contemporary efforts such as Grover Norquist’s anti-tax crusade. Democrats and Republicans alike seem to accept this narrative, which has come to structure much of the current attack on New Deal-era social programs and progressive politics in general.  Senator Bunning, and others in the House, make use of this argument in opposing the current plan. 

The "lost liberalism" narrative derives, in part, from twentieth century commentators like Joseph Schumpeter and Milton Friedman. In particular, Friedman set up the "dilemma" of modern liberalism by placing liberty and equality at odds:

The [classical] liberal will therefore distinguish sharply between equality of rights and equality of opportunity, on the one hand, and material equality or equality of outcome on the other…At this point, equality comes sharply into conflict with freedom; one must choose. One cannot be both an egalitarian, in this sense, and a [classical] liberal.

But is this true? Progressive liberals should consider the possibility that the "lost liberalism" narrative is an oversimplified history, verging on myth. If the dominant narrative is a myth, or fails at the very least to capture the whole truth about "classical" and "modern" liberalism, then the attack on New Deal liberalism by small-government conservatives loses much of its moral force and intellectual basis.  As does opposition to the current bailout plan, if the plan is properly structured.

We might start disassembling the "lost liberalism" narrative by noting a significant difference between the richness of classical liberal writers versus the narrowness and relative aridity of "modern classicals" such as Friedman and Friedrich Hayek. Hayek, in his Constitution of Liberty, defines liberalism as an anti-statist philosophy incorporating limited government and exclusively protecting so-called "negative" rights — protections afforded citizens against government action. Yet we find classical theorists far more balanced in their view towards state power. Montesquieu, in The Spirit of the Laws, imagined that sovereign state power was crucial to guaranteeing freedom from traditional forms of oppression, including private injustice among citizens. No less a capitalist icon than Adam Smith agreed, as did James Madison when he wrote in Federalist No. 51:

It is of great importance in a republic not only to guard the society against the oppression of its rulers, but to guard one part of society against the injustice of the other part.

Classical liberals were concerned about more than individual liberty from government power; at the core of liberalism is a concern about concentrated power — any power — and its effects on human freedom. This concern naturally causes liberals to favor limited government and the rule of law, but it should also keep liberals from treating private economic power as "natural" and beyond concern. The latter concern, however, is explicitly off limits in the narrow version of liberalism on offer by modern libertarians and would-be inheritors of the liberal tradition.

In defending the narrowing of liberalism to protection of private property and free markets, "modern classical" liberals draw upon the deep defense of property and the market offered by Madison and others. Yet the defense of private property offered by Hume, Locke, and others is far from absolute, despite the modern libertarian rhetoric to the contrary. Locke, for example, wrote that "In Governments the Laws regulate the right of property, and the possession of land is determined by positive constitutions." (Two Treatises on Government, vol. II, 50). Madison’s defense of private property also displayed large doses of pragmatism; if property owners are not protected from fellow citizens as well as the government, they will not willingly cooperate in self-rule (Federalist No. 10). Nor does the "market" fare any better in comparisons between classical and modern writers. Neither Locke nor even Adam Smith fetishized the market to the degree seen in Friedman’s Capitalism and Freedom. If anything, the emergence of commercial markets and free trade were seen as a means of redistributing wealth away from landed aristocracies and systems of primogeniture which virtually guaranteed noble monopolies on land and wealth.

And in the latter example we see liberalism in its original historical context. The Founders were using the power of republican government and commercial trade to assault ancient tyrannies. Markets were good because they opened the economy to all citizens, regardless of station or inheritance. Limited government was good because it prevented the abuses of public power seen in aristocratic societies and absolute monarchies. Redistribution, in those days, was considered a fine goal if it meant redistributing wealth from those who had wielded it as power for centuries.

As the influence of the ancient tyrannies on political thinkers waned, new threats became uppermost in the mind of many liberals. The development of social democracy and outright socialism in Europe caused a hardening of laissez-faire commitments among late nineteenth century liberal theorists. It is possible to trace much of the "modern classical" view of liberalism, and the liberalism characteristic of European political parties, to this era. Yet liberals in America continued to respond in innovative ways to new threats. In particular, the American experience of capitalist monopolies in the Gilded Age caused a resurgence of the ancient concern over the tyranny of unchecked private power. Rapid industrialization and rapid immigration-led population growth resulted in massive shifts in income disparities, of a type never before seen in America. The former reality of small business, family ownership, and individual effort were replaced within several generations by massive corporations, concentrations of private wealth and power, and the typical abuses seen in their pursuit. And liberalism did not stand still. One sees reactions to abuses of private power beginning with the Populist movements after the Civil War, continuing in the Progressive Era and achieving real power during the New Deal. The result, as we see today, is twofold.

Regulatory capitalism is designed to provide protection against the enormous distortions that concentrated economic power can create in the market. And welfare liberalism aims to provide a decent minimum to those who are the losers in what has become the only economic game in town. Both were designed to preserve a liberal, market-based society, from a new kind of aristocracy on the one hand, and from popular revolt on the other.  Both are also designed, as we see today, to prevent collapse of basic institutions and infrastructure — such as banks — from abuses or mistakes of the private individuals who run them.  Such protection isn’t designed to protect the individuals who run our financial institutions, but to protect the customers, investors, and other businesses who rely upon "Wall Street" in order to maintain the rest of our commerce, markets, and economy.  We are in the current mess, as most folks now agree, precisely because regulatory capitalism has been systematically gutted by Senator Bunning and "free market fundamentalists" over the last 40 years. 

I began this essay by pointing out that the New Deal is often portrayed as the moment where classical, or "true" liberalism was lost in America. My aim has been to show that if the New Deal is a departure from anything, it is a departure only from modern free-market fundamentalism, or of the extreme laissez-faire version of liberalism popular among elites in the Gilded Age. Progressives own a proud, and yes, liberal narrative stretching from John Locke through James Madison to Franklin Roosevelt. And I suggest that if we hope to seize control of the modern political narrative, we start by reclaiming our past, and stamping out the notion that liberalism took a detour in 1932.

For the essence of liberalism, and especially progressive liberalism, is not private property, representative government, markets, or any specific scheme of rights. Each is merely a method for reaching a goal, and each method has been crucial at various points in our history. None should be considered uppermost, but neither should any be considered obsolete. The essence of liberalism is the search for a politics in which liberty and equality are sufficently balanced so as to avoid the danger of the many absolutisms which threaten us, whether public or private. For only by avoiding absolutism in all its forms can we achieve, preserve, and defend the liberty and security to which we aspire.

We can start this conceptual revolution by helping support the current efforts of Democrats and the Administration to stabilize and support our financial institutions.  And by doing so using the rhetoric and arguments provided by one of our greatest presidents, Franklin Delano Roosevelt.  I recommend sharing the texts of FDR’s First Inaugural Address and his nomination acceptance speech, given as the Depression and banking crisis deepened and the nation slid towards chaos and revolt.  Roosevelt’s words, promising action and a "New Deal for the American  people," are more relevant today than at any other time since the dark days of 1932-1933.  Share them with friends.  Read more about the plan to stabilize the financial sector, and consider the parallels to 1932-1933 carefully.  And then contact your Senators and Representatives and let them know you stand ready to defend our country in the best traditions of both capitalism and liberalism.

(several portions of this essay are derived from a previous post on the now-unavailable Progressive Commons website; given the current crisis I felt it was time to revise that argument and highlight its relevance to the current crisis)