Will the 2020s be a good decade for classical liberals?

27 January 2022 // Alexander Hammond & Chris Snowdon

YES – says Alexander Hammond

It is unlikely that most people will be rampant classical liberals by 2030. Still, for the remainder of the decade, the forces that classical liberals believe in, namely, the ability of markets to innovate, provide wealth, and improve living standards, will continue at a staggering pace.

The economic historian Joel Mokyr distinguishes between two different types of economic growth: ‘Smithian Growth’ represents the gains caused by the expansion of trade, whereas ‘Schumpeterian Growth’ are the economic gains generated by new ideas, innovations, and technological changes.

The developing world (as was also true historically in the West) still has a huge potential for gains from Smithian growth. Fortunately, in these regions, the good institutions (peace, the rule of law, protection of private property, and open trade) on which Smithian Growth relies are improving.

According to the Fraser Institute’s Economic Freedom of the World Report, poor nations are continuing to become more economically free. In addition, the ‘gap’ in the average economic freedom score between developed and developing states has been closing fast. While the most recent data available to measure Economic Freedom are from 2019, there is little reason to think Smithian Growth will falter in the developing world throughout the rest of the 2020s.

Take the African Continental Free Trade Area (AfCFTA) as one example. Implemented in January 2021, the AfCFTA aims to remove 90% of tariffs on goods and services traded between states within ten years. The World Bank has estimated that if all African states ratified the agreement, by 2035, more than 30 million Africans would be lifted from extreme poverty. To date, fifty-four of the fifty-five African Union states have signed the agreement.

In the West, on the other hand, most economic progress is dependent on Schumpeterian Growth. Gains from trade liberalisation (e.g . via new free trade agreements) are not to be sneezed at, but we are already benefitting from fairly open and integrated economies.

It is worth considering the immense number of innovations that have transformed billions of lives and have dominated the West’s economic progress in just the last couple of decades. Smartphones, cloud storage, Google, Google Maps, video calling, Bluetooth, social media, EVs, multi-use rockets, cryptocurrencies, gene editing, and even vaping, did not exist 20 years ago. Countless production processes have also become more efficient.

While onerous government regulation, high taxes, and other barriers could lead to less innovation, there is little reason to believe that it will stagnate. Unlike Smithian growth, where gains can become exhausted either as states become increasingly integrated, or decline as institutions and peaceful cooperation falter, Schumpeterian Growth is more resilient to external shocks and irresponsible policies. As Mokyr notes, “knowledge, once acquired cannot easily be reversed.” Given Schumpeterian Growth also relies on new ideas, it can, at least theoretically, be sustained forever without diminishing returns.

Ultimately, throughout the remainder of this decade, in the developing world economic growth caused by increasing levels of free trade and strong institutions will lift tens, if not hundreds, of millions of people out of poverty. In the developed world, the innovations that underpin economic growth will continue to compound and, in doing so, will improve the lives of us all.

NO – says Chris Snowdon

The 2020s will not be a good decade for classical liberals. The basic lessons of economics will keep being ignored and governments will continue to unofficially implement ‘modern monetary theory’.

The decade has not exactly got off to a flyer. This year will be the third year in a row in which Western governments pour borrowed billions into increasingly inefficient Covid-prevention schemes. When that fire has finally been fought, they will pour borrowed billions into incredibly inefficient climate change schemes. Much of this money will be printed, and real incomes will stagnate, fall or barely rise in many countries. Under pressure from an electorate that wants more public spending and lower taxes, they will deal with the cost-of-living crisis by pouring more borrowed money into the leaky bucket of the welfare state while they look for more things to ban and regulate.

North America and most of Europe is a write-off from the perspective of classical liberals and things will only get worse as millennial socialists and woke nihilists grab the reins of power.

Any hopes that China would become more liberal once it was admitted into the World Trade Organization have been dashed. It is currently in the process of levelling down one of the classical liberals’ favourite case studies, Hong Kong. Like Russia, China is retreating into autocracy and can only be saved by revolution. The same applies to Belarus, Venezuela, North Korea, Cuba, Nicaragua and most of the countries that end in ‘stan’, among many others.

Much of South America is an economic basket case and Turkey is currently trying to tackle inflation by lowering interest rates. If there is hope of some economic sanity prevailing it lies in India, Africa and parts of Eastern Europe but only if they can strengthen their institutions and tackle corruption.

Despite it all, there are so many people living in Africa, India and China that the income of the average global citizen is bound to rise in the 2020s. Even a little bit of capitalism and technology goes a long way. Any country that drops tariffs and takes Marxist economics less seriously is bound to see an impressive reduction in absolute poverty. Classical liberals have largely won the argument for free trade and against old-school communism and the world has benefited greatly as a result, but we have not won the arguments against big government, high taxation, money-printing and over-regulation.

Liberalism – in the uncorrupted, British sense – is a dirty word in most of the world and is in retreat in many of the countries that once purported to practise it. Things will get worse before they get better.

This article appeared first on the IEA’s blog. 

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