Reviving classical liberalism

Sweeping through 2,000 years, Deepak Lal performs the vital task of making history relevant for contemporary world. I look at Prof Lal's "Reviving the Invisible Hand: The case for classical liberalism in the twenty-first century" in the Financial Express, on 23 July 2006.

The trade negotiations at WTO are stalled. Clearly, ten years on, the multi-lateral platform provided by WTO has run out of steam. The focus has shifted to bilateral or regional trade talks, but this is fraught with many pitfalls. So, a few people, including this author, have been calling for unilateral trade liberalisation and economic reforms as a way to capitalise on the economic follies of nations who prefer protectionism.

It is perhaps a coincidence that Deepak Lals latest book Reviving the Invisible Hand: The case for classical liberalism in the twenty-first century appeared at this time. Lal, a renowned development economist, has given a clarion call for unilateral trade and economic reforms. Sweeping through 2,000 years of history, particularly focussing on the past two centuries, Lal performs the vital task of making history relevant for the contemporary world

In Chapter Three, looking at the history of trade, Lal divides the past 200 years into four stages. In the 19th century, the case for free trade was seen as a special case of the argument for laissez faire. In the first half of the next century, the case for free trade was increasingly qualified, and numerous arguments for protectionism emerged. Since the late 1950s, in the third stage, the link between trade and laissez faire was broken with the rise of social democratic idea. Today, Lal argues that the time for the fourth stage has come with the need to restore the case for laissez faire along with free trade.

Ridiculing the idea of fair trade, Lal outlines how the idea arose in the US in 1970 to counter Japans rise, and the same notion is being used by many others to counter the rise of China and other developing countries. Lal explodes the myth of the race to the bottom, and strongly endorses the demand for social standards in the WTO as just high-minded arguments for protectionism.

Lal acknowledges that despite the economic illogic of the GATT and WTO processes, based on looking at trade as a zero sum game, it has been able to remove some of the worst forms of protection. But he credits this to the US support for multilateralism. Lal explains this shift in sentiments in many developed countries to the shift in labour laws and demographics. This has made the workforce more rigid, unable to quickly acquire the skills necessary to keep pace with competition induced by trade, and technological change. Consequently, political opposition to liberalisation has risen in the West.

Lal devotes two more chapters to explaining this opposition to trade and globalisation. In Chapter Seven, he argues that with the collapse of socialism in 1989, an insidious collectivist virus has spread across the world seeking to destroy capitalism by providing it with human face.

He draws a distinction between the classical liberal tradition of English Common Law and the infinitely expansive Continental (European) Public Law tradition. In the former, rights arise as the other side of a voluntary agreement between two parties, where the list of prohibited actions are limited to those causing harm to the other side, therefore limiting the scope of disputes over the permissible actions by one or the other side. In contrast, the Continental tradition requires agents to get permission to undertake feasible actions, and since the possible feasible actions are infinite, such a system of endless rights inevitably leads to endless disputes. Lal concludes that these socialist impulses are atavistic. He urges the state to restrict itself to providing public goods which are essential part of the infrastructure for efficient globalisation, upholding its citizens liberty to undertake any feasible action which does not do anyone else any harm, and which does not renege on obligations. All other aspects of morality are best left to the family and other civil society institutions.

The only point I may add to this very limited yet powerful recommendation is that with the advances in economics and technology, the scope of public goods tend to shrink, while expanding the scope for private action even more.

In Chapter Eight, Lal goes to battle against a myriad of non-governmental organisations (NGOs), the storm troopers of the anti-globalisation movements. Tracing the roots from De Tocqueville view that voluntary civil society associations were identified as being the most important for maintaining democracy in America, Lal notes Mancur Olsons criticism of the benign pressure groups. He accuses them for reflecting the ideals of the global rich even while claiming to speak for the poor. Buying respectability with the enormous funds at their disposal, and without being accountable to the people whose interest they claim to champion, Lal writes that the interests of these NGOs lie in creating scares to maximise their income. Lal spends a few pages looking at various environmental scares from DDT to global warming to genetically modified crops and concludes that the green movement is a modern secular religious movement engaged in a worldwide crusade to impose its habits of the heart on the world. Its main target is to prevent the economic development which offers the worlds poor any chance of escaping poverty.

Lal continues to provoke throughout the book. To this reviewer, one such question is in Lals conclusion, democracy may be a preferred form of government as it promotes the valuable end of political liberty, its instrumental use to promote prosperity may well backfire. To Lal, who traces the relationship between good governance and prosperity to the classical liberal fathers (David Hume and Adam Smith), what matters for development is not political but economic liberty, and for that a state which views itself as a civil association.

Democracy and marketplace need not be viewed in isolation. If economic liberty is not manipulated to accommodate an inflation of pseudo-political rights, and political freedom is not sacrificed for the sake of personal economic aggrandisement, then in the convergence of political freedom and economic liberty, the 21st century might be seen to be the true progeny of the 19th century classical liberalism.

Those who fail to appreciate history are prone to repeat the same mistakes, whose costs are rising and the poor are paying with their lives for the follies of policy makers.

This book should help clear away the intellectual cobwebs and empower policy makers to initiate some of the pressing reforms with conviction. The book brings crucial economic history back to life.