The Crumbling Liberal Order

Having been on a roll for more than seven decades, the liberal world order seems to have entered its sunset period. Ironically, the obituary of the liberal order is being written not by the working class or the proponents of a rival doctrine but by its own paterfamilias — the United States (U.S.). The 19th century German philosopher Hegel hit the nail on the head when he stated that every doctrine and every system contained within it the seeds of its destruction. What inner contradictions are pushing the liberal order to the grave?  

Liberalism took birth in England in later half of the 18th century to hold 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-faire, literally translated as ‘leave us alone,’ was the economic doctrine, while utilitarianism, which identified goodness with happiness and usefulness, was the social philosophy of liberalism. These two doctrines undergird arguably the two most celebrated forms of political and economic organization in the modern world, viz capitalism and representative democracy.   

Common to both verities of liberalism was the belief that freedom meant absence of legal restraints. For Bentham, law and liberty were mutually incompatible. Every law racked up the power of the state at the expense of individual liberty. Freedom was maximum when a relationship was not regulated by law but was left to a voluntary agreement between the parties. When applied to industry, the doctrine ushered in appalling working conditions, with the government keeping its hands off in the name of freedom of contract. Alive to the horrid implications of laissez-faire as well to the need for broadening the support base of liberalism, subsequent liberal thinkers conceded a more active role for the government in the interest of society. Thus, capitalism took a human face. 

As a world order, liberalism arose at the end of the World War II. After fascism had been put to rout, liberalism came face-to-face with another, and more powerful, antagonist – communism. For nearly half a century, liberalism and communism remained at daggers drawn – the Cold War era as it is known as. To cope with the challenges thrown up by communism, which claimed to set up a heaven on earth for the working class, the laissez-faire principle was almost discarded to make room for the rise of the welfare state. Karl Marx’s prophesy that the interests of the capitalist and the labour were irreconcilable had apparently been upended.  

In the late 1980s, the USSR, the paterfamilias of communism, fell apart. In the absence of another rival doctrine, the demise of communism was hailed as the irrevocable triumph of liberalism prefiguring the ‘End of History’. The German philosopher Oswald Spengler’s apocalyptic prediction, made in the second decade of the last century, that the western civilization was doomed to decline was seen to have been conclusively confuted. The 1980s also saw the birth of neoliberalism, which represented essentially resurgence of laissez-faire capitalism. The U.S. with Ronald Reagan at the helm and the UK with Margaret Thatcher in the van were among the most influential exponents of this philosophy – hence, the terms ‘Thatchernomics’ and ‘Reaganomics’ – and presided over massive cuts in social spending and corporate taxes. The stage was thus set for the rich to get richer and the poor to get poorer.

The kernel of liberal economics is its creed like faith in market forces to bring about an optimal allocation of resources. Even a feeble attempt by the state to tinker with the market mechanism is tantamount to throwing spanners in the works of the corporate world, and thus saws down the size of the economic pie. Phrases such 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. 

In the book of liberal economics, trade does not affect in any significant way the distribution of income – either domestically or internationally – because it enables nations and associations to realize their comparative advantage. Hence, temporary job losses and income erosion aside, all trading partners gain from trade. Free trade is thus central to liberal economic policy. 

Liberalism short shrifts the question of equity. In the course of economic development, increase in the size of the national pie is far important than its fair distribution. Let the economy grow, unimpeded by any egalitarian consideration, through mega investments, its benefits will automatically trickle down. Profit-making by corporations should not only be tolerated but encouraged. By the same token, economic inequality instead of being frowned upon should be prized, in that it provides a solid basis for economic progress.  

The cradle of liberalism is the West. In late 20th century, capitalism and democracy – the twin children of liberalism – achieved universality as forms of political and economic organization. The most important convert to liberalism was the People’s Republic of China, which in the 1980s started moving away from a centrally planned to a market economy. However, China’s conversion to liberalism represents more of an expediency than a change of heart. Politically and socially, it remains a totalitarian state, where the Communist Party holds all the aces.  The rise of China thus both holds up and gives the lie to the liberal thesis. While the shift away from socialism has made the Asian giant an economic powerhouse, second only to the U.S., the state and not the market has authored the Chinese miracle. This runs counter to the liberal view that government intervention in the economy makes things worse. Besides, and this is no less important, in China the link between the political (democracy) and economic (market economy) manifestations of liberalism has been cut off. This turns on its head the assumption that economic liberalization is not possible without opening up of the political system and social milieu.  

