A mission statement for Liberalism should start from the very simple basis that has defined and redefined Liberalism over the centuries: power should be dispersed and everybody matters. The subset of Liberalism that is referred to as Economic Liberalism has long held that to achieve this we must push for deregulation of markets and a minimum of redistribution, where redistribution is a means of ensuring equal opportunity but not necessarily equitable outcomes. What we now know about economics and society leads us to a point where we should reclaim and rethink economic liberalism, pushing instead to maximise redistribution of wealth as far as it is possible, rather than minimise it to only the minimum we believe necessary.
The starting point for British and European political Liberalism was in breaking up monarchies and old aristocratic feudal orders and replacing them with democratic representation. It is in the breaking up of concentrations of power that Liberalism lies. To understand how to take the next step forward on that course today we must understand how our economy works and what a liberal view of economics would be. My pitch here is simple- Liberal economics in the 21st century must be redistribution economics. If we start from the position that Liberalism is about breaking up concentrations of power and that each individual matters then what we now know from our history, and what we have learned about economics and society, tells us that the element currently missing from our political economy to make society one step more Liberal is embedding maximising redistribution into our economic systems.
The answer lies in the interplay between the current doctrines of what is called economic Liberalism and in free-market economics itself. Market economics, both at the end of the 19th century and at the end of the 20th, when pushed towards a more deregulated and a more anarchic model, produced, in practice, very large inequalities in wealth and power. This is both shocking and not shocking for economics as a discipline. In an economic model of an absolutely perfect free market it is more or less impossible to make profit of any kind because any opportunity will be seized on instantly by an infinite number of economic actors and competition will drive prices down exactly to meet costs. This includes labour markets and so when you hear people tout CEO pay that is many, many times median earnings as fair because “that’s how much value they produce” alarm bells should ring. After all, we don’t use that argument with doctors or nurses, teachers or cleaners. If a doctor generates £5 million in value each year but will do the job for £70,000 then we pay them £70,000. If a CEO generates £5 million in value but would do the job for £70,000 then why are we paying them £5 million? When the “that’s the value they create” defence is used for the wealthy the implication is always that it is in support of a free market and yet, mysteriously, low wages for people at the bottom of the income ladder are justified as the market simply minimising costs… well, which is it?
Is the job of the market to pay the total amount of value someone creates to that person or is it to pay them the minimum that is required to persuade them to undertake the role?
The irony is that the defence used for CEOs, that they should get the full value of the results of their labour, is actually Marx’s point in The Communist Manifesto! It’s also a bad point because it simply isn’t universalizable. It is virtually impossible to construct an economy where we could even measure the full and accurate value of the results of everyone’s labour, let alone then allocate resources accurately to that amount. That’s why free-market theory takes a different approach.
Free-market theory instead argues that we should pay all economic actors (people or corporations) the minimum required to get them to undertake a task. In an absolutely perfect free market this will result in all prices being driven down by competition to exactly match costs. The result will be that society will produce as much as it is capable of producing (that people want) and where each person ends up having equal purchasing power. This is because if something paid more then an infinite number of people would switch to that activity driving its premium over other jobs down to zero. When we pay people the minimum required to persuade them to complete a job the surplus beyond that, plus the value of everything already created, ends up automatically shared between everyone equally. At least it would if markets functioned perfectly.
This is where the real world starts to peek in. Economics is well aware that this is not the case in reality for a number of reasons. Real-world markets are not perfect and people are not equally able to switch to any job, anywhere, instantaneously. On top of that because markets aren’t perfect profits are not, in fact, zero and so owning capital does usually provide a positive return.
The way the ideology we traditionally call “economic Liberalism” interacts with this reality is as follows:
It starts from the proposition that, as concentrations of power are bad, any concentration of state power is bad and so we should push for as small a government as possible that is consistent with equality of opportunity- the idea that each individual is given an equal starting point and then will succeed or fail based on their own merits. This is often known as a meritocracy, which is ironic because the term ‘meritocracy’ was coined as a name for this idea by someone who thought it was dystopian and horrifying but it is usually now thought of as a positive thing. It is important, I think, to reword this idea in more plain but less positive language: economic liberalism, as it currently stands, argues that we should set up society as a fair race that then ranks individuals according to their worth and creates a hierarchy of wealth and power based on the results. This, I believe, is where the current economic liberalism paradigm breaks down and must be reordered to correct its problems.
