Volume 2, Number 36
12 February 2002

What is a Classic Liberal? (2)

Dear Friends,

In TQE #35, I introduced the classic liberal society. It is the society toward which the Western World has been gravitating for ten centuries, with a few deviations, such as during the twentieth century. But we have always returned from the deviations, and the world is returning right now. In the classic liberal society, power is distributed among "low-level" people and groups. It is not concentrated in king, shogun, emperor, or democratic government.

The classic liberal society seeks balance of power among social groupings, in which socially desirable behavior is imposed sidewise — by group acting upon group — rather than downward, through government regulation. Environmental and other social goals are sought by nongovernment agencies as much removed from politics as possible, while social assistance is administered by private agencies financed in part by cash or voucher grants supplied by government, or by a negative income tax.

This society is described in detail in my book, The Moral Economy. In Part 1, seven current major problems are introduced: poverty, population, environment, ethnic bias, welfare, social security, and health care. In the classic liberal society, these problems will be resolved by a new culture, or new ways of behaving, as outlined in part 2. These ways include new accountability for the management of resources, greater interpersonal trust, new property definitions, and new concepts of money, law, taxes, education, religion, morality, and values. Laws may be passed, but basically these modes of behavior are shaped by the interaction of social groupings with relative balance of power, rather than by government mandate.

How do modes of behavior change in all the ways mentioned above? First, by people deciding that a new mode — say, in management accountability — is better for a certain occasion, such as the Enron scandal. Then it is repeated. When it is successful many times, it becomes cultural, or moral. (We wouldn't think of doing otherwise!) At that point, a law may be passed to bring in the stragglers. But a law that is passed before any of the above may breed distrust instead of trust.

A classic liberal is one who thinks first of how the problem may be overcome by ordinary people taking responsibility. An interventionist finds the solution first in government regulation. These are definitions, not stereotypes. You can be classic liberal with respect to one problem and interventionist with respect to another.

The world in 2302

As economic historian, I look for slow changes over centuries. To those who cannot see the hands of the clock turn, the following outcomes of classic liberalism will appear impossible. But if you had lived in George Fox's time, and someone had predicted the world in 2002 exactly as it turned out to be, would you have believed it? The changes I see for 2302 may not be right, but they are no greater than changes since the time of George Fox. Here they are:

Whoever creates a social cost such as pollution will pay for it. Instead of regulations mandating that automobiles achieve a certain mileage per gallon, drivers will be required (by law) to pay for their pollution. They might pay in taxes or by buying limited-issue pollution permits or in other ways. Thus the market will encourage them to demand fuel-efficient vehicles. (I leave it to science fiction writers to design these future vehicles).

Private persons will pay their own costs, including health care, education, social security, housing, and other benefits now provided by government or employer. Doing so creates a society of personal responsibility, not one of dependence. Since these benefits should be available to everyone, those unable to pay may receive cash (as in a negative income tax, where the government pays you rather than vice-versa). Then they buy the services from the providers that they choose.

Insurance will be sold by private companies to those who pay premiums. The government will provide no insurance, not even for major catastrophes like the World Trade Towers. Major catastrophes are not unusual. For all those affected by the Twin Towers tragedy, many more have suffered the same catastrophes, but being dispersed they have not received the same attention. All should be covered by private insurance, which would be required and subsidized for the poor. People who build in the Mississippi Valley will pay for flood damage to their properties, or else they will buy private insurance at high premiums. Thus they will be discouraged from building there.

Unemployment insurance will also be bought privately, in amounts necessary to sustain a family through a long period of depression. Those who do not have adequate funds will be subsidized by government, up to an amount to be democratically decided. Re-insurance will be required (in which insurance companies spread their risks to other companies). For those who cannot afford the insurance, vouchers will be provided.

Since everyone will have sufficient insurance, there will be no depressions. Insurance proceeds will keep incomes high and thus allow consumer demand to continue. The consumer demand will call for investment, which will lead to full employment. (So there, Mr. Keynes!).

But there is no such thing as absolute security. Even governments have refused to pay their obligations, as England did in the fourteenth century, Spain several times in more recent years, Germany right after World War I, the United States in 1933 (by not redeeming dollars in gold), and Argentina last month.

Certain purchases will be required by law, such as adequate health and unemployment insurance, to prevent free riding. A free rider is one who takes advantage of society's compassion by not paying for insurance or other private costs. For example, our society is too compassionate (I think) to let a person die in the street because he or she does not have health insurance.

Why is this a better society? Because the poor will have contracts, enforceable at law, for social services. Right now, the government betrays the poor, who are the first to suffer in financial crises. The Administration is cutting back on Medicaid, and Bush's budget for the next ten years is less than adequate to finance Medicare.

