«The financial sector is a means and not an end in itself»

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You believe that classical liberals are too focused on economic and financial questions. Why?

Over the past fifty years, much classical liberal thought became very focused on economics and didn’t really talk about some of these other philosophical questions. Classical liberal thinkers of old would have found this very odd. If classical liberals are going to persuade wider audiences of the validity of their positions and arguments, then they need to do good economics, but they need to do other things as well.

 

Has classical liberalism failed?

Classical liberalism has narrowed, and this has limited its attractiveness. It tends to attract people who are primarily interested in and focused upon economics, and who are often less interested in the other broader questions that classical liberal thinkers have traditionally addressed. There’s a tendency to think that classical liberalism somehow emerged from nowhere at the end of the 18^th century, whereas if you study the history of classical liberal thought, you realize that its antecedents go back a very long way. Hayek, for example, argued that they went back to the ancient Greeks, to the world of Athens.

«Classical liberalism has narrowed.»

 

What has led to the deterioration of the classical liberal message?

Classical liberal thought has become somewhat of a victim of developments over the past one hundred years. For one thing, it has to do with the heavy emphasis upon specialization, which is very characteristic of most universities today. For older generations of classical liberals, it was different. Hayek, for example, went to the University of Vienna, he studied economics, but he also studied law, did philosophy, was free to go to sit in on classes that he just happened to be interested in. It was a very broad, but also deep education. It was really very much what would be called a liberal education. Here, I don’t mean classical liberal, I mean “liberal” in a broad sense where you’re deeply exposed to many disciplines.

 

But there are also economic challenges to classical liberalism. Our economies are not growing, though the financial system seems to be doing well.

Growth rates in Western countries are very low and few developed economies manage more than two percent growth a year. That tells us that there are some deep problems in developed economies. And while the financial sector and capital markets are very important, they’re means and not ends in themselves. They serve the wider economy by efficiently allocating capital; that’s their primary purpose. We have to ask ourselves what is going on in in the non-financial part of the economy where capital is ultimately created through production. Its weakness is a problem because if the economy is not growing at a dynamic pace, then it’s likely to start going backwards, and that’s what we’re seeing now.

 

Why aren’t our economies growing?

One reason is declining levels of entrepreneurship, not just in Europe, but in some parts of the United States as well. Entrepreneurship is very important, because it is the process by which new things, new ideas, new products, and new services, are brought to life, and end up in many cases being immensely beneficial to us. So, when entrepreneurship starts to decline, that’s a bad sign. We’re seeing this decline in most developed economies. Secondly, in some Western countries, what I call the ‘anti-growth mentality’ has taken root; there are people on the political left and right who see economic growth as bad, who want zero growth or even negative levels of growth.

 

What does that mean?

It tells us that when you have lots of people, particularly in the political system, who see growth essentially in neutral or negative terms, then there’s no reason to expect that they will do anything to try and reignite and expand the pace at which economies grow. Another problem is the disincentives to be economically creative: whether it’s tax rates or whether it’s levels of regulation, there are all these different types of structural barriers to people being economically creative.

 

What do you make of the zero-growth movement?

In many Western societies, most people are acclimatizing themselves to a new reality – they are settling for complacency. They’re just assuming that there’ll be enough growth to keep things ticking over, but not enough growth that you will see genuine dynamism emerge within an economy. We’re so far away from the world, say, of the 19^th century where we had sudden, very quick and vast amounts of growth. That was a society which was heavily influenced by classical liberal ideas, particularly about the economy. By contrast, in Western countries today, people are afraid of risk, afraid of being creative, fearful of thinking how things might be different.

 

 

Given these conditions, why should anyone become an entrepreneur?

If you have an entrepreneurial mindset and you’re living in a highly regulated, highly taxed society, then my guess is that you’re either going to leave that society and go somewhere else or you will focus your entrepreneurial abilities, skills and insights into gaming the political system. Hence, the entrepreneurial talent within society becomes directed not at creating new goods and services that people want and desire. Instead, it becomes focused upon how to secure things from the political system. I’ve often thought that people who are very good political entrepreneurs would probably be very good private sector entrepreneurs as well.

