Wild Freedom or Civil Freedom

James Gubb, 7 October 2008

Many conservative leaders are in a quandary about the financial crisis. They approve of de-regulated markets but these selfsame institutions seem to be in need of regulation. Many people in the financial services industry have behaved without regard to the good of others and even without reference to the interests of their own companies. Their conduct has been so self-centred that the most stalwart defenders of a market economy have been embarrassed. Indeed some of the most trenchant criticism has come from enthusiasts for the market.

But there is no inconsistency in calling for regulation. No supporter of a liberal-market system has ever advocated the complete absence of legal regulation. Locke famously insisted that liberty was not a ‘state of licence’. Burke was no less cautious in his praise: ‘But what is liberty without wisdom and without virtue? It is the greatest of all possible evils; for it is folly, vice, and madness, without tuition or restraint. Those who know what virtuous liberty is cannot bear to see it disgraced by incapable heads, on account of their having high-sounding words in their mouths.’
The great philosopher of the Enlightenment, Immanuel Kant, encapsulated the vital point when he distinguished between ‘wild freedom’ and ‘civil freedom’. We have a tendency, he said, to live in society and also to live as individuals. In his view, development of innate abilities can only be achieved in a society with the greatest freedom and ‘continual antagonism among its members’ but also the most precise specification and preservation of the limits of this freedom in order that it can co-exist with the freedom of others.
A market economy has always been an artefact of law. It rests on legal protection of property, legal enforcement of honesty and keeping contracts, and on the provision of ‘legal facilities’ like company law to make trade easier. The reason for a competitive economy rather than a monopoly system is that humans are fallible, with selfishness and greed prominent among the potential weaknesses. If there is openness and competition, human failings are more likely to be revealed than under a closed and monopolistic system. This insight remains valid.
Defenders of a free and open system also emphasise the importance of personal responsibility. If people bear the costs of their own mistakes and reap the rewards of their own success, there will be fewer mistakes than if the costs of failure can be imposed on other people. That insight too remains valid.
But what has happened is that many financial institutions have contrived to weaken the transparency of trading so that deception has been possible. It happened on such a scale that bankers do not trust other bankers because they know how fallible they are themselves. No defender of market competition needs to shrink for an instant from taking the regulatory steps necessary to restore the link between success or failure, on the one hand, and rewards or losses, on the other. The first place to look is the rating agencies like Standard and Poors and Moody’s who have been criticised for giving investments their AAA status when they did not deserve it
In a hugely complex economic system it is impossible for ordinary investors to be fully informed. Simplifying devices, like those that give three A’s or two A’s based on expert appraisal of risk, are vital – but only if the simplifiers are accurate.
Defenders of a market economy should defend ‘civil freedom’ from ‘wild freedom’ and demand regulation in the name of openness and personal and corporate responsibility. The wild freedom of people who pursue their private ends regardless of the impact on others is no part of a sustainable liberal democracy.