Liberalism by Fawcett Edmund

Author:Fawcett, Edmund
Language: eng
Format: epub
Publisher: Princeton University Press
Published: 2014-05-31T16:00:00+00:00

v. Keynes, Fisher, and Hayek (i): Liberal Economists in the Slump

By the 1930s liberalism’s economic disappointments were acute. Confidence in free markets and limited government was seriously shaken. It took strong nerves in 1936 to agree with Maynard Keynes that capitalism, though given to “severe fluctuations” was not “violently unstable.” Keynes proved correct, but for believers in the system the gap between turbulence and self-destruction seemed to have narrowed alarmingly. The crisis of the 1930s was on a new scale. Events were shredding liberal platitudes. Economies were not righting themselves when disturbed. Free markets were not bringing social peace.

Liberal belief in laissez-faire economics, never pure or wholehearted, had already weakened at the end of the previous century. The “new liberals” of the 1900s tempered free-market, small-government economics with insurance and welfare of a limited, if expandable, kind so as to cushion deleterious social effects of the market. In winning the battle for progressive income tax, they had broken a taboo against government redistribution of wealth. Save in Britain, free trade was no longer considered a semireligious mark of liberal principle, but treated as one tool of policy among others, to be judged by results. Thrown together in wartime cooperation, business and government discovered productive affinities of scale and organization neither had suspected, encouraging the idea that both could work together as well in peacetime.

Those were significant changes in liberalism’s economic outlook. Yet they did not yet add up to a coherent new vision. In the 1920s much of the old “hands-off” faith returned. Indeed for a time the course of events caused the old faith little serious challenge. A postwar slump of 1920–21 in Britain and the United States was brief. Germany’s finances stabilized after the hyperinflation of 1923 with surprising speed. France in the 1920s broadly prospered. Internationally, a revised gold standard appeared to restore the prewar order.

The crisis of the 1930s broke the spell. Liberalism had confronted nothing like it before. Not only was the breadth and depth of the economic slump unprecedented. Liberalism, in its woes, now faced serious political competitors. Between 1929 and 1932, American output in money terms shrank by 40 percent. Joblessness in 1932 stood at 15 percent in Britain, 17 percent in Germany, and 22 percent in the United States. As liberal parliaments struggled without answers, Bolshevism and fascism loomed as appealing alternatives. Even before the slump, newborn or fledgling democracies in Russia (1917), Italy (1922), Poland (1926), and Lithuania (1926) had collapsed into one-party or strongman rule, or like Greece swung between democracy and dictatorship.

A convincing defense of the prevailing order needed accordingly an economic and a political part. The first had to show that capitalism could still be counted on to deliver the goods: that a return to rising and shared prosperity would continue to underpin liberal democracy. The political defense had to show that the social order and stability that liberals craved was still possible on liberal terms. It had to show that the benefits of prosperity and social peace could be won without concession to domineering power and latter-day tyranny.

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