While it is a valid ideology to be pro-meritocracy so that each individual can be ranked according to their worth it does not live up terribly well to either “breaking up concentrations of power” or to “everyone matters equally”. It also fails on a number of technical points- in practice, it is virtually impossible to achieve equality of opportunity with large inequality in outcomes. As outcomes diverge opportunities also diverge and so a meritocracy is almost impossible to achieve. Secondly, markets just don’t work this way, markets are designed to push prices down to match costs, not to assess total value created by each individual, so even if the only value we cared about was economic (which is clearly not the case) markets would be simply unable to achieve the goals asked of them in the current economic liberal paradigm. Third, what is called rental or monopoly income exists in all markets that are not perfect and as no market is absolutely perfect all markets have some “unearned” income.
This presents significant, and I would argue insurmountable, problems for economic liberalism as currently constituted along meritocratic lines. Before suggesting reforms, however, I would like to cover some alternatives I do not endorse but want to acknowledge.
The first is ‘One Nation Conservatism’. One nationism argues that we should see society as one organic whole and that everyone matters but that structure and hierarchy are necessary for human society, even if that hierarchy is somewhat arbitrary. It is essentially an appeal to order as an ideal even if the cost is some people being arbitrarily lower on the social and economic ladder. This can adapt economic liberalism by rolling back on absolute equality of opportunity and merely offering to alleviate (or even eliminate) poverty with welfare programs and offering education and opportunities for advancement knowing that this will never be enough to overcome the barriers of economic inequality alone but it will, at least, introduce some level of meritocracy into the system even if it is imperfect.
There is also what could be termed the ‘Ayn Rand’ view. Sometimes known as right-Libertarianism or what could be called individualist-Conservativism or perhaps market-Conservatism. This takes a harsher view than One-Nationism and has no interest in maintaining an effective welfare state or in the government providing opportunity at the cost of the taxpayer. There may be a willingness to provide basic law and order to ensure property rights and perhaps even some government-backed loan programs for those who are willing to try and improve their lot but not the taxpayer-funded programs that ‘One-Nationism’ might be willing to countenance.
Finally, it is worth suggesting that defenders of the current economic liberalism model may argue that meritocracy doesn’t have to mean everyone gets the full value of their labour but instead that market prices are correct and we are trying to minimise costs. However, as different people will have different skills and different willingness to engage in economic activities those that are in short supply will be rewarded for their willingness to engage in them and their rare/in-demand natural abilities accordingly. Therefore we should simply provide opportunity and let people make the best use of their natural skills and their willingness to work. This, clearly, is far closer to Liberalism than the previous two options and is the first description I feel comfortable saying matches what self-identifying “neo-liberals” might be comfortable with. It is this version of economic liberalism that I believe reformers should be content with because it is the argument closest to liberalism for a meritocratic movement and it is the dominant model amongst those who would clearly self identify as Liberals but not Conservatives, i.e self-identifying neo-Liberals.
So what objection would Liberalism have to this last view?
Firstly that it takes insufficient account of monopoly income and the effect on opportunity. This might initially seem solvable by taxing the more obvious forms of monopoly income such as land rents but there is a further source of monopoly income embedded in the logic of neo-liberalism/the current ‘economic Liberalism’ model that we must contend with. If markets are imperfect and contain monopoly rents of numerous kinds we can not catch them all, and that is a problem generally, but one specific example that leaps out is the monopoly rents in labour markets. If we accept that some will earn more because of their unique skillset we must acknowledge that this is a form of monopoly rent. This model asserts that that is fine because it is comfortable with meritocracy, but it conflicts with Liberalism in two important ways: it means that we no longer consider everyone to matter, instead now they are ranked, and it allows concentrations of power amongst the individuals lucky enough to be able to access those streams of monopoly income. While this does work in the “negative Liberty” mindset the cost of that mindset is both of the core Liberal sensibilities, we inevitably see concentrations of power and we do not consider every individual to matter/to be allowed the full range of choices they might have. It does not, however, yet contradict the meritocratic motto of “equality of opportunity, not equality of outcome”.
