Hayek, Schumpeter, and Friedman – some of the great liberal thinkers of the 20th century – are not to everybody's liking. Even less so in times of economic crisis where markets are condemned for their volatility and government is called upon to regulate and protect. But everybody should listen to what these thinkers have to say on the importance of economic freedom, for long-term growth but also for civic rights and political liberty. One may disagree with their specific conjectures and the fundamental value they attribute to freedom, but one must not ignore their basic tenet: that state intervention has hidden costs which cannot be fully appreciated one by one for they together shape the society we live in.

The principled vision of a free society at the heart of earlier liberal writing is rarely expressed in current politics. Debate about reform of the Common Agricultural Policy (CAP) can serve as an example. The CAP is criticized for all kinds of shortcomings: for distorting the economy and harming trade, for stimulating pollution and inadequately promoting public goods, for favouring large farms and disadvantaging certain types of farming etc. Tracing all the CAP’s separate effects and adding them up in a balance sheet is indeed reasonable but insufficient. We should also ask: ‘How does the CAP compare to our ideals of a free society and how would society look like if all of it was run like the CAP?’ Wherever society deviates from a principle, it pays a price – it weakens the principle, invites other transgressions, and risks, cumulatively, the unraveling of seemingly unshakable attainments.

On the principles of a free society, Hayek writes (The Road to Serfdom, University of Chicago Press, 2007, p. 86) that liberalism ‘regards competition as superior not only because it is in most circumstances the most efficient method known but even more because it is the only method by which our activities can be adjusted to each other without coercive or arbitrary intervention of authority.’ Friedman takes up this argument (Capitalism and Freedom, University of Chicago Press, 2002, p. 3): ‘By relying primarily on voluntary co-operation and private enterprise, in both economic and other activities, we can ensure that the private sector is a check on the powers of the governmental sector and an effective protection of freedom of speech, of religion, and of thought.’ Markets provide the means for the free expression of heterogeneous opinions, and competition among publishers for their audience make them reluctant to obey to governmental censoring. Friedman also stresses the freedom from power that markets bring to the relations between individuals: to buyers and sellers, to employers and employees. Competition is blind to race, religion, and gender, and those who discriminate on these and comparable grounds place themselves at a disadvantage. In more economic terms, Schumpeter argues for the dynamic virtues of market competition: the market encourages individual effort, it permits the most arduous and talented to rise to responsibility, and it rewards innovation in the eternal process of creative destruction. Brief, economic freedom is beneficial to political freedom and economic wealth. Governmental intervention may still be justified – but it needs to be justified, by compelling arguments. The more so, the more government intervenes in the micro-management of the economy. What then are the benefits strong enough to vindicate subsidies like the following (they are taken from the German program for implementing the so-called second pillar of the CAP, aimed at rural development)? Farmers receive money for renovating farm buildings that they dedicate to non-farm uses; farmers receive money for exchanging land with one another; farmers receive money for long-term on-farm investments; farmers receive money for boarding pet animals or distilling alcohol; farmers receive money for setting up joint organizations for production and marketing; farmers receive money for cooperating with non-farm businesses. If any such activity or investment promises gains, farmers can be trusted to undertake it. There is no market failure to be mended by government.

Western societies have made a wise choice to leave the economy to the market within the limits of generally applicable rules. Public subsidies to enhance economic efficiency and innovation are to be limited to those cases where the benefits clearly outweigh the costs – that is, primarily to research and development. The CAP abounds with subsidy programs that have explicitly economic objectives but where a solid analysis demonstrating the net benefit is missing – although they require heavy administrative involvement and should thus be subject to a special burden of proof. The danger is that with the post-2013 CAP reform, which will be part of the EU’s new long-term budget, the money freed by abolishing or reducing first-pillar subsidies, notably direct income support to farmers, will be shifted into such dubious second-pillar programs.

By the same token, such money should not be channelled into across-the-board income insurance for farmers. Again, this is not only a question of the advantages and disadvantages of state-sponsored insurance within agriculture but of principle, that is, its applicability to all sectors of the economy. Schumpeter writes (Capitalism, Socialism and Democracy, Harper, 2008, pp. 73): ‘Spectacular prizes much greater than would have been necessary to call forth the particular effort are thrown to a small minority of winners, thus propelling much more efficaciously than a more equal and more “just” distribution would, the activity of that large majority of businessmen who receive in return very modest compensation or nothing or less than nothing, and yet do their utmost because they have the big prizes before their eyes and overrate their chances of doing equally well. Similarly, the threats are addressed to incompetence. But though the incompetent man and the obsolete methods are in fact eliminated, sometimes very promptly, sometimes with a lag, failure also threatens or actually overtakes many an able man, thus whipping up everyone, again much more efficaciously than a more equal and more “just” system of penalties would.’ It may be right and responsible to device a targeted income-insuring scheme that helps poor farmers during a transition period characterized by the phase-out of various CAP subsidies. However, any such insurance must be tightly limited by the principle of self-responsibility and its importance for the common wealth.

Hayek, Schumpeter, and Friedman were writing at a time when different visions of society and economy were competing and clashing. They were committed to defending a freedom they deemed endangered. Today, we no longer suspect the onset of socialism (or fascism) behind any unnecessarily interventionist policy. Our concern for freedom can be voiced less radically – yet, it still needs to be voiced forcefully.

Note: This article was originally published on the ECIPE website and can be accessed here.