Because I am on vacation until the beginning of July, this week’s article of the #Weekly #Wintersberger was written in advance and dealt with a topic that is not directly related to actual events within financial markets.
Last year I concluded that the idea of liberalism was in renewed crisis. Sadly, my observation that policymakers will move farther and farther away from liberal principles turned out to be true.
Now that both, the left and the right, are calling for price ceilings and windfall profit taxes to dampen the effect of strongly rising energy prices, one has to soberingly realize that the attempt of the neoliberals to give liberalism a more human image failed.
However, the idea to implement collectivistic policies did not come initially from neoliberals. Once, Otto von Bismarck founded the german government health insurance to fight the growing voluntary insurance systems within the socialist labor movement. Bismarck was a formidable power politician and interventionist who primarily wanted to secure his power and weaken the socialist movement. As a nationalist, right-wing politician, he was just as much an interventionist as his left opponents.
The right and the left shared the same interest: to hand out money to particular groups. However, conservatives preferred to maintain the status quo, while the left praised socialism as the new, better system. The liberals quickly noticed that the road to hell was paved with good intentions.
The early 1920s are a perfect example of how conservative and nationalist politics tried to secure the privileges of one group at the expense of all others. The group was Germany’s extensive industry, which tried to lobby for an easy monetary policy because it benefited them. That resulted in the disastrous hyperinflation in Weimar Germany. This image of the greedy capitalist has shaped the imagination of many socialists ever since.
When the stock market crash ended the roaring twenties, the public quickly blamed it on the free market. All around the globe, the idea of liberalism was replaced by interventionism to revive economic growth.
Keynesian policies were already in place before Keynes published his General Theory of Employment, Interest, and Money. So far, Keynes’s book offered nothing new, but it served its purpose: It generated a theoretical framework for government policy.
Liberalism was in a deep crisis, and many proponents knew it. Therefore, American lawyer Walter Lippmann gathered some of the leading liberal economists of the time (including Friedrich August von Hayek, Ludwig von Mises, Wilhelm Röpke & Louis Rougier) in Paris in 1938 to discuss how to revive liberal ideas.
Most participants argued that classical liberals had to soften their laissez-faire approach to make liberal ideas popular with the public again. Especially Wilhelm Röpcke and Alexander Rüstow viewed that one has to accept economic interventionism in some areas of the economy, while economists like Mises and Hayek dismissed that idea.
The meeting is seen as the birth of neoliberalism. However, despite its aim to convince the world that a free economic system was necessary, it never could persuade a majority for a more extended period, with one exception. In 1990, when the USSR fell apart, everyone thought this was proof that a free market system was superior to a planned economy. Nevertheless, even here, the joy was very short-lived.
After the second world war, Hayek tried to gather all significant liberal thinkers in Mont Pelerin in the Swiss Alps. Still, again he and Mises failed to convince the other participants to follow the laissez-faire approach, which led to Mises’ famous tirade where he called the other participants a bunch of socialists. Hayek also quickly lost his influence within the Mont Pelerin Society, and the neoliberals became the driving force within the group.
However, the following years should be determined by interventionism. Keynesian economics and monetary expansion set the tone, although Germany under Ludwig Erhard showed what even a restrained free-market system was capable of. The German social market economy was the role model for the proclaimed third way, a liberal system with some government intervention.
Undoubtedly, one must acknowledge that the third way prevailed over the liberal idea during that time. Still, even the German Ordo-liberals could not stop the triumphal procession of interventionism.
When President Nixon cut off the gold window in 1971 and made a deal with Saudi Arabia to keep the global demand for dollars high, economic interventionism got another boost.
That marked the final step to an international monetary system that gave interventionist monetary policy a free hand. As politics determines the provisional figures at the top of central banks and the ruling politicians always were interested in interventionist policies to hand out voting presents to related groups, it was clear that politicians would take advantage of the system.
