"Reviving the Invisible Hand – The Case for Classical Liberalism in the 21st Century"

By Deepak Lal (Princeton University Press 2006)

Classical liberalism was not invented by Adam Smith but was a force which helped to shape the Roman, Chinese and Indian empires before his time. Deepak Lal suggests that it was Pope Gregory VII in the eleventh century whose reforms led to the growth of the market economy in Europe and the rise of “Western” economic power. Adam Smith recognised and codified the key elements of classical liberalism at a time when its force was ready to be unleashed. This force was channelled by “laissez faire” policies (avoiding regulation) and unilateral free trade (in the case of Great Britain). “Laissez faire” was seen by Adam Smith and David Hume as a mechanism to force specialisation and drive efficiency in order to compete successfully. “Laissez faire” was not unbridled licence; classical economists strove for “liberty under the law” so that contracts could be binding and wealth enjoyed in peace. The role of government in the view of Adam Smith was to be to do the things not done by traders and manufacturers, namely to protect society from foreign traders, every member from oppression and injustice by other members of society and to provide and maintain public works and institutions. These ideas have re-emerged in the current “Washington Consenters” on economic policy. True liberals are not egalitarian and do not support state involvement in business.

Deepak Lal shows how classical liberalism was eroded by ideas derived from Rousseau through the nineteenth century and was shattered by the impact of World War I. The growth of the state and subsequent struggles with communism and fascism tethered entrepreneurial instincts and led to a huge transfer of wealth into state institutions through regulation and taxation. Free trade disappeared and mercantilism increased.

The struggle between the West and the Soviet Union/China after World War II was played out in part through the United Nations and new global institutions – The World Bank and IMF. These bodies brought the Second and Third Worlds into a new globalisation process which was dirigiste, unlike the globalisation before World War I. With the demise of the Soviet Union, US hegemony is increasingly unwelcome and unsustainable and new players are driving globalisation, the Middle East petrol powers, China and India with Japan and Russia seeking to adapt themselves. This process has been partially facilitated by the WTO but American attempts to control its development have frustrated further progress. The new world order is also undermined by France and others who are dirigiste by temperament; Russia is playing a spoiling game.

Deepak Lal demonstrates how opening markets, removing exchange controls and stimulating competition have begun to move the world away from the state-dominated model which emerged in the last century. The dichotomy between state control and economic liberalisation is starkly demonstrated by China and it is now human aspirations which are driving change worldwide. The growth of communications and the Internet make it increasingly difficult to suppress information; free access to knowledge is a key driver of classical liberalism. In the view of Deepak Lal it is the virtues of classical liberalism which are best able to address the “ancient poverty of the Third World”. His greatest fear is that the “New Dirigism” of the USA will combine with other reactionary forces to frustrate the full achievement of globalisation.

This is a thoughtful, well researched and challenging book. It has a deep historical perspective and a broad coverage of the continuing battles between regulation and deregulation, free trade and managed trade and between liberty and equality. The globalisation glass is now either half full or half empty, depending on your view point. The USA has never embraced free trade in its whole history and clings to its doctrine of reciprocity. Unless that changes the glass may remain half empty.

Adrian Davies - 12th October 2007