Pascal Salin’s “Revenir au capitalisme, pour éviter les crises”

GIOVANNI BIRINDELLI, 13 April 2010

(Original publication: Catallaxy Institute)

Most liberals are invariably affected by what I call the “Copernican syndrome”: having a different reference system, they tend to see things in a way which is opposite to that of most individuals.

On the one hand, this happens with abstract concepts, such as the law, for instance. Professor Hayek for example wrote that “It would … be nearer the truth if we inverted the plausible and widely held idea that law derives from authority and rather thought of all authority as deriving from law – not in the sense that the law appoints authority, but in the sense that authority commands obedience because (and so long as) it enforces a law presumed to exist independently of it and resting on a diffused opinion of what is right” (Hayek, F.A., 1982, Law, legislation and liberty (Routledge, London), Vol. 1, p. 95); and again, the phrase that we chose as Catallaxy Institute’s motto: “(In modern times) law, which in the earlier sense of nomos was meant to be a barrier to all power, becomes instead an instrument for the use of power” (ibid., p. 92). Using an astronomical metaphor, one could perhaps sum up the meaning of these two passages by saying that in a free society it is not the law that revolves around power and authority (as today is almost invariably taken for granted without questioning) but rather authority and power that revolve around the law.

Liberals, however, tend to be affected by the “Copernican syndrome” not only in relation to abstract concepts, but also in relation to facts, and in particular economic facts (where the word “economic” is used here in the widest possible sense). Frédéric Bastiat, for example, maintained that: “our adversaries consider that an activity which is neither aided by supplies, nor regulated by government, is an activity destroyed. We think just the contrary. Their faith is in the legislator, not in mankind; ours is in mankind, not in the legislator” (Bastiat, F., 2007, That which is seen and that which is not seen, in Bastiat collection (Mises Institute, Alabama), Vol. 1, p. 13).

The latest book by Professor Pascal Salin (Revenir au Capitalisme, pour éviter les crises, 2010, Odile Jacob) is another example of this “Copernican syndrome”, in this case related to the current economic and financial crisis.

With a style whose elegance, clearness, simplicity (in the noblest sense of the word) and efficacy reminds that of Hayek, Professor Salin explains, on the one hand, why the economic and financial crisis is not, as it is widely believed without questioning, a product of capitalism and free market, but rather of state interventionism (in particular, in monetary policy, housing policy and economic/financial regulation); on the other hand, he also explains why, in the long term, only free markets and capitalism can offer a way out of the economic crisis (and, in addition, a way out which is moral), whereas state interventionism, which is being increased even more after the crisis (often via international coordination of policies), in the long run will necessarily worsen the crisis (not to mention its moral consequences and implications).

Professor Salin’s economic argument rests entirely on the approach of the Austrian school of economics and therefore I, for one, cannot but agree with it: Austrian economics is the only one which can explain and at the same time could foresee well in advance the current crisis: “Those who did not content themselves of a few, superficial notions of Keynesian inspiration, but who really read Hayek, but also Mises, are compelled to admit that the latter must be designated as the great winners of the confrontation, not only against Keynes, but also against Friedman. … We will not find anything in the Keynesian theory, as it was developed by Keynes himself or by those whom he inspired, to understand the current financial crisis. On the contrary, there is a perfect correspondence between everything that was explained by Mises and Hayek and what we see today. Unfortunately, the Austrian theory of the economic cycle is totally ignored” (Salin, P., 2010, Revenir au Capitalisme, pour éviter les crises(Odile Jacob, Paris), p. 123, my attempt of translation).

When my colleagues and I had the honour to be received by Professor Salin in Paris for the interview he conceded to Catallaxy Institute, I remember that, after the interview, accidentally and quite surprisingly we discovered that, when it happens that we try to introduce persons who are not familiar with it to the Austrian school’s approach to economics and in particular to its views on the key role that knowledge plays in the economy, both he and I use precisely the same metaphor: that of the traffic light (where the traffic is regulated by centralized knowledge) versus the roundabout (where, within general rules of conduct, the traffic is regulated by peripheral, and therefore individual, knowledge); the latter implies the use of much more knowledge of much better quality (because, unlike the former, it includes knowledge of time and space, and because it implies individual responsibility), and reduces drastically the risk of systemic moral hazard (someone making a mistake in the “button room”, or taking hold of that room with violence, can make a lot of damage to the entire system, whereas in a spontaneous order there is no “button room”). Of course, mutatis mutandis, the same principle which applies to a particular kind of spontaneous order (the economy) applies to any other kind of spontaneous order (for example the law).

