Investing in Freedom

“Most people in the West still cling to the view that freedom generates economic growth—but what happens if this is demonstrably no longer the case?”

Economy Guest Speaker
Francis Fukuyama: his prediction of "the end of history" has not come to pass

Twenty years ago, it was widely believed in the West — and no doubt in much of the rest of the world as well — that there was an almost inevitable movement towards liberal democracy. True, there were still some large and important countries where a different view of the future was to be found, but the general perception was that they were bucking a trend to which they would succumb before very long. It might take a few decades but eventually a combination of rising living standards, increasing demands for accountability and the evident success of liberal democracies in providing a relatively satisfactory way of ordering human affairs would prevail.

Today, perceptions are very different. Western confidence in both its institutions and the way it takes political decisions has been badly shaken. There are two major reasons why this has happened. One is that much of the rest of the world, a lot of it under much more autocratic systems of government than are to be found in the West, has done better economically than the West  in recent years, especially since the crisis in 2008. Second, the West’s poor economic performance has undermined confidence in the competence of our governing classes and their strategic vision. The consequent political fragmentation has made it much more difficult to find the consensus needed to deal with contentious problems.

The high point of Western confidence, coming shortly after the collapse of Communism in Russia and Central Europe, was the publication of Francis Fukuyama’s book The End of History and the Last Man, published in 1992. Economic history over the subsequent two decades has sadly undermined his vision. Between 1992 and 2011, living standards across the world grew by 56 per cent, in South Korea by 267 per cent and in China by 529 per cent. By contrast, the UK chalked up 36 per cent, while Germany, supposedly one of the powerhouses of the West, did no better than 27 per cent. The reality is that most people, given a choice between a faster rising standard of living and a greater degree of freedom in the traditional Western sense, see a clear trade-off between the two. For some people freedom means everything, but for most people it is nice to have, but not essential. A new car, a bigger home, holidays abroad and a better education with correspondingly improved prospects for their children are higher priorities.

Other failings have undermined admiration for the Western way of life. Chronically high levels of unemployment, particularly in the southern parts of the European Union, have sapped confidence in the capacity of the Western economic model to provide a reasonable way of life for a large section of the population. Rising inequality, although a problem everywhere, tends to run to excess particularly in the US, but with the UK not far behind.

The West’s relentless fall in the proportion of the national income devoted to investment rather than consumption increasingly calls into question whether Western economies are striking a reasonable balance between the present and the future. Political deadlock in the US and policy paralysis in the EU make liberal democracy appear incapable of getting difficult decisions taken and implemented. For a long while, it looked as though countries poorer than those in the West were just catching up. Such a view is no longer tenable: countries such as Singapore are forging ahead, with living standards already significantly higher than those in much of the West. 

The reason why all this matters so much is that the West is now in danger of losing out not only on economic growth, and all that goes with it in terms of living standards and political significance, but also because freedom may well be the next major casualty. Liberal democracy used to be able to claim not only that it was a better way of ordering human affairs than autocracy in personal terms but also that liberal institutions provided a more effective framework for economic advance than state-driven growth. Freedom generates economic success in conditions where the state exists to serve the individual and not the other way round. Contract law is better than the exercise of too much discretion. There should be a free press, the presumption of innocence until proved guilty, fair elections and changes of government. Most people in the West, especially in the Anglosphere, still cling to the view that freedom generates economic growth — but what happens if this is demonstrably no longer the case?

This is why taking a radical look at where our current economic policy framework is leading us is so vitally important. I believe that, with some major but entirely feasible changes of perception, it would be possible to get the West’s economies to perform hugely better. I set out how to do this in a recent pamphlet, There Is An Alternative (Civitas). We need to recapture the components of GDP where productivity growth is highest, which is in light industry. We can do this by making investment, manufacturing and exporting hugely more profitable than they are at the moment, by having a far more competitive exchange rate. We need to lift our investment as a proportion of GDP from about 14 per cent, where it is now, to over 20 per cent. We must start making what the world wants to buy or we will be caught for ever in balance of payments crises.

We need to focus on having an exchange rate policy to make the UK competitive again. Without this, not only will we lose out economically but our cherished notions of freedom and liberal representative democracy will be under threat as well. There is a huge amount at stake.