While in societal life, liberal worldviews have been able to record one victory after another, for example, the legal equality for women or partnerships apart from the classical marriage model, economic freedom got further and further decimated.
It is also painful that this social progress was not achieved by the neoliberals but by left-liberal groups, and as such, in the most anti-liberal way: Instead of freeing private life from the influence of the state and politics, as it would have been required from a liberal point of view, new laws were passed that politicized and regulated private life. In my opinion, this step contributed to an ever-increasing polarization (if one assumes that one supports the thesis that this happened, which is not entirely clarified).
After the Soviet Union finally collapsed, as von Mises correctly predicted back in the 1920s, many third-way advocates thought that interventionism could now be pushed around. In trying to do so, they overlooked how far they had already made interventionism by themselves.
Instead of giving the consumer a choice to decide on the quality of an offered good or service, more and more market entry barriers for the production of goods and services have been introduced under the guise of consumer protection, which in the end, as always, was also welcomed from the conservative side as well because this protected already established companies from competition in the market place.
Neoliberals mostly came up with an excuse for why such policies were not that bad and helped the economy move forward. Those companies, in particular, benefited from an expansion of legal requirements, hygiene regulations, and other regulations, which further undermined the responsibility of consumers and hindered the trade in goods and services. The striving for individual and economic liberty, an essential requirement for a classically liberal society, was thus made more difficult.
I suspect that a large part of the population would have come to terms with even with that interventions, as economic progress continued and made many things possible that would have been unthinkable 40 years ago. Only because of innovative forces of this residual liberalism (which were still in play) was it possible to compensate for lost jobs in industrial production, which had emigrated to the Far East during globalization.
The Great Financial Crisis of 2008 marked a turning point in history: On the one hand, some people rediscovered the theses of a genuine, liberal (laissez-faire) economic system (which would not have been possible without the internet, which now provided access to the ideas of classical liberalism), but on the other hand to a further expansion of interventionism as an answer to the economic downturn.
Under the significant influence of the intellectuals, who have always been advocates of economic interventionism, it prevailed that in the eyes of the majority of the population, it was neoliberalism, a system that they considered as one which promotes the unhampered market economy, has triggered the financial and economic crisis.
The role of the rating agencies, who had provided the securitized junk loans with triple-A ratings and are still strongly protected from competition by the US government, was turned around by the interventionists: This shows that the capitalists (who, as in Weimar times, had more of an interest in interventionism as in free markets) make the rules, so their argument goes. They overlook that it is always state interventionism that makes these things possible, and those are the ones who make the rules.
Then the more liberal mainstream economists committed their biggest mistake in recent history: In contrary to the opinion of classical liberalism, according to which everyone has to bear the consequences of one's economic actions, they propagated that the state has to intervene (very similar to the Keynesian doctrine) in this crisis to save the economy.
Privatizing profits, socializing losses! was the reproach by the interventionists to the neoliberals, and rightly so. The attempt by mainstream economists to justify these economic interventions to the general public failed miserably.
The solution they proposed for overcoming the economic crisis, a (temporary) expansion of the money supply, led to the fact that precisely those, who had previously brought themselves into problems through risky economic behavior, benefited. At the same time, the broad masses fell by the wayside apart from maintaining their jobs.
Suppose the crisis had been allowed to run free, as in the 1920 depression in the United States (you may never hear of this crisis because it was over so quickly). In that case, a transformation to a more agile and sustainable economy could have been accomplished. If one had tried to clarify this to the population, they might have been able to get their support for this presumably short, difficult period.
It is no coincidence that things like cryptocurrencies have been enjoying increasing popularity since the 2008 crisis because people are looking for alternatives to the zero interest rate trap (Ronald Stoeferle, Mark Valek, Rahim Taghizadegan) as they increasingly anticipate that they may not be able to maintain their standard of living into old age with public pensions payments only.
People feel that their economic situation did not improve during the 2010s, while stock markets climbed from one all-time high to another. They notice that the monetary policy pursued by the interventionist no longer serves to increase their standard of living but rather enriches wealthier groups, who were able to expand their economic prosperity further and further.
