Classical Liberalism and International Economic Order

Studies in Theory and Intellectual History

Razeen Sally

• Publisher: Routledge
• Year: 2002
• eBook ISBN: 9781134710256
• Topic: Business
• Subtopic: Business General
• Index: Business

This book makes an innovative link between classical liberalism and questions of international economic order. The author begins with an outline of classical liberalism as applied to domestic economic order. He then surveys the classical liberal tradition from the Scottish Enlightenment to modern thinkers like Knight, Hayekn and Viner. Finally, he brings together the insights of thinkers in this tradition to provide a synthetic overview of classical liberalism and international economic order. The author's deployment of classical liberalism strikes a different note to other 'liberal' interpretations in economics and political science. In particular, classical liberalism points to the domestic preconditions of international order, and advocates unilateral liberalisation in the context of an institutional competition between states.

1
INTRODUCTION

A recurring theme in this book is the notion of a spontaneous order: the mutual interaction of multitudinous individual components that generates a regular, self-reproducing pattern (or order) of activities. Now the essential point about a spontaneous order is that it is definitely not a preconceived design; there is no single or group mind behind it—there is nobody ‘minding the whole store’, as Thomas Schelling fittingly expresses it. The individual elements of the order have their own action and motives, with little or no inkling of the macro-order that will eventuate from their action and interaction. As Schelling goes on to say, ‘micromotives’ lead to ‘macrobehaviour’ that individual agents neither foresee nor intend; and yet the result— the macro-order— is a self-stabilising system, not a mere anarchic chaos of events.¹

One of the pillars of the Scottish Enlightenment, Adam Ferguson, captures this translation from micromotives to macrobehaviour in a felicitous phrase that will crop up on a number of occasions in the following chapters: (social) orders are ‘the result of human action, but not the execution of any human design’. These are orders that, to Adam Smith, spring to life through the operation of an Invisible Hand; to F.A.Hayek, they are spontaneous orders; and to Paul Krugman, they are self-organising systems.²

Of course, not all orders work this way. In the realm of social affairs, however, this process of spontaneous evolution is perhaps the best explanation available of the development of language and speech, the establishment and expansion of the English (and later US) common law, and, most importantly for our purposes, the operation of a decentralised market economy coordinated by a price mechanism. Moreover, as I will argue in later chapters, the spontaneous order is a better characterisation of a liberal international economic order than any alternative explanation.

Descending from the macro-order to micromotives, writing a book is rather different from the process outlined above. A book is usually a preconceived design, the intended product of its author’s mind, rather like a machine designed and put into operation by an engineer. My Ph.D. thesis, for example, was such a premeditated affair, from the conception of the initial idea, the elaboration of the theoretical model, the conduct of empirical research, through to the writing of successive chapters.

What I find initially intriguing about this book is that it is strangely different from the usual way books are authored. There was no preconceived design at the outset; the end-product became the unintended outgrowth of a series of separate studies in intellectual history begun just over four years previously. When I launched myself into the study of the German neoliberal tradition of law and economics, I had absolutely no idea that this would lead to a much more encompassing and sweeping monograph on classical liberalism and international economic order. Initially, I thought that the work of Walter Eucken and Franz Böhm in Freiburg, and of their allies Wilhelm Röpke, Alexander Rüstow and Alfred Müller-Armack, formed part of a distinctive German tradition of historical and institutional economics that had veered away from the Anglo-Saxon mainstream from the first half of the nineteenth century. However, it gradually became apparent to me that German neoliberalism had much more in common with the classical liberalism of the Scottish Enlightenment than the historicism of List, Schmoller and Sombart. Its ethical concern for individual freedom secured by a framework of legal rules, as well as its advocacy of a significant but circumscribed agenda of public policy, led straight back to Adam Smith’s Wealth of Nations and forward to Hayek’s Constitution of Liberty (the most recent expression and update of what Smith had in mind).

