Liz Truss’ downfall won’t end the economic fallout

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Outgoing British Prime Minister Liz Truss walks out of a doorway at 10 Downing Street in London on October 25. (Kirsty Wigglesworth/Associated Press)

As former British Prime Minister Liz Truss’ liberal reforms have badly hurt Britain’s economy, a chorus of pundits have argued that the end of liberal thinking is near. Who could at this point be foolhardy enough to claim that simply cutting taxes on the rich – and doing nothing else – would make us all rich?

Well, don’t think for a minute that this British debacle will put an end to liberal thinking. This latest form of supply-side trickle-down economics is, after all, rooted in a belief system that dates back thousands of years. Even though it has failed time and time again, people and governments always come back to the dream that markets can just work on their own.

Adam Smith, considered by many to be the founder of liberal thought, is a good guide to understanding how powerful this philosophy is. Smith was an heir to the moral philosophy of Roman Senator Cicero. Like Cicero, Smith believed that if like-minded upper-class men tended their farms and traded in friendship and not simply for profit, they could rely on nature to create a perpetual system of wealth. It seemed a plausible idea. The Roman Republic was over 500 years old and its senatorial oligarchy had enjoyed consistent wealth and status since time immemorial.

Smith blended faith in the old cult of market agriculture with new scientific optimism. Inspired by Newton’s scientific view of universal laws of motion, Smith sought a science-based social and economic recipe to codify Cicero’s belief in an eternal natural order of wealth production. For Smith, the magic formula involved a ruling class of virtuous landowners who would balance out the natural avarice of merchants, creating an “invisible hand” by which the market would be regulated to produce wealth on its own.

Between 1774 and 1776, just as Smith was writing “The Wealth of Nations,” France eliminated subsidies, monopolies, and grain price controls in the hope that total free trade and the freedom of landowners would trigger market growth. Instead, the market collapsed, as hoarding and rising prices caused shortages, starvation and uprisings. Smith published his treatise, which advocated the very reforms that failed spectacularly in France, around the time King Louis XVI reversed course.

The failure of free-market reforms has never put a lasting brake on laissez-faire economics in the great industrial democracies. In 19e In the last century, free market thinkers believed that if the state withdrew from economic affairs, the country would prosper, even as social unrest and social inequality would eventually lead to regulations on factory conditions, labor children, wages and worker welfare.

In 1905, economic historian William Cunningham wrote that liberal thought was a bankrupt ideology. He complained that it was a “strict rule which could not be deviated from” and a “subterfuge” under which greed and “indifference lurked”. Free marketers are gutting Britain’s economy and pushing the country into war with its neighbours, he warned. He believed that following the principles of free trade could prove “fatal” for Britain. As powerful as Cunningham’s critique was, it did not deter liberal thinking.

This perpetual loop of free market revival, crash and correction repeated itself in 20e century America and Great Britain. When the Great Depression hit in 1929, President Hoover took the advice of Andrew Mellon, then Secretary of the Treasury, and let the Depression “wind up” the American economy. Proponents of free trade, such as economists Joseph Schumpeter and Friedrich Hayek, both believed that the Depression was “creative destruction” that would produce good. For them, the only thing a state should do was let supply and demand work their economic magic. But even Hoover was later forced to acknowledge that his free-market policies were seriously destroying the nation’s economic capacity.

One might have thought that the Depression and the economic success of Franklin Delano Roosevelt would have killed liberal thinking once and for all, but the hope that “the cure” for economic disaster would “mobilize” the productive elements of the economy, such as Hayek said it, bounced back stronger than ever.

What explains the persistence of the free market dream in the face of serial failure? Liberal thought is simply too entrenched in the philosophical and political make-up of Western democracies to disappear. Free markets produce wealth, and free markets (with the help of the state) are certainly preferable to the alternative of planned or centralized economies.

Yet if history teaches us anything, it is that the dream of establishing an autonomous and self-sustaining economic order – whether set in motion by Cicero’s nature, Newton’s mechanics or the formulas of general equilibrium of supply and demand of economists – is an illusion. But it is a powerful.

We must constantly remind ourselves that free markets only work well when supported by social democracy, state industrial strategy (think of all the government incentives that directly or indirectly support Tesla), and serious investment in infrastructure, education and research, as well as responsible budgetary management.

When the free-marketers return with their promises of trickle-down economics – and they will – we will, once again, have to argue that markets cannot be left to their own devices.

Jacob Soll is a college professor and professor of philosophy, history, and accounting at USC Dornsife and the author, most recently, of “Free Market: The History of an Idea.”

This story originally appeared in the Los Angeles Times.

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