Economic Freedom Libertarian Philosophy

Economic Freedom and Libertarian Philosophy

There are features of this attempt at a 'technical' definition which may be called in question and which must be considered later, but it will be recognizable to those economists who have elevated economic freedom to an important goal in its own right and have claimed that it is the most important means of ensuring that the economy develops at the right 'tempo'. Discussion of the usefulness of the concept of economic freedom, therefore, centres on these two libertarian propositions.

He who lets the world, or his own portion of it, choose his plan of life for him, has no need of any other faculty than the ape-like one of imitation. He who chooses to plan for himself, employs all his faculties. He must use observation to see, reasoning and judgment to foresee, activity to gain materials for decision, discrimination to decide and, when he has decided, firmness and self-control to hold to his deliberate decision

... It is possible that he might be guided on some good path, and kept out of harm's way, without any of these things. But what will be his comparative worth as a human being? It really is of importance, not only what men do, but also what manner of men they are that do it. (Mill, 1859)

The passage captures the essence of the libertarian view of the good society, clearly implying that it requires that individuals should accept the necessity for choosing and for recognizing their responsibility for making choices. It must simultaneously require that, to develop the capacity for choosing, individuals must have the widest possible freedom of choice in the acquisition and disposal of resources. Two further conclusions follow.

The only restriction on economic freedom experienced by the individual should be when such freedom harms others.

The individual is not accountable to society for his actions and this, together with the different and changing preferences of individuals, makes libertarians distance themselves from attempts to establish a 'social welfare function' (cf. Rowley and Peacock, 1975).

The second proposition maintains that economic freedom brings the added bonus of promoting the economic welfare of both the individual and of society. Economic freedom encourages the individual to 'better his condition' (Smith, 1776) by exploiting opportunities for specialization and gains from trade which will be fully realized through the spontaneous emergence of markets. Not only is economic freedom regarded as the only material condition compatible with human dignity but it is also a necessary condition for the economic growth of the economy and for its adjustment to the changing preference structures of its members in response to market forces. The market is a 'discovery process'(Hayek, 1979) in which participants adjust to change, giving rise to the notion of the 'invisible hand' which co-ordinates human economic actions automatically without recourse to government intervention. Pace Hahn (1982) and others, libertarians do not attach importance to a general equilibrium solution, attained by the operation of competitive market forces (cf. Barry, 1985). Indeed, though some exceptions will be noted below, it is claimed by supporters of the doctrine of economic freedom that disturbance of the natural process of exchange by government intervention assumes knowledge of the intricacies of the economy which is vouchsafed to no one, but there is no guarantee that officials, who maximize their private interests like everyone else, would be willing to maximize some social optimum even if they knew how to do so.

It was clearly recognized, by Hume and Smith for example, that for markets to work efficiently there must be a well-defined system of property rights and that costs of contracting between individuals in order to benefit from gains-from-trade would need to be minimized. The promotion of market efficiency was therefore bound to require some government intervention. No specialization or gains-from-trade would take place in a society in which there was no machinery for settling disputes and for preserving law and order. Acceptance of coercive intervention, however, requires that the 'rule of law' prevails. The law must be prospective and never retrospective in its operation, the law must be known and, as far as possible, certain, and the law must apply with equal force to all individuals without exception or discrimination. The state could also have a role in reducing the costs of contracting both by the removal of barriers to trade and to factor mobility and by the positive encouragement to the reduction in the costs of transport. In this latter respect Adam Smith supported reduction in the 'expense of carriage' by state financing of road building and supervision of financial methods to promote road maintenance and improvement.

At no stage therefore in the development of the doctrine of economic freedom, as understood by economists, was it regarded as synonymous with 'laissez-faire'. At the same time, the role of the state in respect of the promotion of economic freedom was and has remained strictly limited in libertarian thinking. Indeed, some modern libertarians devote much discussion to the possibilities of 'privatizing' even such traditional functions of the state as the maintenance of law and order.