In defence of liberalism 2: socialist liberalism

It is all the more bitter that a misperception of liberalism by parts of the left is mirrored by an equally unreasonable and dogmatic belief in the supposed efficiency or inherent fairness of markets by many liberals. There is a third way after all.

Marc Chehab
6 October 2014

My previous post argued that the greatest achievement of the liberal revolutions of the nineteenth century was that they led to constitutional government, even though many early liberals couldn’t see beyond the racism, sexism and slavery of their societies and didn’t envision modern liberalism’s notions of radical human equality before the law.

I agreed that later progress in broadening the category of who is considered a citizen was mainly achieved by popular struggle ‘from below’. by and on behalf of the excluded. In the words of the great abolitionist Frederick Douglass:

The whole history of the progress of human liberty shows that all concessions yet made to her august claims have been born of earnest struggle. ... If there is no struggle, there is no progress. … Power concedes nothing without a demand. It never did and it never will. Find out just what any people will submit to, and you have found out the exact amount of injustice and wrong which will be imposed upon them; and these will continue till they are resisted with either words or blows, or with both. The limits of tyrants are prescribed by the endurance of those whom they oppress. [my emphasis]

I also lamented the fact that a good portion of the left seems to want to bash liberalism rather than engage it productively on the grounds of what it is in the here and now. Why is the Left so certain that it possesses a key insight or quality denied to or refused by all liberals?

Principal among many reasons is probably our disagreement over private property rights – particularly over property of the ‘means of production’ (capital assets) and the wage labour resulting from it. So this post tackles that head-on and argues that ‘socialist liberalism’ is no contradiction.

The differences

Socialist parties all over Europe have emerged from, or have been allied to the labour movement. They developed powerful critiques arguing that the economic system arising from individual property rights (and having a currency) which we call capitalism is an inherently rigged game. To put (to my mind) the most forceful version of this critique at its simplest (which happens not to be Marx’): It is systemically impossible for everybody to own a business (mainly because of the productivity gains from the division of labour), yet those who do own businesses get to appropriate profits by diverting the business’ income to their own pockets rather than to the workers.

Rather like the lottery, then, capitalism is a game which relies on losers. Markets – when they work – often do indeed reward innovation (iPhone) and entrepreneurship (Richard Branson), but these rewards flow to capitalists. If you are employed – as the majority are – whether or not you get a reward for innovation or initiative is mostly up to whether your employer is benign or not.

Liberalism, on the other hand, emerged first and foremost to secure the property rights of the growing capitalist class from absolute monarchy by subjecting everybody to the same rule of law. Additionally, most liberals have drawn decidedly conservative lessons from the disintegration of the French Revolution into the Left’s Terror and Napoleon’s empire. ‘Justice’ without ‘order’ disintegrates. To oversimplify the matter in a catchphrase: Liberals had their belief reinforced that the goal was to establish a just order, not justice per se – because they considered the latter not humanly possible.

On liberals’ distrust of power

To explain the difference consider Adam Smith’s beautiful analogy in Theory of Moral Sentiments (Part VI, Sec. I, Chap. II) about the ‘man of system’.

The man of system … is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government [justice], that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regards either to the great interests or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might [choose] to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

So if you look at society from an abstract position ‘above it’ the way a chess player sees the chess board, the solutions to its ills seem painfully obvious. In the case of the French Revolution, well, you simply remove all privilege. Done. In the case of modern Europe, simpler still, you alleviate poverty in a day by giving from the rich to the poor. Justice achieved.

Smith’s point is that, on a purely practical level, there is an inherent limit to how well such necessarily top-down solutions can work. People (luckily) cannot be shoved around the chess-board like vegetable, but will react intelligently and creatively to the way you (plan to) change society. An intelligent egoist may well abuse your well-intended charity. There is a practical limit to how well power works.

More importantly in my view, in order to (try to) shape society the way you want, you will require power to do so. And while your undertaking may be benign, will your successor be benign too? If we created a position with the power to do the right thing, does it not mean the next incumbent has the power to do the wrong thing?

The way liberals (and anarchists) see it, the problem with power is not only who is in power and what they do, but power itself!

The clash between this position and particularly the socialist left seems inevitable: the left overwhelmingly recognise that capitalism is a rigged game, whereas liberals refuse the state the power to infringe upon i­ndividuals’ human right to property (Art. 17) which is at the root of the very same capitalism. And because of this perceived incompatibility, I think, liberals are looked upon by the left as though we were no more than in bed with capitalists, antidemocratic, and elitist…

When, actually, we simply reject power’s claim to self-evident legitimacy. If you want to tell people what to do, including with their property, the onus is on you to justify yourself. Not them. Morally this is even true if ‘you’ are in a democratic majority. Though nobody is immune to double standards, I believe I speak on behalf of the liberal-minded majority of Europe when I say that nobody – no state or group – has a self-evident right to violate individuals’ human rights, including that of property. A democratic vote gives two wolves no right to eat the lamb (a recycled example from Marvin Simkin). Neither does it make a robbery more moral if two pickpockets were to first vote on who your wallet belongs to. And to accuse liberals of being ‘antidemocratic’ for upholding human rights even in the face of a hypothetical democratic majority begs the question of what moral grounds would remain to disagree with a mob’s ‘democratic’ burning of a witch.