Most unprogrammed Quakers are interventionist. They sincerely want to help the disadvantaged, but they have unwittingly helped to create a society in which individual responsibility has eroded. Taxpayers want to take more out of the common pot than they willingly put in. There is never enough money for health care, affordable housing, unemployment insurance, and other social benefits for the poor. In the long run, the result will be a society like Argentina, Mexico, India, or China, where individual creativity is hampered, where would-be innovators are suppressed, and where poverty is the lot of many. Another result of the interventionist society is that government can — during an "emergency" — take funds out of the social-benefit pot to pay for war (as the U.S. is doing right now).

But history will slowly dilute the scenario of the interventionists. It will gradually be perceived that unhindered voluntary transactions add up to the most prosperous world with the most fair distributions of income and wealth, as witness Hong Kong, Singapore, South Korea, and Taiwan. Throw in some redistribution of incomes (say, a negative income tax), and no one is poor.

The European Union, the worldwide movement toward deregulation, massive tariff reductions since 1929, alternative schools, and privatization of state enterprises in less developed countries, are all harbingers of the classic liberal society. Just this week, India announced "the privatization of several state-owned companies, an end to restrictions on the stocking of some agricultural commodities and a plan to shed excess government manpower" (The Economist, 2/9/02).

How does classic liberalism differ from anarchy?

Classic liberalism has rules, laws, and property rights. How does it differ from libertarianism? I believe the classic liberal economy is more compassionate, in three ways:

First, if the poor cannot afford a minimum standard of living, the government (i.e., taxpayers) should subsidize them, either with cash or housing vouchers, health vouchers, and the like. For those whom we believe incapable of making appropriate decisions, we should offer counsel or — for the mentally disabled — caregivers.

Second, power must be dispersed as much as possible. Although the classical economists did not make a point of this, I showed, in Centuries of Economic Endeavor, that the emergence of classic liberalism in northwestern Europe and Japan required a certain power diffusion. The king had to lose power, and the peasants and merchants had to gain it.

Third, rules must require the producer to pay all costs of production, including social costs. Private costs include any resource consumed, such as labor and materials in production. Social costs include the degradation of resources, for example pollution of air, which diminishes its value. If a producer does not pay for sewage dumped into a river, he or she incurs a social cost but not a private cost. Social costs include those suffered by anyone or everyone, while a private cost is a resource consumed and paid for privately. Private costs are a subset of social costs.

When the producer pays all costs these are automatically passed on to the consumer. Assuming voluntary exchange, consumers take on these costs because they are the ultimate users of the resources consumed. This completes the circle, and by their independent actions as consumers (to buy or not to buy, to buy this and not that, etc.) they determine resource use. If we wish to tame the appetites of consumers or control the waste of resources, we need to work on people's consciences.

The efficient producer is one who produces any given output at the least private cost. ("Given" includes quality as well as quantity). The most efficient society is one where private costs and social costs are identical — that is, the producer pays for all of his or her pollution and other social costs.

Douglass North, a Nobel laureate in economics, found that the greatest economic development had occurred in the Western world where producers tended, more than in other places, to pay their social costs. Obviously, they do not do so completely, since air and water are often polluted at no cost to the polluter.

I believe the classic liberal path is but a continuation of the road the Western world has been following for ten centuries. If we become impatient and intervene to speed it up, we only postpone the results. I started The Quaker Economist in order to bring to Quakers a new insight, since most of the current Quaker press and Quaker organizations are primarily interventionist. Perhaps you would like to review earlier Letters (at TQE Home) to see if that is what I have truly done.

To what world do you aspire? Email me at the address given in the Readers' Comment section, below.

Your friend indeed,

— Jack Powelson

Note: The Moral Economy (University of Michigan Press, 1998) describes the classic liberal society in detail and suggests a path to reach it. Subscribers to TQE who wish copies at author's discount, please send check for $17 ($15 for the book and $2 mailing) to Jack Powelson, 4875 Sioux Drive #001, Boulder CO 80303. This is the price I must pay for each copy.

Sincerely your friend,

Jack Powelson

Readers' Comments:

Please send comments on this or any TQE, at any time. Selected comments will be appended to the appropriate letter as they are received. Please indicate in the subject line the number of the Letter to which you refer! The email address is tqe-comment followed by @quaker.org. All published letters will be edited for spelling, grammar, clarity, and brevity. Please mention your home meeting, church, synagogue (or ...), and where you live.

How is the European Union a harbinger of a classical-liberal society? (I had been thinking of it as the reverse — a wide-reaching standardization and proliferation of government regulations.) I'd be delighted to understand otherwise.

— Catherine Cox, Goose Creek (VA) Meeting.