Soon after studying German neoliberalism I began what I thought were wholly separate studies of two US economists, Frank Knight and Jacob Viner. Once again I detected clear and strong parallels with the early design and compass of Hume and Smith, which only made me want to delve deeper into the works of the Scots in the Glasgow and Edinburgh of the eighteenth century. Only at this stage did it dawn upon me that my excursions into the life-work of individual thinkers were part of the larger whole of classical political economy, first mapped out by Hume and Smith, carried on, although perhaps in somewhat diluted form, by the nineteenth-century English economists, and resurrected by a number of thinkers in the twentieth century, ranging from Edwin Cannan, Arnold Plant, Lionel Robbins, Ronald Coase, Hla Myint and Peter Bauer at the LSE, Eucken, Böhm et al. in Germany, to Knight, Simons and Viner in Chicago (although Viner left Chicago for Princeton), and, last but far from least, Hayek, whose peripatetic émigré life led him from one centre of economic liberalism to another through the turbulence of the twentieth century (from Vienna to London to Chicago to Freiburg).³

While putting the pieces of the jigsaw puzzle together it occurred to me that all these thinkers, unwittingly or self-consciously, were essentially updating Adam Smith and, perhaps to a lesser extent, David Hume, for modern times. In the process what they had to say struck me as quite different, not only in comparison to nonliberal or antiliberal contemporary thought, but also to other varieties of modern liberalism, including the rational actor paradigm in neoclassical economics and the ‘social’ (or social democratic) liberalism that has insidiously worked its way into intellectual discourse and public chatter in North America and Europe.

Hence classical political economy came to be one connecting thread through the different thinkers covered in this book. Nevertheless, it is far from being the only connecting thread. Since graduate school days my academic specialisation has been the field of international political economy, especially that part of it that covers trade policy. A developing and increasingly consuming interest in the intellectual history of trade economics and political economy led me to the study of three thinkers, Wilhelm Röpke, Jacob Viner and Jan Tumlir, all of whom combined a theoretical bent with clear and controversial opinions on the increasingly interventionist and collectivist trend of international economic policy in the twentieth century. These were three contrasting personalities with many differences of intellectual approach, but I detected much common ground between them, and, following a closer reading of The Wealth of Nations (particularly Book IV) and some of Hume’s Political Essays, I realised that this common ground was first ploughed by the Scots in their musing on the international economic order of their time.

This realisation soon became the second—and crucial—connecting thread of the book. By this stage, midway in the research span of these interrelated studies, it was transparent that I was writing a book on the theme of classical liberalism and international economic order. From then on everything else was a filling-in exercise, elaborating each tradition of thought and drawing the links between them, particularly as far as international economic order was concerned, as well as pointing to some differences within and between the various traditions covered.

The foregoing version sounds purely ‘intellectual-historical’ in motivation, but this is far from being the case in reality. I cut my teeth on modern policy analysis as a graduate student and retain a working interest in the international economic policies of my time. Hence one other motivating factor for this book: the keen desire to relate the ideas of the men I study—some, like Smith and Hume, long dead-and-buried, others, like Hayek and Tumlir, only recently departed—to the ideological battles, policy dilemmas, institutional constraints and exigencies of the end of the second millennium.

And so the following few hundred pages have been written with a definite theme in mind, but that theme was not cast in stone at the point de départ of research. The evolution of my own knowledge reminds me of Sir Karl Popper and Michael Polanyi in their separate accounts of how personal knowledge evolves and progresses—in a nonlinear, bit-by-bit fashion, by slow degrees fitting the pieces of the puzzle into something that has shape and form. The final product is seemingly architectonic but, unlike the work of an accomplished architect, it does not issue from a grand master-plan before the building work begins.⁴

So much for the genesis and gestation of this work. Now it is high time to justify its writing. Why classical liberalism and international economic order? What is the ‘beef’ in the subject, to borrow the terminology of a recent US president?

There would not be anything astonishingly novel or path-breaking about a tome on classical liberalism in political economy and its renewal in the twentieth century. Some of the books I will draw upon, such as Henry Simons’s Economic Policy for a Free Society, Walter Eucken’s Grundsätze, Knight’s collections of essays and, most notably, Hayek’s Constitution of Liberty and his three volumes of Law, Legislation and Liberty, have already done that in one way or another. Finally, one should also mention those deeply engaging political philosophers of a conservative disposition, such as Michael Oakeshott and Bertrand de Jouvenel, whose propinquity to classical liberalism is quite striking. All these thinkers and many others have revivified Hume and Smith for our day and age.

