The Development of Classical Liberal Ideology: Next installment

 By way of introduction, here is a word from Paul Campos:

Sociopathy can even be transformed into a political ideology: It’s called “libertarianism,” and its votaries labor mightily to escape the natural implications of their views, by inventing elaborate and subtle arguments about how self-interested defection from social norms will not actually be self-interested in the long run, for Reasons.

 

A common source of confusion is that the term "liberal" has come to mean something rather different than it did in the 19th Century. The so-called "neoliberalism" that we endured beginning with the Clinton Administration was actually an attempt to get back to something closer to the original meaning, and probably should have been called paleoliberalism. But libertarianism is the term we use today for what was called liberalism in the 19th Century.* I hope that leaves everybody less confused.

 

The Wealth of Nations, as I have said, is not a scientific work. It doesn't rely on any sort of rigorous empirical observation. On the contrary, much of it consists of fables and myths, and what observations is does contain are largely anecdotal.  As the physical and biological sciences made breakthroughs in understanding and gained prestige, economists felt the need to place their own theorizing on a more rigorous footing. However, they reasoned backwards: rather than doing real research or conducting experiments, they considered what component facts would need to be true in order for Adam Smith's claims about the Free Market to be supportable. Then they turned these component necessary facts into assumptions, from which they built their theory much as Euclid built his. Sadly, the assumptions are not true, which should have been embarrassing, but which in fact hasn't deterred economists from teaching their fantasy-based theory to college freshman for 150 years or so. 

For today, I'll just start by listing a few.

The first is probably the most egregious and obviously ridiculous. That is the assumption of no externalities. It means that the costs and benefits of any transaction are fully captured between the parties. You sell me coal, you get the money and I get the coal, and we're both happy. There are no other consequences to anybody else. Economists acknowledge that externalities are possible, but they pretend that this is an unusual occurrence, called a "market failure," which might justify some trimming around the edges. But in fact it is totally pervasive, it is difficult to imagine a transaction without externalities.

Another assumption is perfect competition. That means that whatever I'm looking to buy, I can find a large enough number of willing sellers that I'll find exactly what I want and they'll have to give me their best price, or I'll go the next one. Also, they can't conspire among themselves to jack up the price. Even Adam Smith recognized that this was not a natural state of affairs, and we have laws purporting to prevent monopoly, but they aren't enforced. There are also so-called "natural monopolies," which we'll get to later.

Other assumptions include perfect information, willing sellers and willing buyers, and assumptions about human psychology and behavior, which have been definitively proven false. We'll discuss these.

Finally, there is a problem that classical economists and libertarians usually just ignore, which is that even if the mythical Free Market did work the way they pretend it does, it contains no mechanism that produces outcomes which are necessarily just or equally beneficial to everyone. On the contrary, the dynamic of unconstrained capitalism is to concentrate more and more wealth in fewer and fewer hands, and there is no argument that would convince more than a very small number of people that this is fair or desirable. For a while, around the mid-20th Century, this stopped happening, but now it is happening again. It is one of the two great crises of our age. The other has to do with those ghostly externalities.

* Some libertarians in addition to being economic liberals in the 19th Century sense also claim to repudiate laws enforcing moral restrictions such as those against homosexuality or drug use that 19th Century liberals might support, but for the most part this is not a priority for them.