Classical Liberalism – A Primer. Eamonn Butler

in the twentieth century, hostilities and threats in Europe promoted a nationalist culture and greater faith in the role of the state. After each wartime expansion, governments failed to shrink back again. In 1913, before World War I, government expenditure was just 17 per cent of GDP in France, 15 per cent in Germany and 13 per cent in the United Kingdom. It is now roughly three times that as a percentage of GDP, and many times more in absolute terms.

      Meanwhile, just as the physical scientists were shaping the physical world, so economists and sociologists fancied that they could shape human society scientifically too. They saw central planning as more rational than the natural disorderliness of markets, with their externalities and their supposed tendency to monopoly or to unemployment. No longer was the onus on interventionists; now the classical liberals were the ones who had to justify their demands to let freedom prevail.

      The modern revival of classical liberalism

      Policy problems and the classical liberal response

      But the vaulting confidence of the interventionists was misplaced. Economies became racked with unemployment and inflation (sometimes, inexplicably for them, at the same time), low growth and crises in housing, energy, lending and foreign exchange markets where governments set prices or manipulated supply and demand. A growing welfare state was plagued by problems of dependence and lack of incentives. There seemed no way to reduce the size of government, nor the demands it was making on taxpayers.

      Even though they were on the defensive, classical liberals of many shades had been thinking about such problems for a long time. They went back to the old classical liberal principles and re-thought them, developing new or updated arguments that were better suited for the changed times. Eventually, in the 1980s, this intellectual revolution would inform the policies of world leaders such as Ronald Reagan in the United States and Margaret Thatcher in Britain.

      Intellectual developments

      The Austrian School economists, starting with Carl Menger (1840–1921), had recognised that economics was not a science but a matter of individual values and actions. Austrians like Ludwig von Mises (1881–1973) and F. A. Hayek (1899–1992) realised that state controls distort economic signals, setting off unpredictable consequences.