At any rate, in the first decade of the current century just when liberalism appeared to be scaling heights, it began to lose ground. What happened? The discontent with economic liberalism or capitalism dates back to its rise. The liberal philosophy is based upon two mutually incompatible concepts of nature. 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 forces of supply and demand have the tendency to usher in an optimal outcome in the long run through what Adam Smith called, ‘the invisible hand’ of the market. One implication of the harmonious view of nature was the labour theory of value, which has a very important place in classical economics. The more labour, so goes the theory, a worker puts in, the more value he takes out in the form of wages. The outcome is ‘natural justice.’

The other concept of nature it divorces is of justice or harmony. Instead, the natural order is regarded as being red in tooth and claw. As interpreted by classical economists, 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 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.  The liberal notion that the benefits of economic growth trickle down from the affluent to the rest of the society is up the spout. Since capital feeds on itself, the fruits of economic growth tend to be concentrated in just a few hands. 

"An Economy for the 99%", an Oxfam 2017 publication, gives credence to the view that capitalism widens inequalities. Some of the findings are worth mentioning: (a) since 2015, the richest one percent have owned more wealth than the rest of the world; (b) eight persons now own the same amount of wealth as the poorest half of the world; (c) the incomes of the poorest 10% went up by less than $3 a year between 1988 and 2011, at the same time, those of the richest one percent ratcheted up 182 times as much; (d) in the U.S. over the last 30 years the growth in the incomes of the bottom 50% has been zero, whereas incomes of the top one percent have grown 300%; (e) over the past 25 years, the top one percent have gained more income than the bottom 50% put together; and (f) in 2015/16, the world’s 10 biggest corporations together had revenue exceeding the public revenue of 180 economies combined!

The market economy’s main strength allegedly consists in maximizing growth. However, the market forces did not prevent, if they did not actually cause, the recession that hit the world in 2007-08 and from which it is still recovering. Between 2007 and 2017, the world economy registered a modest average growth of 2.5%. Developed countries in particular have been hit harder: The U.S. economy grew 1.4%, Euro Area 0.8%, the United Kingdom 1.2%, and Japan grew 0.6%. So the outcome has clearly been less than optimal. When economic growth slows down, jobs are lost and social discontent balloons up. According to the Financial Times, in the first two years of recession, nine million people were laid off in the U.S. alone.   

Free trade, which lies at the heart of liberalism, has strong distributional effects within an economy, as it tends to reward relatively abundant factors of production and penalizes the scarce ones. Thus, on balance, in developed countries, like the U.S., one of the outcomes of the FTAs is that labour intensive sectors are the losers, while capital intensive sectors are the winners. In the wake of the North Atlantic Free Trade Agreement (NAFTA), thousands of American workers employed in the apparel and other labour intensive sectors lost jobs to cheaper imports coming from Mexico. 

The U.S. Bureau of Labor Statistics puts the number of jobs shed in the country’s manufacturing sector between 1999 and 2011 at six million. The stage was thus set for the rise of Donald Trump. A billionaire, Trump is well steeped in profit-making but that did not prevent him from giving a rap on the knuckles to the exponents of neoliberalism in the race for the White House. Though at best Trump spoke half-truths; he was able to take the pulse of the public discontent. On his first day as president, he pulled his country out of the Trans-Pacific Partnership (TPP) treaty and later insisted on NAFTA re-negotiation. However, his most crucial decision has been to unleash a trade war with China and other leading economies, which prompted them to retaliate. All such decisions signal a clear departure from liberalism.  

A world order or regime needs a hegemon to create and sustain it. The regime goes down if the hegemon is no longer in a position to hold it together. Thus communism went down with the USSR. Likewise, if the U.S., which has sustained the liberal order over the past seven decades, declines, or walks away from liberalism, the liberal order will fall apart, unless another country is willing as well as has the capacity to uphold the regime. If we look around the world, we may pinpoint two countries or blocs as the suitable candidates to fill the slot: the European Union (EU) and China. However, in the wake of Brexit, the EU is facing an existential crisis. Even otherwise, sustaining the global order is too heavy a cross to bear for any EU member. We may also rule out Beijing picking up the role of the hegemon, as that would entail a fundamental shift in the Chinese political system, a matter on which its top leadership has put its foot down. Such a gloomy situation portends the eclipse of the liberal world order.

From the foregoing, this does not follow that capitalism is at risk. Over the past two centuries, capitalism has exhibited enormous capacity to dig in. Starting with laissez-faire, it went on to accommodate sweated labour in the 19th century through social legislation. In the 20th century, capitalism created the welfare state to keep the ‘monster’ of communism at bay in the developed economies. In the 21st century, capitalism will not hesitate to wash its hands of free trade in the interest of its survival. Thus the post liberal world order is likely to be anchored by a new face of capitalism, which will at best give a qualified support to free movement of goods and services.

The writer is a frequent contributer to national print media on issues of politics and economy. 
E-mail: [email protected]


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