Why liberalism works

irdre N. McCloskey and Manuel Conthe

On 19 November 2020, the Rafael del Pino Foundation organised a live dialogue on www.frdelpino.es entitled "Why liberalism works", with the participation of Deirdre N. McCloskey and Manuel Conthe.

Deirdre Nansen McCloskey is Professor Emeritus of Economics, History, English Language and Communication at the University of Illinois at Chicago. Trained as an economist at Harvard in the 1960s, she has written nearly 400 academic articles on economic theory, economic history, philosophy, rhetoric, statistical theory, feminism, ethics and law. She is also the author of twenty books, including The Bourgeois Virtues. Ethics for the Age of Commerce (Fondo de Cultura Económica, 2015).

Manuel Conthe is Columnist and Chairman of the Advisory Board of Expansión. Manuel Conthe is an independent Spanish international arbitrator. A lawyer and economist, and former securities regulator, he is a recognised expert in finance, energy markets, M&A transactions, valuation of damages and, more generally, economic and corporate litigation. Previously, as a civil servant of the Kingdom of Spain, he was Director General of Foreign Transactions and Investments (1987-1988), Director General of the Treasury and Financial Policy (1988-1995), Secretary of State for the Economy (1995-1996), Vice-President for the Financial Sector at the World Bank (1999-2002) and Chairman of the CNMV (2004-2007). He was also a partner in a financial consultancy firm (2002-2004). During his years in Brussels (1996-1999) as Chief Advisor for Economic and Commercial Affairs at the Spanish Representation to the European Union, he was heavily involved in international trade and investment negotiations as well as in arbitration panels of the World Trade Organisation (WTO). He is the author of three books on economic and political paradoxes, game theory and cognitive biases in law and economics ("Behavioral Law & Economics").


On 19 November 2020, the Rafael del Pino Foundation organised a dialogue with Deirdre McKloskey, Professor Emeritus of Economics, History, English Language and Communication at the University of Illinois at Chicago, on the occasion of the publication in Spain of her book "Why Liberalism Works".

Professor McKlosekey explained that the shift in the meaning of the word liberalism in the United States from Adam Smith's original meaning began in 1880 when they began to talk about regulation by the state, the exact opposite of what Adam Smith was talking about. In 1933, liberalism in the US represented moderate democratic socialism.

To move away from the old idea of a zero-sum economy, where the aristocrat gets richer because he takes something away from the peasant, it is important for everyone to understand how incredible the increase in per capita income since Adam Smith is. When we compare ourselves to our ancestors, we are 3.000% richer than they were. People think that, since 1800, the increase has been 100% and that most of that wealth goes to the rich, but that is not so. On the contrary, it has gone to poor people. It is the great enrichment of society. The problem with the word capitalism is that it implies that what makes this happen is the accumulation of capital, which is not the case from the point of view of causality. Of course, to make progress you have to make progress, but you need labour, you need a climate, you need an environment. There are many prerequisites, but above all innovation, new ideas. That is why I prefer to call it innovism, because the conditions for innovation are indispensable, including freedom.

Schumpeter talks about creative destruction. When we talk about creative destruction, it's not people with guns killing other people, but people coming up with new ideas that become alternatives to what was there before. This is what generates this social gain that spreads in society, because these alternatives compete with each other. What we are talking about is overcoming zero-sum. If an inventor has an idea and keeps it, we are still in a zero-sum game. But if the idea spreads, we overcome that. For example, opening a department store in the 19th century was a great idea, which others began to emulate everywhere. But in the 20th century there are so many department stores because the original idea was so good, everybody loved it.

A hundred years ago we assumed that, because of the externalities of the communications network, the telephone system had to be state-owned. But that idea didn't work well. There are externalities, but you can't immediately assume that the government is going to get it right. In many countries, the public management of the telephone system was fatal and it took a long time, even years, to get a telephone. Then the alternative came along, mobile phones, and suddenly there is competition. There are network externalities, but don't assume there are problems. Zoom, which uses the telephone network, works well while others do not. But there will come a time when an alternative to Zoom will emerge, because it has happened again and again thanks to innovism.

Anyone should be able to trade with anyone they want, as long as it is legal. So why cut off that right when arriving at a country's border? The same applies to migration. However, the idea of free immigration scares many people.

There is a certain natural bias towards socialism because of families. Today's children often don't know what their father does in the office, and they don't know that in the past they were already working at the age of fourteen. Today's children don't understand the economy because they don't work, because they don't help their parents in their work. In the past, when they worked, when they helped their father at work, on the farm, in the shop, they understood very quickly concepts such as scarcity, the market. This will always be a problem because the family will always be a socialist enterprise: the capacity of each one, the needs of each one. You are not going to charge your children for a snack, for example. A theory that many people like is that the bosses have mountains of gold and the fight against him is to get him to give some or all of the gold to the poor. The problem is that the boss gets that gold because he sells things, because he sells things to us. So there is a fallacy here. We have a commitment to the poor, but neither the left nor the right seem to understand that helping the poor starts with freeing people to innovate what they need to innovate.

