Why Libertarianism Doesn't Work

Some thoughts on free-market libertarianism & the problems posed by inequality & populism.

If peace, security, and order are to be obtained and secured—the preconditions for the exercise of one’s own liberties (peace from eternal conflict, security of one’s personhood, and order by rule of law)—then there are certain truths that cannot be avoided, regardless of the rational nature of one’s movement, which must take the irrationality of others into account if it is to be of any value at all.

Countries that have open markets with relatively low levels of tax and transfer mechanisms create the conditions perfect for movements that would seek abundance through conflict, security through violence, and order through disorder.

It may very well be the case that the free market, with little to no government intervention and low levels of redistribution, is the best way to increase the welfare of the least well-off in any society (a noble aim). But even as the welfare of the least well-off improves, inequality will rise—this is by the very nature of the market. Some will be better at accumulating vast sums of wealth than others. And those that have already accumulated some minor advantage will, with a bit of luck and hard work, considerably increase this advantage over time. In short: there will be winners, and there will be losers.

A growing economic elite inevitably merges with the political elite (access to resources enables high levels of educational attainment, funds for campaigning, lobbying, the sponsorship of think-tanks and interest groups, control of media outlets etc.). And as the elite grows, so too will the populist movements. It’s no secret that growing levels of inequality correlate with growth in populism on the left and the right (typically when inequality is perceived as a result of unfairness—but not always).

Populism refers here to movements that are anti-establishment in nature: anti-elite, that stand in opposition to liberal economics, usually reject globalisation, and would typically require a highly centralised authority in order to bring about the changes they desire. There are different strands on the left and right, often replacing corporations with immigrants or retaining opposition to one but not the other.

Of course, inequality is not the only thing driving their rise in popularity, but the things that do boost their growth also drive inequality.

Labour-market shocks from deregulating markets and exposing them to foreign competition regularly lead to an overall reduction in employment in many sectors, as well as wage deductions (particularly in industries competing with Chinese imports). In the US, the “China Shock” led to a growth in anti-trade, anti-China, and nativist sentiment. Dropping manufacturing jobs in the US to have goods made cheaply overseas and then sold back to your own community for large profits (often relying on exploitative labour practices overseas) is seldom regarded as anything other than unfair—something that may drive resentment even more than considerations of equality.

If one compares the situation in the US to Europe—which, though not free of populist movements, are of a different nature (anti-EU/Brussels/Rule by Bureaucrat)—one will note that the anti-trade sentiment is not as prevalent, though Europe engages in robust trade on the global market. It’s likely that the fact that Europe has a history of strong social insurance and welfare helps balance out the negative effects of such trade shocks. This, in turn, reduces the appeal of these populist movements.

When the costs imposed on individuals by, for instance, globalisation are not shielded by robust social insurance, it drives support toward more radical and extreme political movements. Polanyi argued in the 1940s already that globalisation needs to be politically contained. Unmoderated market capitalism may lead to dire social consequences. The gains made by the wealthy, as a consequence of these markets, need to be redistributed in order to compensate those who have lost out, and to ensure none of the groups exposed are left behind.

À la Friedman, free-market proponents urge us to look at the consequences of policies rather than their intention. Well, if the consequence of deregulatory programs and limiting welfare is a form of inequality that is so easily harnessed by would-be authoritarian rulers, then yes, we should probably look at the consequences.

Perhaps the best case study for this is Chile. Once the playground of the Chicago Boys, who advocated for deregulation, privatisation and free-market policies that led to various reforms in Chile’s economy from the mid-70s. Chile’s economy has been one of the fastest-growing and most prosperous in South America, increasing the welfare of the least well off in leaps and bounds: poverty rates went from 7.5% to 1.8% in 2017 (people living on less than $3.20 a day). Foreign investment, due to favourable conditions (likely encouraged by the idea of Chile operating as a bastion against communism during the Cold War), increased the success of local businesses and raised the quality of life for many Chileans.

And yet. 2019-2021 saw protests across the country, sweeping out from the nation’s capital: Santiago. Massive income disparities, a job market with limited options for the working class, a sense of unfairness (employers aren’t obligated to provide equal pay for equal work), low government investment in higher education (making it inaccessible for many, which makes it easier for those with access to resources to entrench their positions), and numerous other perceived distribution errors all initially manifested in protests against Santiago’s Metro subway fare increase.

And then, last year, Gabriel Boric amassed more votes than any presidential candidate in history, securing the presidency for the left-wing Social Convergence party. In the wake of the protests, Gabriel has promised to implement a welfare state, increase public spending, and dismantle the bindings of Pinochet’s legacy. “Chile was the birthplace of neoliberalism,” he said on the night of his primary win, “and it shall also be its grave!”

Boric represents a sort of “moderate” response to the consequences of deregulatory mechanisms, privatisation, low public spending and rising inequality. He lowered his rhetoric to broaden his appeal to the centre and attained his coming presidency through democratic elections. But his victory—in what used to be the jewel in the crown of the Chicago School of economics—is perhaps the best indicator that economic models cannot be detached from political models. Inequality comes with political consequences, and in future, they may be far more severe than those offered by Gabriel Boric.

In a sense, the above suggests that we should act contra ragion di stato: if one is to safeguard the security of the state, one must necessarily ensure the welfare of its people. Taken differently, if one hopes to reach a society of abundance, peace, and justice, one must first obtain peace, security, and order—an impossibility in the face of growing populist movements.