Does Economics Imply Liberalism?

Economics as a field of thought as we understand it today began with the Enlightenment period.* As such, the initial study of economics was done through a liberal lens. The economic policy recommendations that came out of this study, popularly known as laissez-faire certainly has a liberal feel to it. Indeed, Smith christened his system developed in The Theory of Moral Sentiments and The Wealth of Nations as “the liberal system.”

But does this foundation imply that economics is inherently liberal? I posit it is not necessarily the case. One can understand economics very well and be illiberal.

Let’s take, for example, a simple supply and demand model. This model serves as the foundation of much of economics (indeed, we can derive pretty much all of economics from one simple fact; resources are scarce. This fact leads us to opportunity cost, which leads us to demand curves, with leads us to supply curves, which gives us the foundation of modern economics). Liberals will often point to the supply and demand model, rightfully so, to show the unintended consequences of illiberal policies; according to the model, minimum wage will lead to unemployment (especially among the marginally employable) or price controls will lead to shortages. These outcomes of the model are cited by liberals.

But those outcomes were also initially cited by illiberals in support of those same policies. The fact that minimum wage kept marginally employable people out of work was a benefit to many initial proponents of the minimum wage (see the Congressional debates on the Davis-Bacon Act). It has been used recently for justification for minimum wage to keep immigrants out of jobs.

But there are other implications of the model. As A.C. Pigou showed, if there are costs that fall on other people, the model suggests that a tax can be imposed to correct for these costs. Ronald Coase showed this logic holds if there are transaction costs to negotiating. Paul Samuelson showed that one of the implications of the model is, given certain assumptions, international trade without barriers can actually harm a domestic nation’s overall economic welfare. More recently, some behavioral economics like Richard Thaler have shown now, again as implied by the model, that certain “nudges” can be applied to correct market failures. All of these are implied by the model and are illiberal in nature.

Liberals can, and do, object to some of the items discussed in the previous paragraph. They cite public choice concerns, or calculation and knowledge problem issues. They cite the self-interest of politicians or the problems of bureaucracy. All of these are important (and also implied by the model as well).

As we can see, the model itself (which we are using here as a segment of economic knowledge) does not imply in and of itself any liberal or illiberal bias. It is, in that sense, apolitical. How the model is applied, what exceptions or policies are proscribed, do not depend, thus, on the economic science but rather on the subjective and estimated probabilities of the individual using the model. For example, let’s say we have two people using the supply and demand model to recommend policy dealing with pollution. An analyst who puts relatively low probability on government’s ability to correctly set a Pigouvian tax would recommend no explicit policy (or, perhaps, something akin to cap-and-trade). Meanwhile, an analyst who has a relatively high probability of the government’s ability to correctly set a Pigouvian tax may recommend such a tax. Both these analysts are guided by the same model, but their recommendations and predictions based of the model are different. They’re not different because one is more ignorant than the other. The objective data being used is the same. What is different is the subjective data each analyst uses.

Economic knowledge does not imply a liberal outlook. Just like any science, it can be interpreted and applied in different ways.

*I am hesitant to give it an exact starting point, such as highlighting Adam Smith as many people do. Smith may have been the first systematic treatment of economics in English, but there were many other authors who were considering the problems of economics before him: David Hume, Francis Hutcheson, Gershom Carmichael, the French Physiocrats (who influenced Smith), and the Salamanca School, just to name a few.