 

Classical liberal thinkers of old foresaw this danger, right?

There’s a famous part of Alexis de Tocqueville’s “Democracy in America”, where he talks about how he asked the question “how democracies can become despotic?” And he answers that this can happen when the political class promises people that “We will give you, the people, what you want, as long as you keep voting for us.” Tocqueville called this soft despotism. Today, we observe political parties on the left and the right basically competing for people’s votes by offering people stuff in exchange. The political class is not saying things like, “We’ll reduce regulation and make it easier for you to be entrepreneurs and be competitive.” That is not a recipe for growth. It’s a recipe for economic stagnation and political corruption.

 

But those opposed to economic growth want to deprive us of stuff, they want us to fly less, eat less meat, etc.

Well, indeed, there is a contradiction here. On the one hand, they’re telling us not to get on planes, not to drive cars, not to use air conditioning or eat that steak. But at the same time, they’re also saying that there is no such thing as a welfare state that’s too big, and that we can never have enough regulation. There’s a contradiction built into many of the things that they say, where they’re in fact trying to stop us from doing certain things and encouraging us to opt into a type of soft form of serfdom based around the welfare state. The current political situation makes it very hard for a reform-minded, classical liberal thinker or politician to come along and say, “Vote for me, I’m not going to give you more stuff. I’m going to give you less stuff, because I want you to be creative. I want a more competitive economy, I want more growth.” That’s a very difficult political message to sell these days.

 

In the past decades, central banks have supposedly been made independent from politics. What lessons did we learn from that?

We learned that giving central banks independence has not made them immune from political pressures. Governments do have influence, whether it is governments speaking in very negative terms about central banks, or whether it’s in terms of governments, presidents, prime ministers or heads of state virtually demanding that central banks behave in a particular way. In other words, independent central banks are still subject to enormous political pressure. At the same time, in societies which claim to be free and democratic, the notion that institutions must operate with accountability to the citizens is very difficult to square with the idea of having independent central banks. That raises questions of legitimacy.

«We learned that giving central banks independence has not made them immune from political pressures.»

 

But have central banks done their job properly?

It hasn’t helped that many central banks have made some serious mistakes over the past fifteen years, whether it’s keeping interest rates too low, or raising them too quickly. Well, no one’s perfect. But I haven’t seen any central bankers fired. I haven’t seen any central bankers resigning because of bad performance on their part. On the one hand, I like the idea of central banks setting interest rates, setting monetary policy, without excessive pressure from government, because when governments run monetary policy, they tend to do it in whatever way they think serves their immediate political interest, not the long-term well-being of the economy. Again, however, central banks now have a legitimacy problem, because they’re not accountable.

 

That much power might lead to corruption.

Or worse. Now central banks are being asked to intervene and try and shape policy about things ranging from climate change to diversity, equity and inclusion programs. The US Federal Reserve is being challenged to shape monetary policy in ways that will fight climate change. To which my response is: That’s not the purpose of a central bank. What this fundamentally points to is the emergence of technocracy across society, whereby we have effectively handed over entire spheres of human activity to experts, people who are specialists in particular areas of human endeavor.

 

In what area, for instance?

The most vivid example we saw of that more recently was during Covid. Many governments effectively handed over the conduct of public policy to epidemiologists, to people who are experts in disease control. They weren’t interested in the effects of lockdowns upon the economy. They weren’t interested in the effect of lockdowns on children’s mental health. They weren’t interested in the effects of lockdowns upon things like democratic accountability.

 

And you oppose experts making political decisions?

The people who need to make decisions about public policy are the people who are elected to do so. Experts are important because they can provide specific knowledge and insights that political leaders generally don’t have. But when you put experts in charge of entire ministerial portfolios or entire spheres of life, then, because they’re experts, they tend to have a very narrow perspective. That’s a problem because, as the expression goes, experts should always be on tap – not on top.