Two liberal responses to Piketty

It is all the more bitter that this misperception of liberalism by parts of the left is mirrored by an equally unreasonable and dogmatic belief in the supposed efficiency or inherent fairness of markets by many liberals. Their hope seems to be that the capital-labour divide may be overcome by competitive markets, which should press down profit margins – so it is thought.

However, only recently Thomas Piketty delivered what is to date the most complete study on economic inequality which argues that the appropriation of capital profits is the major driver of inequality (his data was disputed by  the Financial Times’ Chris Giles, which Piketty conclusively rebutted here). The unnatural profit accumulation (‘unnatural’ being a corollary from Smith’s ‘natural price’) made possible by the capital-labour divide is a problem in low-growth economies like ours. To make matters worse, an additional driver of inequality unrecognised by most economists I think is the banks’ power to create money equivalent to state currency almost out of thin air, which, as I previously argued, is illiberal.

Let’s stay with Piketty’s study which concentrates on the ‘classical’ driver of inequality: The capital-labour divide. Policy responses liberals could accept I think can be divided roughly into two, and for non-dogmatic thinkers like Joseph E. Stiglitz, it is possible to combine the two.

First, there is a recognition that, actually, it is questionable that competitive markets were what led us into the crisis. Far from being not regulated enough, many markets are positively regulated in the interest of capital. Banks ‘too big to fail’ have been rescued for decades now, governments try to attract large enterprises and rich individuals by offering them tax reductions, and the sheer burden of paper work that regulation brings with it acts in the favour of large enterprises at the expense of smaller ones. In these cases, far from letting markets play, states have positively aided large corporations and banks. ( Obviously, it would be a logical fallacy to conclude from this that, therefore, free markets are the solution.)

The other part of the response has been that if states get the rules of markets right, capitalism can be fixed. Again Stiglitz:

Piketty’s forecast of still higher levels of inequality does not reflect the inexorable laws of economics. Simple changes – including higher capital-gains and inheritance taxes, greater spending to broaden access to education, rigorous enforcement of anti-trust laws, corporate-governance reforms that circumscribe executive pay, and financial regulations that rein in banks’ ability to exploit the rest of society – would reduce inequality and increase equality of opportunity markedly. / If we get the rules of the game right, we might even be able to restore the rapid and shared economic growth that characterized the middle-class societies of the mid-twentieth century.

This category is based on the simple assertion that if there is good reason to believe that certain markets do not self-regulate (which many don’t), the state should weigh in and regulate it. From environmental, to financial regulations, to redistributing unnatural capital gains – all of them are essentially market failures that the state is called upon to fix.

A third liberal possibility – socialist liberalism

I think there’s a third policy response which is not recognised, precisely because the left and liberals engage so unproductively. In leftist terms, is there a liberal way for workers to take ‘ownership of the means of production’ and thus end the accumulation of excessive profits in the hands of the few? And in liberal terms, is there a way to soften the unnatural accumulation of profit resulting from market failures without resorting to state power to interfere with people’s property?

There is, I think, and it’s already being practiced by upper management. In public companies the problem that emerged was that because the owners (the shareholders) give control of the company to managers, they needed a way to ensure that managers run the company in their interest. How do they do that? By paying them parts of their salaries in company shares.In this way, owners create a (Marxists would add ‘artificial’) union of interest between them and upper management, effectively turning upper management into half-workers, half-owners who gain a share in the company’s profit.

Why shouldn’t normal workers ask for the same? In Sweden, in 1975, the so-called ‘Meidner Plan’ proposed that some of the companies’ profits must go to a union-controlled fund in the form of shares. Under the plan, unions would have gained majority ownership of most companies in Sweden. (Jeffry A. Frieden. Global Capitalism. W. W. Norton. 2007. p. 367.)

A more liberal version of the same idea would be the following: Imagine if workers gained on top of their wages company shares (as individuals, not as unions, nor as a class!), they would – little by little – appropriate more and more ownership in the company they work. In effect, they would gain a share of the profit their company makes, the power to elect directors and a voice in shareholder meetings. To state the obvious, there is absolutely nothing illiberal about that.

Neither is there anything illiberal about getting there. It is entirely within the boundaries of liberalism for trade unions to organise and pressure companies (unless they push workers to breach obligations they freely committed to in their employment contracts). Nobody has the right to force you to work! Workers are entirely at liberty to refuse to work (if they don’t breach a freely signed contract). Collective bargaining, in other words, is liberal. And trade unions can perfectly well apply the same strategies they have employed for centuries to push for their workers to gain company shares for their work.

This would be socialist, because workers would gain control over ‘the means of production’. It would be liberal, because individual human rights would be upheld, state power wouldn’t be increased and nobody’s property would be taken away. It would even be capitalist, because ‘the means of production’ would still be in private hands.

Would this lead to the socialist utopia? No – luckily not. Healthy market exchange wouldn’t be hampered. Wages, though, would almost certainly become more equal as profits would be distributed more widely and the need for state-led welfare policies would probably be reduced. Indeed, if anything, it would be a more liberal society than the one we have today. For is it too optimistic to expect that a company with worker-shareholders will be more prudent and far sighted than one heavily influenced by cocaine-addicted, greedy short-term investors? Wouldn’t this be closer to the real spirit of liberalism?

So: workers of the world, unite! – within your respective unions to push your respective employers as respectfully as possible to pay you individually in company shares! (Yes, on the PR front, that doesn’t work.)

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