Nevertheless, all the scholars mentioned above operate pretty much with a ‘closed economy’ model in mind, that is to say, they are thinking of political-economic processes that take place within nations. They pay little or no attention to relations between nations, let alone to a systemic view of the international economic order. This is exactly where there is a yawning gap in modern understanding. Through Hayek and others, a classical liberal view of individual freedom, the institutional-legal framework and the scope of public policy, has reappeared for national order, but there is no generally appreciated classical liberal view of international order. Inasmuch as there is a liberal defence of an open, market economy-based international order, it is left to neoclassical economists with their rational actor postulates and models of perfect competition, and political scientists who extol the virtues of intergovernmental policy coordination. An explicit recognition of how individual freedom is bound up with what happens beyond the nation-state is not really apparent. Moreover, there is little concrete awareness of the order that surrounds cross-border market-based transactions, especially in terms of the underlying legal and extralegal framework that protects property rights and contracts, and the public policies that make the international economic order oscillate between openness and closure.

This is rather odd. The classical liberal argument seems to stop at the national border, which appears particularly inadequate at a time when economic interdependence between nations is increasing and impinging ever more on ‘domestic’ activities. Surely the classical liberal case has to move from ‘behind the border’ and travel ‘beyond the border’ (to borrow terms from the trade policy lexicon).

It is not as if a classical liberal argument on international economic order has never been made. It had great prominence in both Hume’s Political Essays and Smith’s Wealth of Nations; indeed Adam Smith elaborated a comprehensive theory of international economic order in Book IV of his great work. Then the English economists of the following century took on board much of what was set out by the Scots, although some aspects of the Scottish political economy case for a liberal international economic order became gradually diluted as the nineteenth century progressed. In the twentieth century the baton has been picked up by the likes of Jacob Viner, Wilhelm Röpke and Jan Tumlir, although none of them matched Smith in developing an overarching system of international political economy. Unfortunately, the work of these moderns (which I hold in great esteem) has not had the panoramic survey and the resonance of, say, Hayek’s Constitution of Liberty in ‘domestic’ political economy. The classical liberal argument on international economic order has either had insufficient sweep, force and verve, or it has simply fallen on deaf ears.

At a time when there is so much background noise, popular and otherwise, on the state of the international economic order, and at a time when global communications make most of us more aware of its opportunities and constraints than ever before, it is high time, with the aid of Hume, Smith, Viner, Röpke, Tumlir and others, to reconstruct and set out a classical liberal perspective on international economic order. To be worth the effort, the latter should have a distinctive message and strike a different note to the conventional ‘liberal’ treatments of the same subject.

My desire to help plug this gap, to draw the link between classical liberalism and international economic order with the support of past sages, is one justification for this book. There is another ‘negative’ justification that arises from a lingering discontent with the present state of academic international political economy, particularly in the liberal tradition.

The best practitioners in international political economy are the relatively small numbers of neoclassical international economists who have a nose for policy issues and institutional constraints. Jagdish Bhagwati and Paul Krugman are, perhaps, the outstanding examples. Even so, neoclassical economists, implicitly or explicitly, tend to apply what Krugman calls ‘maximisation and equilibrium’, that is, the combination of rational utility-maximisation and general equilibrium-based perfect competition, as the benchmark to analyse and evaluate the international economic order. At least implicitly, the case for a liberal international economic order is predicated upon such a perfect competition model.

This approach is in stark contrast to the classical liberal defence of a liberal international economic order that, from Smith and Hume onwards, has never relied on ‘maximisation and equilibrium’, rather assuming that human beings are fallible and that competition is imperfect. On the contrary, the classical liberal case centrally relies on an institutional foundation of law and appropriate public policy at different levels of governance, displaying much greater sensitivity to real-life institutional constraints and policy choice than the neoclassical tradition. The appalling ignorance of the history of economic thought on the part of most modern economists renders them largely insensible to these concerns.

