Shocks and aftershocks

2: The undeliverable promise of liberalism.

The difficulties besetting the world today can be traced back to their origins in the speculations of the 18^th century Enlightenment.

The seeds of the great conflagration of 1789 were planted decades before.

There is no single point at which the modern world can be said to have its foundations, but one year and two documents stand out. The year is 1776. The documents are the American Declaration of Independence and Adam Smith’s The Wealth of Nations. Those two documents set the pathways for the next 250 years in politics, society and in economics.

By the time the Declaration of Independence was formulated, the thirteen colonies had been at war with Britain for more than a year. The stresses and resentments that had built up over decades against the capricious edicts of a far-off government and a rigid, rather stupid King George III, spilled over into armed revolt. But what happened there is best described as a war of independence: reform, not revolution.

But the case for independence had not been clearly enunciated. The Declaration drew on the principles of a new liberalism – already enunciated by Voltaire, Locke, Rousseau and many others – and transformed them into practical political action. It began with a rhetorical flourish which should not be taken too seriously:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”

Those words were drafted by Thomas Jefferson, a rich Virginian slave-owner and landed proprietor. “All men” did not include most men, any women, any slave, any native American or anyone who was not fairly wealthy. Hypocrisy was built in to this founding document.

But it went on:

“That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed. That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.”

That point – that the people’s consent is a necessary condition for the legitimacy of government – was more significant. Nevertheless, for at least the next century and a half, only some people were to be asked.

The Declaration of Independence was about politics; in The Wealth of Nations, Adam Smith described the beginnings of modern economics. He described how capitalist markets could work and changed the way the world defined the most basic concepts of what constituted wealth and production.

The old notion of the way finance worked, known now as mercantilism, held that gold and wealth were the same thing. The only way for a nation to become more prosperous was to amass more gold, either by taking it from someone else or finding new sources. It caused many wars and drove Spain and Portugal to establish empires in the Americas. Otherwise,  economics was a zero-sum game: one nation could only prosper if it was at the expense of another.

In The Wealth of Nations, Smith showed that concept to be plain wrong. True wealth, he insisted, was not in gold or money but in the things people can use. A baker who baked a loaf created wealth, and the money a customer paid for it was not itself wealth but a measure of its value.

Although money, he said, “in common language frequently signifies wealth”, it was not. Rather, a nation’s wealth comprised “its lands, houses, and consumable goods of all different kinds”.

But perhaps his most far-reaching hypothesis was about how capitalism worked. Isaac Newton, a century earlier, had described a clockwork universe; Smith described a clockwork economy. If commerce was left alone, without government interference, everything would sort itself out. According to The Wealth of Nations, free markets would provide a perfect mechanism for creating wealth and distributing it, efficiently and fairly, to everyone.

“Every individual,” he wrote, “neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

Competition in a free market would force prices down to the lowest level consistent with making an enterprise worthwhile. Free competitive markets would bring the poor out of penury:

“[The rich] consume little more than the poor, and in spite of their natural selfishness and rapacity…they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.”

Here was classical, or liberal, economics in its most basic form. Government involvement was always destructive. Taxes should be kept to an absolute minimum.

The size and scope of government should be firmly restricted: “It is the highest impertinence and presumption … in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense.”

Subsidies and import restrictions were bad. All trade should be free.

Smith thought his clockwork economy would produce, automatically, a kind of Utopia in which poverty would disappear. “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable,” he wrote. But that, in practice, was the world that his prescriptions were doomed to perpetuate; and the fight against the inequality and poverty that those prescriptions  enshrined would last from his time until our own.

Revolution or reform?

The ideas of reform were put into action simultaneously in America and in France. The outcomes were very different.

In Philadelphia, a constitutional convention spent two years drawing up a constitution: a supreme law setting out the rules of government. It was, like all complex political negotiations, a saga of horse-trading and compromise. The opponents of slavery, mostly from New England, were in the minority. One in three of the convention’s 55 delegates owned slaves. In Virginia, the largest and richest state, half of all families were slave-owners. In the end, slavery was endorsed but the slave trade would be banned – but not for another 20 years.

The mechanisms of government took longer to sort out. There were no models to follow: this was the first constitution for the first liberal democratic republic. So they adapted what they knew, and therein lay the mistakes.

In line with prevailing theory, they separated the powers of the three branches of government: executive, legislature and judiciary. This, it was thought, would prevent any of these groups from wielding unchecked power. But they gave all executive powers to one person, the president. Despite proclaiming that America did not have a king, they created one: elected, not hereditary, but a king nevertheless.

They could not have known that perverse interpretations of the first and second amendments (free speech and the right to bear arms) by future Supreme Courts would lead to uncontrollable election donations and the consequent corruption of congress and the presidency. Nor did they realise they were setting the nation up for almost 50,000 gun deaths every year.

But that document demonstrated to the world, for the first time in human history, how a liberal, democratic and stable republic could be created. It came into effect on 4 March 1789. Two months later, on 5 May, the Estates General met at Versailles in an attempt to settle France’s intractable financial and political crises. On 28 May, the Third Estate – the professional and merchant middle-class – walked out to form what became the National Assembly. On 14 July, the Bastille was stormed and the revolution was under way.

A new, better world was on its way, they thought. William Wordsworth went to Paris before the revolution had soured into total loss:

“Upon our side, we who were strong in love!
Bliss was it in that dawn to be alive,
But to be young was very heaven!”

But the hope did not survive.

The events which cascaded from those five months shaped the affairs of Europe for the next half-century. But the stresses that led to the affairs of 1789 had built up for centuries before finally exploding into insurrection, terror and war.

Tocqueville ... revolution was inevitable

The ancien régime, cemented in place by Louis XIV in the previous century, had become unworkable. The king had centralised the entire administration of France to safeguard his own position but as a result, the nation’s affairs ossified into permanent stasis. Alexis de Tocqueville, writing in the 1850s, found that even the most trivial matters had to be approved by the royal council at Versailles. A village which wanted to repair its bell-tower had to get permission from Paris in a process that took two and a half years. The nobility, now shorn of any real political power, clung ever more fervently to privilege and position, becoming isolated from the middle class and peasantry. Nobles paid no tax: eventually the cost of the entire machinery of government, remote and inflexible, fell on the huge and impoverished peasant underclass.

In this incendiary mix, the abstract ideas of liberté, égalité, fraternité postulated by the political philosophers proved explosive. French society had been denied the moderation that allowed change in other countries to slowly evolve. “Men of letters,” wrote Tocqueville, “had never been involved in public affairs on a daily basis as in England; on the contrary, they had never lived more aloof from them …

“If, like the English, they had been able, without destroying their former institutions, to change their ethos gradually in a practical way, perhaps they would not have been so willing to invent totally new ones …

“Not a single taxpayer bruised by the uneven distribution of the taille was not warmed by the idea that all men should be equal; any small landowner stripped bare by an aristocratic neighbour’s rabbits was pleased to hear that every kind of privilege without exception was condemned by reason.”

Even as the revolutionary wars raged, as Napoleon rose and fell, the seeds of the next upheaval were germinating. The French revolution passed but the industrial revolution remains with us.

And it, too, brought its challenges.

NEXT: 3: Freedom for the wolves. The era of laissez-faire economics was the distilled expression of liberalism. But it created a world of plutocracy alongside massive squalor.