The use of knowledge in society, to borrow the beautiful title of Hayek’s famous paper, is one of the key pillars on which the Austrian theory is developed; it is almost an element of its DNA: every economic analysis from the Austrian school’s point of view includes this element, and so does, of course, Professor Salin’s analysis of why, for example, state interventionism in monetary policy (including the legal imposition of a single currency), in housing policy and in economic/financial regulation, has been disastrous.

I mentioned this anecdote of the accidental discovery of the recourse to the same metaphor in order to give an intuitive idea of why Professor Salin’s position and mine are exactly and profoundly the same on this subject.

***

There is, however, one thing on which we have different views, namely the definition of capitalism. I fear that this difference of opinion reflects, in part, the one concerning the definition of liberty that emerged from our last debate. This difference of opinion does not take place at the level of economic analysis, but at that of political philosophy (which, in the case of the Austrian school, is closely related to the former).

Professor Salin defines capitalism as “a spontaneous system of organization of individuals resting on the respect of legitimate private property and freedom of contracts” (p. 223). There is nothing in this definition of capitalism that I would not include in mine; however, I would include more than this. In order to explain why, I will start by making a quick reference to Professor Popper’s approach to capitalism, on which I strongly disagree.

Professor Popper (quite astonishingly, being a liberal) makes a distinction between “unrestrained capitalism” and “economic interventionism”. In his view, the latter is a more “adult” version of the former. In particular, he claims that “economic power may be nearly as dangerous as physical violence; for those who possess a surplus of food can force those who are starving into a ‘freely’ accepted servitude, without using violence” (Popper, K., 2005, The open society and its enemies (Routledge, London) Vol. 2, p. 135). Therefore, he claims, economic power must be coerced and limited via state interventionism: “we must demand that unrestrained capitalism give way to an economic interventionism” (ibid. p. 136, italics in the original text).

In order to show that economic power may be “nearly as dangerous as physical violence” and “force those who are starving into a ‘freely’ accepted servitude”, Popper mentions some cases of child labour that Marx reports in the Capital, such as, for example, that of “’William Wood (who), 9 years old, was 7 years and 10 months when he began to work … he came to work every day in the week at 6 a.m., and left off about 9 p.m. …’ ‘Fifteen hours of labour for a child 7 years old!’ exclaims an official report of the Children’s Employment Commission of 1863”; or that of “’Mary Anne Walkley (who) had worked without pause 26 ½ hours … A doctor, Mr. Keys, called in too late, testified before the coroner’s jury that “Mary Anne Walkley had died from long hours of work in an overcrowded workroom”’” (ibid. p. 132-3).

I take it for granted that child labour is unjust (that is, that there would not be a single lawyer, in the sense of archaeologist of the law, who could discover a principle on the grounds of which child labour is legitimate) and therefore that, if necessary, coercion by the state should be used in order to prevent it.

Having said this, however, I find Professor Popper’s argument indefensible (and in contradiction with the view of liberty, law and equality before the law that he defended in the rest of The open society)In fact, Popper makes an awkward association, or rather confusion, between power and violence, which clearly are two different and quite independent concepts: the boxer may be much stronger than the fragile old lady queuing at the post office before him; in fact he could kill her by just touching her. This, however, does not mean that he is violent. By being strong (or stronger), the boxer did not violate any principle of justice: it is in hitting the old lady that he does so (if he does it). In the same way, it is in hiring children for hard jobs that a company violates a principle, not by being economically powerful.

If the state used coercion in order to discriminate against the boxer just because he is physically strong (or against the company just because it is economically powerful), this would be illegitimate and would constitute a violation of liberty and of the principle of equality before the law.

It is true that situations of “severe privation”, as Professor Hayek calls them, may induce a family to send a child to do hard work, even of the type William and Mary Anne did. This, however, does not mean that child labour is legitimate and that it should be allowed. Of course, if the alternative for William’s family is either to send William to do hard works or to die of starvation, the situation becomes very complex.

