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Liberalism, capitalism and democracy


May 22, 2020

The writer is an Islamabad-based columnist.

Will Covid-19 hasten the demise of the liberal world order? In the event that it does so, the pandemic will only be a catalyst. It is the inner contradictions in liberalism that will write it off.

Liberalism took birth in England in the latter half of the 18th century with a view to holding up the Industrial Revolution before spreading to continental Europe. The intellectual basis of liberalism was provided by three British thinkers: Adam Smith, David Ricardo, and Jeremy Bentham. Smith and Ricardo between them laid the foundations of classical economics, while Bentham put in place the legal and political underpinnings of liberalism.

Laissez-a-faire, literally translated as ‘leave us alone,’ was the economic doctrine, while utilitarianism, which identified goodness with individual happiness and usefulness, was the social philosophy of liberalism. These two doctrines undergird easily the two most celebrated forms of political and economic organization in the modern world, viz capitalism and representative democracy.

Common to both varieties of liberalism was the belief that freedom meant absence of legal restraints. For Bentham, law and liberty were mutually incompatible. When applied to industry, the doctrine ushered in horrid working conditions, with the government keeping its hands off in the name of freedom of contract. The situation forced subsequent liberal thinkers to concede a more active role for the government in the interest of society. Thus, capitalism took a human face.

The liberal philosophy rests upon two mutually incompatible concepts of nature – both dating back to antiquity. The first concept identifies nature with harmony and justice. The natural order being inherently beneficial necessarily brings in happiness and prosperity for individuals. By the same token, left to themselves, the market forces have the capability of producing an optimal outcome in the long run.

One implication of the harmonious view of nature was the labour theory of value. The more labour, so goes the theory, a worker puts in, the more value he takes out in the form of wages. To put it differently, if workers draw subsistence wages, they must be putting in low value as well – which is to say, the fault lies with them and not with the system. At any rate, whether workers prosper or languish, the outcome is deemed to be ‘natural justice.’

The other concept of nature strips it of any ethical connotations. Instead, the natural order is regarded as being red in tooth and claw. This view sees society as consisting of classes rather than individuals. The interests of one class are always opposed to those of others, thus leading to class conflict. As production steps up, the scarce land is increasingly brought under cultivation, resulting in larger rents for the landlord and smaller profits for the capitalist; while the labour gets wages just enough for it to keep the wolf from the door.

Thus the classical economists highlighted perpetual antagonism between the land-owning and other two classes (capitalists and workers) in order to prove that the landlord was the villain of the piece. In its historical context, taking such a position was also necessary for making a case for free trade. It was left to the genius of Karl Marx to use the logic of the labour theory of value to show that the interests of the working and the capital-owning classes were also irreconcilable and that the capitalist was the prime villain.

However, contrary to Marx’s prediction, the working class or the proletariat has not been able to overthrow capitalism; both the Russian and Chinese ‘Red’ revolutions took place in agrarian or preindustrial societies. Starting with laissez-a-faire, capitalism went on to accommodate sweated labour in the 19th century through social legislation. In the 20th century, capitalism created the welfare state to keep communism at bay. Once – in the late 1980s – the Marxist threat had fizzled out, capitalism dumped the welfare state and contrived neoliberalism, which represented essentially resurgence of laissez-a-faire capitalism. The US and the UK, with Ronald Reagan and Margaret Thatcher in the van respectively, were among the most influential exponents of this philosophy and massively cut social spending and corporate taxes. The stage was thus set for the unbridled rise of big corporations.

The kernel of liberal economics is its creed like faith in market forces. Even a feeble attempt by the state to tinker with the market mechanism is looked upon with suspicion, as it would throw the spanners in the works of the corporate world and thus saw down the size of the economic pie.

Such phrases as ‘individual liberty’, ‘the right to choose’, ‘free trade’, ‘unhindered competition’, ‘freedom of enterprise’, ‘economic integration’, ‘open borders’, and ‘flexible markets’ have been the rallying cries of the liberal ‘revolution’. Liberalism has captivated contemporary economic thinking hook, line and sinker, with the result that the word ‘reform’ has become synonymous with putting in place an arrangement in which the market leads both the state and society by the nose.

The founders of liberalism, as well as its diehard exponents, believed that the almost infinite number of possibilities of capitalist development could be actualized only in a democratic polity fashioned on Western values.

Historically as well, capitalism and multiparty democracy have gone hand in hand. Hence, when in the late 1980s Soviet leader Mikhail Gorbachev set upon restructuring the socialist economy, he was advised by his American counterparts to open up the authoritarian political system as well. He agreed and ended up breaking up the USSR.

Almost concurrently, Americans made similar demands on another mega socialist nation, China. But the Chinese leadership was farsighted enough not to pay heed to the advice. The Chinese adopted market economics but adapted it to the fundamental conditions and unique history of their society – ‘Socialism with Chinese Characteristics’ as the adaptation is called.

Today, socialist China is the world’s second largest economy and the hub of global manufacturing. Singapore is another state that successfully embraced capitalism but shunned multi-party democracy. As the doomed USSR and successful Chinese cases bring out, there is no logical relationship between the political and economic varieties of liberalism.

Of late, the most potent challenge to liberalism has come from nowhere else but its paterfamilias – the US. Free trade, which lies at the heart of liberalism, has strong distributional effects within an economy, as its scales are tipped towards relatively abundant factors of production and are skewed against the scarce ones. Thus, on balance, in developed countries, like the US, in the wake of the free trade agreements (FTAs) labour intensive sectors have been the losers, while skill and capital intensive sectors the winners.

Consequent upon Nafta thousands of American workers employed in the apparel and other labour intensive sectors lost jobs to cheaper imports from Mexico, thus making renegotiation of Nafta and other such trade pacts a headline promise of Donald Trump’s 2016 campaign for the White House.

On his first day as president, Trump pulled his country out of the Trans-Pacific Partnership Treaty (which envisages the globe’s largest free trade area), has made the WTO, liberalism’s multilateral face, virtually irrelevant and later had the Nafta re-negotiated. He also unleashed a trade war with China and other leading economies, thus making a clear departure from liberalism.

By announcing to restrict immigration into the US and building a wall on the border with Mexico, Trump has also upended the notion of open borders, which is so vital to liberalism. Not to be left behind, the UK decided to quit the European Union – the biggest ever embodiment of the principle of free movement of goods and of people.

Before Covid-19 had hit the world, the basic principles of liberalism had already been torn to shreds. The lockdowns necessitated by the pandemic have renewed with tremendous vigour the calls for national self-sufficiency, manufacturing at home and curtailing the dependence on the market for resource allocation. Several developed countries have set up, or are considering doing so, funds to bring back offshore investments in contravention of the principle of cost minimization.

In his seminal work, ‘Decline of the West,’ Oswald Spengler argues that as a rule democracy gives way to Caesarism, by which he means a charismatic or strong leadership. Already, the world is witnessing the rise of such leadership in several democracies. It remains to be seen whether Spengler’s view holds water in the 21st century.

Irrespective of the fate of liberalism, capitalism does not seem to be at risk. Over the past two centuries, capitalism has exhibited enormous capacity to dig in. In the 21st century, capitalism will not hesitate to wash its hands of liberalism in the interest of its survival. The child will outlive its father.

Email: [email protected]

Twitter: @hussainhzaidi