Liberalism at the crossroads

Dismantling neoliberalism and reverting to the social democracy of the past cannot be the answer


US President Donald Trump. Photo: AFP
US President Donald Trump. Photo: AFP

Liberalism is in disarray, struggling to make a credible case for itself amid counter arguments from both the left and the right. The failure to do so is there for all to see: Donald Trump on the far right, and Bernie Sanders on the left. But a floundering liberalism does not mean that these alternatives have credible answers to the underlying economic problems of postmodern society deriving from ageing, growing inequality, globalization, the loss of competitiveness to rising powers, and robots replacing human labour. The right and left seem to be winning on the rebound.

Where might the answers lie?

Contemporary political systems are underpinned by the revolutionary triptych of liberty, equality and fraternity first assembled during the French Revolution. The interactions and feedback loops between these often contradictory panels led to the rise of the left, right and centre that throw an explanatory light on much of modern history, from the great revolutions of the 17th and 18th centuries, to the romantic and nationalist movements of the 19th, the socialist, fascist and anti-imperialist revolts of the 20th, and the fault lines of the 21st.

Liberalism can be seen as a triptych with liberty at the centre, buffeted by equality and fraternity in the two side panels. In socialism, the central panel is occupied by equality, and in right-wing regimes, by fraternity. Leave man free and inequalities multiply. Attempts to equalize constrain individual liberties. Fraternity expands collective liberty at the expense of the individual and obfuscates inequalities.

Liberty spelt the doom of the divine right of kings and inspired the great modern revolutions. Over time inequalities multiplied, resulting in the Romantic revolt and socialism in the 19th century, culminating with the Russian and Chinese revolutions in the 20th century. The Marxist critique that capitalism has an inherent tendency to impoverish and concentrate wealth through growing inequality continues to be relevant to this day.

Classical liberalism underscored equality of status and opportunity. All men may not be equal in all respects, but as Abraham Lincoln observed in 1857 in his speech on the Dred Scott decision of the US supreme court, they are equal in the eyes of the law. Socialism’s appeal lay in underscoring equality of outcomes. Liberalism countered the crisis of the 19th century by humanizing itself through social democracy, which constrained economic liberty through tax transfers to reduce growing unequal outcomes, affirmative action and the welfare state. These constraints on economic freedom ultimately led to a second crisis of capitalism, with liberalism reinventing itself under Margaret Thatcher and Ronald Reagan by restoring economic freedom. This neoliberalism has now run its course, leading to its third major crisis.

But dismantling neoliberalism and reverting to the social democracy of the past cannot be the answer. The challenges of the 21st century are different from those of the 19th and 20th. Whereas inequality worsened formerly alongside competitiveness and robust economic growth, presently inequality is growing alongside declining competitiveness and trend growth relative to the new rising powers.

Liberalism’s solution to growing inequality was to transfer incomes from the rich to the poor through taxes on income and trade. Reliance on such taxes was a double-edged weapon with negative externalities in the form of reduced competitiveness and incentives to invest and produce. The current crisis calls for addressing inequality without impairing competitiveness and animal spirits. One way of doing so is through a shift from trade and income taxes to inheritance taxes. Income earned by individuals during their lifetime, including the wealth accumulated as a result, could be subject to low taxes. Inherited wealth, on the other hand, could be taxed heavily. This would both encourage enterprise and discourage the kind of inherited privilege targeted by those who stormed the Bastille. In a sense, this is the unfinished agenda of the French Revolution. A number of operational issues would doubtless need to be debated and resolved, in particular removing the loopholes that currently render inheritance taxes ineffectual, excluding going concerns such as public corporations, marking illiquid assets to market and optimal rates.

Fraternity is closely linked to both liberty and equality, but it takes the collective rather than the individual as its point of reference. It was originally defined narrowly to be exclusive, as it excluded “other” ethnic and social groups (such as slaves). This narrow definition frequently led to a clash with liberty, resulting in the rise of nationalism that broke up the great empires following the Napoleonic wars, to wars between European states culminating with the two world wars, and the anti-colonial and civil liberty movements. Globalizing forces, beginning with customs unions, the European Union and virtual communities spawned by the communications revolution, are further diluting the concept of the other, leading to an increasingly inclusive concept of fraternity. This is both undermining the nation-state and creating a nationalist backlash, with the global migrant crisis as the flashpoint.

Liberalism was a very disruptive force, as the history of the West makes amply clear, igniting social upheavals, wars between nation states and world wars. The panels of the triptych were shuffled from time to time, resulting in the nationalist and socialist revolts. The influence of these disruptive forces have by no means ended, but regimes on the far left and right that challenged liberalism during protracted economic downturns and crises have proved unstable, ultimately succumbing to internal revolt. The liberal triptych has proved more durable, bouncing back time and again after reinventing itself despite periodic crises along the way. It is likely to do so again. It is no coincidence that societies with the greatest political stability and highest per capita incomes are liberal. The central panel of the Liberal triptych is presently being pressured by the equality panel on the left on account of rising inequality and diminishing economic opportunities, and by the fraternity panel on the right through a resurgent nationalism. It is, however, a triptych worth fighting for.

Alok Sheel is a retired civil servant.

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