This is where the second point of contention arises: by definition, those monopoly rents do not function according to free-market rules. They pool up and reinforce themselves. In short, they erode equality of opportunity. This is seen in the way countries that have large inequality of outcomes universally also have poor social mobility while countries with much closer equality in outcomes have much more social mobility. This is a devastating problem for the current model of economic liberalism because it blocks the possibility of each individual earning only based on their own skills and willingness to sacrifice. In a market that was perfect save for people’s individual ambition and skill, meaning a shortage of some types of labour that those with the right skills and willingness could exploit for higher wages, could initially be meritocratic (by this definition of meritocracy at least) but upon gaining the advantage of higher incomes those people would immediately see those advantages begin to compound over time so that the system was not meritocratic from that point forward. We must, inevitably, share the fruits of previous work as equally as is possible in order for current work to provide income that is anything resembling meritocratic. Meritocracy, in effect, eats itself.
Thirdly as providing a welfare net and educational/employment opportunities that give equality of opportunity is impossible we are forced to judge the “appropriate” level of the welfare net, as well as it’s composition, plus the size and composition of the educational and employment programs of the government, on an ad hoc basis. Essentially without any objective measurement to fall back on, and with equality of opportunity being proportional to equality of outcome anyway, we are forced to ask society to judge the trade-off they are comfortable with. At this point, it is unclear how this judgement is not essentially society judging where it is within a left-right spectrum of Social Democracy vs One Nationism with Liberalism nowhere to be seen. With individual empowerment through opportunity not being an accessible goal, and instead being a social decision where society chooses the aggregate life chances and social order it is comfortable with (rather than focusing on maximising opportunity for each individual) economic liberalism has fallen away. If, as we have observed, equality of opportunity is tied to equality of outcome through rents and monopolies affecting opportunity then the true meritocracy neo-Liberalism’s version of economic liberalism strives for is simply impossible.
Inequality itself interferes both socially via eroding equality of person and economically by eroding equality of opportunity. These are the philosophical and Liberal arguments against the current model of economic liberalism which are only reinforced by the economic problems we see at the high points of economic inequality. Each time inequality has spiked demand for goods and services has eventually been unable to keep up with the savings accumulated by the wealthy while simultaneously financial instability through stock market and debt bubbles have wrecked the economy. We need redistribution to stabilise these causes of instability and to stave off the violent and cruel populism that follows. Both socially and economically we need the stability created by redistribution. The only alternative is stability through harsh hierarchical order. In short, whether it be Ayn Rand market-Conservatism or economically liberal Neo-Liberalism we will face enormous instability economically and socially. The only options available to us are to reject Liberalism and accept a Social Democracy/One-Nationism political paradigm or else to embrace Egalitarian-Liberalism as not just a social but an economic model. That is why I am proposing that rather than abandon economic liberalism entirely we simply refold it back into Liberalism as a whole via redistribution economics. The only viable route to Liberal free-market economics is not with the minimum of redistribution but with the maximum of redistribution possible that is consistent with stable prices. This provides economic stability and continuously maximises the amount of economic surplus and existing capital stocks available to everyone equally, as consistent with an idealised free-market distribution. The closest we can get to a perfect free market requires us to accept markets bidding down prices to close to costs and so minimising what we pay people to the minimum they will accept for their labour while redistributing the surplus value generated and the monopoly rents from existing capital to all equally. This is limited by redistribution allowing workers to demand higher wages in return for work, hence the need to alter redistribution based on price stability. This can be both redistribution in society, between those who are better or worse off, and redistribution in time, using taxation to remove spending power during periods of high inflation and returning that cash to consumers during periods of low inflation or deflation. I look forward to building up policy solutions that achieve this goal, that, I believe, is the task of Liberals and economic Liberalism in the 21st century. For Liberals, I argue, it is egalitarian-Liberalism or bust.