The situation is somewhat different with respect to the increasing numbers of political scientists who have something to say on issues of international political economy. First, one should make the distinction between US and European practitioners.

The Americans, to their credit, are more careful and precise than the Europeans in making theoretical propositions and in applying them to policy issues. On the downside, however, there is a tendency among quite a large number of US political scientists to restrict the study of international political economy to a miniscule set of questions, usually revolving around the conditions that facilitate or hinder policy coordination between governments. Quite apart from anything else, this conformism of approach stymies truly individual thinking.

One gets the distinct impression that most European noneconomists who pronounce upon issues of international political economy are either old social democrats who hark back to the Trentes Glorieuses, the Golden Age (in the eyes of its neoKeynesian beholders) that collapsed in the mid-1970s, or come from the barely reconstructed socialist Left, filling old bottles of Marxism, structuralism and dependency with new vintage, en vogue critical theory, postmodernism, feminism, environmentalism and goodness knows how many other varieties of plonk. There seems to be an awful lot of reliance on sociological mumbo-jumbo — always eyebrow-raising, given sociology’s well-earned credentials as the most dubious of the modern social sciences. Lastly, there are far too many European political scientists and sociologists who write about international political economy with an almost complete ignorance of the most basic propositions of economic science. Without a platform of economic understanding, it is impossible to say anything worthwhile about political economy. The result is a predictable and vacuous mix of do-it-yourself economics and what Krugman dismisses as Pop Internationalism.

Both US and European political scientists in international political economy have a rather skewed and reductionist view of liberalism, resulting from a near-total ignorance of the intellectual history of economic liberalism. Indeed I would hazard a guess that those political scientists in international political economy who have carefully read Hume and Smith, not to mention Ricardo, the two Mills, Senior, Torrens, Cairnes and Marshall, can be counted on the fingers of less than two hands (although that does not prevent many of them from quoting the usual well-known aphorisms from The Wealth of Nations). The product of this chronic deficiency is a straight equation of economic liberalism with the rational utility-maximising actor, perfect competition, an unqualified laissez faire, an extreme harmony of interests doctrine and a ‘nightwatchman’ state— all completely foreign to what Hume and Smith had in mind, and almost completely foreign to the nineteenth-century classical economists!

Furthermore, in political science circles, a brand of thinking that travels with the label of ‘neoliberal institutionalism’ almost monopolises the advocacy of a liberal international economic order. The latter has almost nothing in common with classical liberalism, but it has quite a lot in common with the turn-of-the-century ‘new liberalism’ and twentieth-century versions of social democracy. Neoliberal institutionalists, most of them occupying positions in US universities, have a strong, and often seemingly unconditional, attachment to international organisations and elaborate mechanisms of intergovernmental negotiation and policy coordination. They regard such mechanisms as essential to the maintenance of a relatively open and stable international economic order. At the same time most of them are at least implicit defenders of interventionist governments, generous welfare states, and corporatist arrangements uniting governments and well-organised interest groups within nation-states—all the hallmarks of a mixed economy, not a free market economy.

From a classical liberal standpoint, very few of these planks of neoliberal institutionalism correspond to a truly liberal international economic order, as I shall argue in subsequent chapters. However, because observers do not link classical liberalism to questions of international economic order, these reservations, not to mention an alternative liberal conception of international economic order, rarely rise to the surface.

Thus my dissatisfaction with the state of liberalism in international political economy, and my feeling that a full-blooded classical liberal advocacy of international economic order is hardly voiced and articulated, form the preamble to a statement of objectives for this book. The chief...

Table of contents

• Cover Page
• Half Title page
• Series Page
• Title Page
• Copyright Page
• Contents
• Dedication
• Acknowledgements
• 1 Introduction
• Part I The foundations of classical liberalism
• Part II American excursions: Knight and Viner
• Part III German neoliberalism: Eucken, Böhm, Röpke
• Part IV Constitutionalism and international political economy: Tumlir
• Part V Conclusion
• Bibliography
• Index