Robust political economy (or why classical liberal institutions are best)

I was impressed by Mark Pennington when I heard him speak at a Mont Pelerin Society conference a couple of years ago, and am more impressed now after having read his new book Robust Political Economy: Classical Liberalism and the Future of Public Policy.

Pennington says in his introduction that his aim is synthesis more than originality in classical liberal theory, but the book is very ambitious in applying a ‘unified theoretical framework’ of classical liberal ideas about limits on knowledge and moral motivations to a range of partially or fully rival theories in or associated with neo-classical economics, left-liberalism, social justice, social capital and deliberative democracy.

My forthcoming review of the book is below the fold, or if you prefer here is his IEA presentation on the book and here is the Cato presentation.
Robust Political Economy: Classical Liberalism and the Future of Public Policy
By Mark Pennington
Edward Elgar Publishing 2011
302 pages £25 ISBN 978 1 8490 765 4

The UNSW academic Martin Krygier draws a useful distinction between the ‘methodological’ and the ‘normative’ aspects of political ideologies. Theories about how the world does or could work are ‘methodological’. Theories about values are ‘normative’. The two types of theory have a complex relationship. The normative ideal of socialism, equality between people, continues to resonate even though methodologically it is now discredited, overwhelmingly thought ‘not to work.’ The methodological ideas of conservatism (Krygier’s example) about the unanticipated and often unwelcome consequences of radical change are useful insights, even though the ‘normative’ aspects of conservatism expressed through ‘traditional’ religious values are often unappealing.

Mark Pennington’s book Robust Political Economy puts him in the school of classical liberal thought that emphasises methodological claims. Mainly following Friedrich Hayek, Pennington focuses on the institutional implications of limited human cognitive capacities and, to a lesser extent, limited moral motivations. The strands of classical liberalism or libertarianism that make normative rights-based arguments are largely absent from this book, while the normative arguments of left-liberalism, as found in the work of John Rawls or Ronald Dworkin, are present but criticised on methodological grounds.

Pennington’s cryptic title, ‘robust political economy,’ refers to his key test for comparing economic, political and social institutions: how ‘robust’ they are to our cognitive and moral weaknesses. The book’s key contention is that liberal institutions—private property, a market economy and limited government are robust to these weaknesses, that they work fairly well even when our individual knowledge is limited and we are prone to neglect the interests of others. Moreover, they work better than the institutions proposed by rival economic and political theories.

The comparative element of Pennington’s argument is important. He is not saying that liberal institutions completely solve the ‘knowledge problem’ or prevent unethical behaviour. Compared to an ideal situation, liberal institutions will be found wanting. Compared to the realistic alternatives, liberal institutions look more attractive. In dealing with basic human limitations, we have better or worse options, not complete solutions.

The first rival theory Pennington examines in detail will surprise some readers: neo-classical economics. For many critics of liberalism, neo-classical economics and classical liberalism are conflated into ‘neoliberalism.’ In policy terms, the confusion is understandable. Neo-classical economists often support the market policy solutions also favoured by classical liberals. They share a normative bias in favour of satisfying individual preferences.

Yet as Pennington points out, neo-classical theory assumes that the full benefits of markets exist only when there is perfect competition and perfect information. As few markets have many sellers offering homogenous products or buyers with full knowledge of products and prices, these conditions are rarely met. In neo-classical economics, ‘market failures’ justify government intervention to correct problems caused by under-informed consumers and less than fully competitive markets.

Yet on Hayek’s analysis (which Pennington supports), neoclassical economics looks at markets the wrong way. Perfect information cannot exist because markets are discovery mechanisms, in which people learn about as well as satisfy their preferences. ‘Imperfect’ competition is often valuable, as it is the by-product of firms offering new or differentiated goods and services. On Hayek’s analysis, there is no reason to believe that governments will make better judgments on consumer preferences than markets.

Switching from economics to politics, Pennington considers the challenge to liberal institutions from theorists of ‘deliberative democracy.’ The key idea behind deliberative democracy is that ‘aggregative’ institutions, where outcomes are the sum of individual preferences (markets and to a lesser extent current democratic politics), should make way for ‘dialogic’ institutions where people gather in conditions of equality to deliberate on common ends. Deliberative democracy’s supporters see it as an alternative to both liberal individualism and central planning.

Pennington argues that deliberative democracy fails a ‘robust political economy’ test. It obliges citizens to keep themselves informed about politics, despite the high opportunity costs and low rewards from doing so. Deliberative democracy consumes time without producing influence. It asks people to be more saintly in their devotion to deliberation than is at all realistic.

Deliberative democrats support ‘voice’—staying within institutions to change them, over ‘exit’ –individuals leaving institutions that no longer satisfy them. Yet exit mechanisms can use tacit information that individuals cannot articulate in ways that would persuade others, and favour social learning by letting individuals try new things. Exit mechanisms let minorities establish their own institutions, avoiding majorities imposing their decisions on all. As Pennington remarks, many once unpopular or downtrodden minorities found space in markets and the voluntary sector long before they achieved democratic political recognition.

Pennington observes that of all the arguments against classical liberalism, the most powerful is that it leaves too little space for ‘social justice’. He applies his key ideas about limited knowledge to the social justice theories of Rawls, Dworkin and Iris Marion Young. Pennington is right that constructing a ‘grand theory’ of society-level social justice is very difficult. Complex questions of who is disadvantaged, which resources should be redistributed, and how to maintain incentives frustrate plans to redesign society from first principles.

These arguments are well made, but more persuasive against political theorists than real-world ‘social justice’ proposals. These share much with the ‘mosaic’ of private-sector welfare institutions that Pennington praises in a subsequent chapter. Policy starting points are rarely blueprints for how society should look, but more specific issues. Trial and error reveals which remedies work best. The practical goal is not a socially just end-state, but continual evolution and adaptation in response to real problems in people’s lives. Pennington’s classical liberal critique still applies: compared to private welfare agencies, social democratic states often suffer from poor information flows, weak incentives and inefficient decision-making processes. But a social democrat could accept all these methodological points, and still believe that on balance welfare states make a positive difference, because private charity and self-help would leave too many people with too little.

Overall I found Robust Political Economy to be a very good book. It applies core Hayekian ideas to political theory and public policy issues (poverty relief, global governance, and environmental protection) that have emerged or developed since Hayek completed his major work. As Pennington has said elsewhere about his book, it offers a ‘unified theoretical framework’ explaining how classical liberalism responds to range of alternative theories.

A strength of Pennington’s emphasis on methodological issues is that people who do not share classical liberalism’s normative ideas can nevertheless learn from its insights into decentralised decision-making. A sign of this is that many social democrats now see a larger role for markets, marrying their normative commitment to helping the disadvantaged to a liberal methodological understanding of how societies and economies work.

Understanding human cognitive and moral weaknesses is, however, only part of the classical liberal story. Even if government could in some circumstances make better decisions for individuals many classical liberals would still object. Individual rights and liberties are to them important whether or not they always lead to better consequences. Their normative support for freedom comes first. Methodological arguments can reach out to classical liberalism’s opponents, but they do not fully explain what drives the political commitments of classical liberals themselves.

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