The claim that countries can grow out of their ever-increasing debt did not come true again. As the debt increased, the level of economic growth continued to decline.
Recent developments since the beginning of the 2020s do not point to the fact that liberalism can celebrate a resurrection. Governments try to fight every economic downturn with enormous fiscal spending (be it the pandemic or the war and the sanctions). Still, most people identify those problems with neoliberalism, the unbridled market that causes those problems.
Although it finally reached some journalists and economists that central banks and governments largen the wealth gap via monetary and fiscal policy, hardly one of them questions interventionism. Instead, governments try to solve problems with further interventions, which, if successful, mostly create many other issues.
The recent measures in response to the Ukrainian war caused a substantial increase in energy companies' profit margins. However, instead of fighting the shortage of investments in the fossil fuel industry, which primarily arose because of the ambitious plans to avoid using fossil fuels, governments implement price controls that did not work in the past and will not work now.
The interventionist approach of whatever it costs continues to be the dominant approach with which governments want to fight the crisis. During the pandemic, neoliberals called for state interventions to save the economy and protect them from the consequences of its lockdown policies.
Once again, businesses could be sure that the government stands by them in times of need, while citizens, primarily from the left of the political spectrum, ask themselves why the only thing they receive is a tiny amount of money, while all the money in the world is available for big business.
During the pandemic, the whole western hemisphere discussed whether the health system should be equipped with more capacity. Besides the argument that it takes years to train professionals, another objection was that there is not enough money to finance it.
As always, the urging of the neoliberals to return to a restrictive budget policy sanded because Keynesian economists argued against it and warned that this would choke off economic growth.
While (with the US being the exception) the people hardly received some financial aid, there was always enough money for everything else. Still, governments order millions of vaccine doses, mainly benefiting pharmaceutical companies through continuous high profits.
Now that governments have discovered that it is not a disadvantage to have a functioning military, the investment sum cannot be high enough. However, it is clearly debatable that investments in defense are pretty reasonable. However, when it comes to the public, the politicians argue that there is no money to support them. Sending weapons to Ukraine mainly leads to a windfall profit for the defense industry because those are the ones who produce the weapons the west buys and delivers to Ukraine.
Somebody who invested in those stocks is happy, but for the average Joe and Jane, it is proof that the capitalistic system only benefits the rich on their expenses. Therefore, it should be no surprise that those people are moving to the extremes of the political spectrum, which offer straightforward solutions for the problems that interventionism has created.
Ursula von der Leyen once said that sanctions against Russia come at a high price, but it is a price worth paying because one is morally obligated. To be honest, there is no valid argument against it, but I would like to point out that it is not the politicians who will pay the price but the general public. Those will be the last ones who will enjoy government aid; if they receive something, it will be a small one-time payment.
Although I reject proposals for a windfall profit tax from a liberal view, it does not surprise me that the people ask themselves why there is always enough money for everything, except for alleviating their distress in some way.
Consequently, one can say that what I wrote last year still applies: The neoliberal supporters of the third way did nothing good to liberalism, even though they had good intentions at first. It will be the propagandists of the third way who will drive people into the arms of the interventionist (I think we will be happier to have a job rather than having protected savings - Madame Lagarde) and once again let the idea of liberalism degenerate into a minority position.
It seems paradoxical that despite the previous crisis also leading to increased interest in the classical liberal ideas, they have plunged liberalism, for all its historical merits, into a renewed crisis. Unfortunately, as liberals understand it, proponents of the neoclassical economic mainstream bear much of the blame for this.
Only when people finally return to classical liberal ideas, such that losses are also privatized, can interventionism's (temporary) victory be prevented. Smaller, more agile companies and banks would ultimately benefit from this. Let us hope that texts like this will help get more people excited about liberalism!
Have a great weekend!
Fabian Wintersberger
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