Answer: (I usually comment on Readers' Responses only when requested to do so). The European Union is all that you say, but there are some balancing factors, mainly the free movement of labor and goods across borders and mergers of national corporations for greater efficiency. Much of this is resisted by national governments, mergers for instance, but I believe that on balance it is a step toward globalization and the classic liberal economy of three centuries hence. — Jack

I went through some of the earlier issues and I was very impressed. As a Classical Liberal/Jeffersonian Democrat with strong Quaker sympathies (went to a Quaker college and have been dating a Quaker for about 8 years), I really appreciate what has been done so far. I look forward to the upcoming issues.

— Jeff Bentley, New Garden Friends Meeting, Greensboro (NC).

The Washington Post reported yesterday that the US Olympic Comm. spent about $20 million more to train athletes for this winter's games than for the Nagano Games. Also, the US won about 20 medals more than at Nagano. Conveniently, this works out to a million dollars per marginal medal. My question to you is this: Do you think that it was a worthwhile investment? Other thoughts on the matter?

— Asa Janney, Herdon (VA) Friends Meeting.

Note: Answers to this question will be welcomed and probably published. — Jack

Let me suggest a modification to just one paragraph in TQE #36, where you say insurance has the potential to do away with depression. (If we are all insured against unemployment, there will be no drop in consumption). You also invoke Mr. Keynes.

Inflation is purely a monetary supply problem. Think of money not as "money," but as a thing you barter goods and services for. Just as you would sometimes want more flour than other times (e.g. christmastime), you might want more money sometimes than other times. This is called liquidity only by recognition that money has the special characteristic of "that thing which is barterable for nearly everything else".

The problem with bits of green paper (our current money) is that our government can easily adjust the supply of them. It's far too tempting for the government to raise money by printing up new dollars and spending them. Since the supply is now increased, the demand falls, and the "price" of money falls (i.e., other prices go up in terms of money). Every depression or recession has been preceded by a boom, and the boom by an increase in the supply of money. Some people (e.g. Mr Keynes) believe that the cure is the hair of the dog that bit ye — i.e. more inflation. And indeed, a recession can be staved off by printing up more dollars. But the example of Weimar Germany, and today's Turkey (a Big Mac Meal costs four million Turkish lira), shows that it only pushes a worse problem into the future. Consumer demand has nothing to do with this.

— Russ Nelson, St. Lawrence Valley (NY) Friends Meeting

I heard a news announcement that a radical animal rights organization was now being accused of being the leading domestic terrorist organization in the US. I got to thinking and realized that the Klu Klux Klan was a terrorist organization — that's exactly what their purpose was. Terrorize blacks into keeping quiet about any amount of discrimination and unjust treatment the white community wanted to dispense. KKK would still be happy to do this. Ah, and then I thought of another fine group. The right-to-lifers who get just a little carried away and bomb abortion clinics and shoot doctors in the back. And a variety of other tactics designed to intimidate and terrorize doctors and clinics from engaging in a legal practice. I can remember when bombing churches was a favorite tactic against blacks, too.

I wonder if Bush and his friends will move as aggressively on the clinic bombers and doctor shooters as he did in Afghanistan? Not holding my breath. (I've been out of the country for a few years — maybe that sort of thing no longer happens — hope so.)

— Doug Fenner, Queensland, Australia.

I was startled and provoked by your thoughts in TQE #36 about the role insurance might play three hundred years from now.

Let me suggest that insurance as we know it, for most events, will be impossible. Most things will be predictable, and thus you will not be able to buy into a risk pool for anything less than the simple cost of saving up for the event you want to insure against. For example, the year of your death will be known (barring accidents) from birth, and so it will be impossible to purchase insurance against outliving your resources at any price less than then cost of a savings account. The same will be true of floods, storms and earthquakes. Since the economy and demography will have reached steady state, and your abilities to earn a living determinable by analyzing your body and brain, it will be possible to determine exactly what your life-time earning power will be. Since unemployment will be predictable, the only way insure against it will be to save when you can.

— Allan Abrahamse, Orange County Friends Meeting, Santa Ana (CA).


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Publisher: Russ Nelson, St. Lawrence Valley (NY) Friends Meeting

Editorial Board

  • Roger Conant, Mount Toby Meeting, Northampton, MA.
  • Virginia Flagg, San Diego (CA) Friends Meeting.
  • Merlyn Holmes, Boulder, Colorado.
  • Janet Minshall, Anneewakee Creek Friends Worship Group, Douglasvillle (GA).
  • Jack Powelson, Boulder (CO) Meeting of Friends, Principal Editor.
  • J.D. von Pischke, a Friend from Reston, VA.
  • Geoffrey Williams, Attender at New York Fifteenth Street Meeting.

Members of the Editorial Board receive Letters several days in advance for their criticisms, but they do not necessarily endorse the contents of any of them.

This newsletter was formerly known as The Classic Liberal Quaker.

Copyright © 2002 by Jack Powelson. All rights reserved. Permission is hereby granted for non-commercial reproduction.

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