Whether and, in case, when economic interventionism that is aimed at dealing with these extraordinary, extreme situations of severe privation can be admissible, on which grounds, and under which conditions, is a complex issue that depends also on one’s, possible non-arbitrary, definition of “severe privation”. For reasons of space I cannot discuss this issue here. However, personally I do not exclude a priori such form of interventionism, provided that a few conditions are met, some of which are the following ones: 1) it is aimed only at the cases of severe privation, i.e. the cases in which a person cannot compete in the market in order to satisfy her basic needs (whose definition I do not discuss here); 2) it is residual: covering only the part not covered by other voluntary help spontaneously offered; 3) it is admitted on the grounds of humanitarian reasons, that is of reasons which are opposite to reasons of justice (Hume, D., 2007, Treatise on human nature (Oxford University Press, Oxford), p. 370): in other words, it is openly admitted that economic interventionism is illegitimate and therefore all countermeasures are taken to reduce it as much as possible; 4) the state is already minimal (that is, to put it in lemons terms, it is not possible to reduce it further without damaging the rule of law); 5) it is implemented outside of the market, leaving (or making, I should say) this free, that is avoiding to distort it (Hayek, F. A., 2002, The road to serfdom (Routledge, London), p.137); 6) even when this economic interventionism, which implies illegitimate coercion, is considered inevitable on the grounds of humanitarian reasons, coercion and discrimination should be limited as much as possible (e.g. capitation taxation should be preferred wherever possible to proportional taxation, and the latter to progressive taxation); and others.

In my opinion, Professor Popper’s position is not acceptable because, in considering economic interventionism as a more evolved form of capitalism, he does not consider it as an illegitimate exception to the rule, but as the rule itself. In other words, he appears to violate every one of these conditions of admissibility of illegitimate economic interventionism (even though he admits that also economic interventionism is dangerous).

Now, the reason why I am uncomfortable with Professor Salin’s definition of capitalism is that, according to that definition, it is not so immediately and unequivocally clear that the businessman who hired William or Mary Anne is nota capitalist. In fact, it could be argued (as Popper did) that, by hiring William, that businessman did not violate legitimate property rights nor freedom of contract (especially if freedom, of which freedom of contract is only a particular use, is intended in relation exclusively to property rights).

Less elegantly than Professor Salin, I would define capitalism as that economic system based primarily on the rule of (negative) law and therefore on the respect of the principle of (negative) equality before the law and on (negative) liberty.

Each of these terms would require an entire book but, in a nutshell, I intend (negative) law as an abstract principle, i.e. “a standard that is to be observed, not because it will advance or secure an economic, political, or social situation deemed desirable, but because it is a requirement of justice or fairness or some other dimension of morality” (Dworkin, 1977, Taking rights seriously (Duckworth, London), p. 22) and therefore, by adopting Hume’s idea of justice, because it is the result of a spontaneous process of selection of successful uses, institutions and conventions (“successful” in the sense that they contributed to enhance the chances of survival of the social group, e.g. by reducing internal conflict, as in the case of private property). (Negative) law is opposed to positive “law”, which is the arbitrary command given by authority.

By (negative) equality before the law I intend equality of all individuals before an abstract principle. (Negative) equality before the law is opposed to positive “equality before the law”, that is legal inequality: namely, the authority forming arbitrary categories on the grounds of arbitrary parameters (race, income, sexual orientation, ecc.) and then treating individuals differently but uniformly within each category (Leoni, B., 1991, Freedom and the law (Liberty Fund, Indianapolis), p. 68).

By (negative) liberty I intend that condition of men in which coercion of some by others is reduced as much as possible. (Negative) liberty is opposed to positive “liberty”, that is power.

Now, on the grounds of this definition, it evidently cannot be said that the businessman who hired William or Mary Anne is a capitalist, because capitalism, as freedom, requires the respect of principles of justice such as, on the one hand, those of private property and, on the other hand, those that forbid to hire a child for hard work (or to have sex with her) even with her consent.

Not a long time ago, during a discussion, a nostalgic communist used the case of Mr. Silvio Berlusconi to make a general attack against capitalism. By using my definition of capitalism, I found it quite easy to reply that, in my opinion, Mr. Belrusconi is not a capitalist, precisely because some of the (often political) means by which he developed his business, unfortunately, are well known; the origin of his wealth is not; and, above all, the system (both legal and economic) in which this wealth was invested and developed, because it is based on a positive concept of “law”, of “equality before the law” and of “liberty” (that is, because it violates the law, the principle of equality before the law and liberty) was and still is incompatible with capitalism.

***

Notwithstanding this apparent disagreement, which, as that on the definition of liberty, regards a fundamental concept but is not itself fundamental (for our views are different expressions of the same tradition of classical liberalism),Revenir au capitalisme is one of the most effective, beautiful and well written books that I have read lately. I personally find it hard to take seriously someone’s opinion regarding the economic and financial crisis if she does not have her own answer to the fundamental questions that this important book poses and to the facts that it illustrates.

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