Why do we have to argue with our children when they say we are going to try socialism, as if it has not already been tried in the Soviet Union, in Cuba or in Venezuela? A nation can be perceived as a family in analytical terms, but not as a psychological hypothesis. Just as two people should be able to trade freely, so should nations be able to trade with each other.

Keynesianism never quite caught on, this idea that you get richer because you spend more, it doesn't seem to make sense. Keynes says that economists are in a position to calculate the marginal efficiency of investments. If we think in a longer term than the market, it makes no sense for a bureaucrat, an economist, to know how to invest in my neighbourhood. In any investment there is essential local knowledge. I don't believe that the deficit has to increase in order for global demand to grow. The new monetary economists say that deficits don't matter and that you can print as much money as you want, but that's total madness.

Milton Friedman believed in the nationalisation of money, that the state should control money. Money, however, should be whatever people want it to be. It can be shells, it can be gold. From this perspective, central banks have no function and should be closed down. The economists who work in those banks should go and do more useful things. Years ago, an economist said, at a conference at the University of Chicago, that we should have a currency system that has a lot of elements to stabilise it, but how do you get people to support it? This is the problem.

Liberalism is adultism, it is a philosophy of free adults. All other philosophies, with their economic philosophies, are designed to treat people as if they were children, as if they needed supervision. Liberalism is adultism.

Sometimes we might argue for collective action, but the implicit assumption in that analysis is that collective actors will do things better than individuals. If we have a problem, for example, with the loss of aquifers, maybe the problem can be solved by talking, maybe the solution can be achieved through negotiations. Maybe you don't need a state to do it. In this sense, we have to think that we are not all wise, that there are externalities. But externalities are a mathematical concept and what we need are facts, not mathematical concepts.

If our ancestors were poor, with a per capita income of 2 or 3 dollars a day, and now in the United States it is 120 dollars and in Spain 100 dollars, this is an impressive change. The left despises the idea that all boats (incomes) rise when the tide comes in. One could understand the criticism if there were boats that went up very little, but the truth is that they are going up with the tide. A 3.000%. In our societies, the poorest are doing better than under the old regime. There are two problems in the world: tyranny and poverty. Those are the real problems. If we could get rid of tyrants we would solve the first problem and also the second because then people could innovate. Then we could solve the problems of the climate, of the poor because their parents were also poor, of the disabled.

Comparative advantage has nothing to do with absolute advantage. The problem of competition for Robert Franck, professor at Cornell University, is the relationship with neighbours. For example, having a library with many books has nothing to do with how many books other scholars have, but with what can be found in each book. What Franck is doing is honouring envy as a goal of social policy and the problem with envy, as Shakespeare said, is that it is insatiable, you can't get enough of it. Are we going to have IQ equality? How are we going to do that, by smashing people's heads in until they are all equally dumb? This is madness.

I don't accept that there are psychological biases, as Daniel Kahneman claims, because what economics focuses on is not individual psychology, but how people act and react. They can be ignorant and make mistakes, but they can still be efficient and innovative if they have the right ideas. Is it said that the consumer is irrational and that the state has to correct everything? The problem is that the state is not perfect. Bob Thaler, Nobel laureate, begins by talking about 240 cognitive biases discovered by psychologists. What a number. With that many biases, we can't possibly move from one room to another without killing ourselves. Are people crazy? Then he says that the market cannot help people. Therefore, the government must step in and give people little nudges. But economists are social scientists and they don't need to put people's psychology back together. The psychology of individuals is not a social science.

Such nudges are paternalistic libertarianism. People are either treated like children, or they are treated like adults. One has to ask whether the government has the necessary skills, is honest enough, altruistic enough to give good nudges and important enough to manage a tyranny well. Governments do not do this well. They have demonstrated this in the past. They often do it foolishly. So does the private sector, but the cost is going out of business. What the government wants is to attract people and not pay them.

One way to help the poor live better is to focus taxes on resources that are inelastic. If you have a tax, there is an incentive not to pay it by changing the source, whereas, if you tax property or inheritances, the result is that taxes can be collected because the tax base does not move. This affects workers. In Latin America, being liberal sometimes means supporting an oligarchy of protectionist companies, and when workers complain, the army appears.

Liberals oppose the war on drugs. In Portugal everything has been decriminalised, but there has been no increase in the number of addicts. However, the number of criminals has gone down. We have to stop disapproving of what other people do. If you want to eat fried food and watch TV all day, it's up to you.

The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio González, are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of the authors.

The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio J. González, are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.