7.1. Trust and regulation

Norms specific to the welfare state, which are difficult to challenge on the sole ground of social justice, are today questioned because of the supposedly perverse role they would play with regard to the regulation of economic activity and growth³. Mistrust or the feeling of living in a society where the spirit of citizenship is weak would lead individuals to demand a market regulation that is detrimental to competition and growth. Conversely trust would make the same demand for irrelevant regulation. In other words, trust and regulation would be substitutes. The welfare state would be meaningful only in the absence of trust on the part of individuals. In addition, we would be dealing with a vicious circle: regulation would reduce trust and in return, the low level of trust would lead to more demand for regulation. Culture would mold institutions that would retroact on culture. Mistrust would then be a source of disorder that would have to be compensated unless it could be remedied through education. This second solution is deemed far more preferable especially as it is assumed that regulation promotes corruption.

This vision of the world is, at the least, reductive. Trust would relate to a cultural practice and have nothing to do with how people coordinate with each other. Or, more precisely, an assumed state of spontaneous trust would ensure the coherence of behaviors and absence of conflict. However, without having to imagine the possibility of opportunistic behaviors or cheating, it must be admitted that there is lack of information about others’ behavior, which undermines everyone’s trust in their own calculations as much as it fuels mistrust with regard to others. All of which means that trust, starting with that of companies, is dependent on appropriate forms of communication that are part of market regulation, that is, accepting connections between actors, often considered as market imperfections. These forms are diverse, and reflect sometimes strong cultural diversities, but what they have in common is the broadening of the time horizon of individuals by making future actions more predictable. It would, therefore, be absurd to stick to a simplistic opposition between regulated and unregulated societies. Unregulated societies are equally unstable as fully planned societies, and the middle as well as virtuous way is that of regulated societies.

The social contract is an essential dimension of trust. It is based on the common acceptance of norms that cannot express an absolute truth, but which are lines of action whose merits are recognized by all. Inequalities may exist, but on the condition that their nature is such that they do not weaken the social contract and do not reduce actors’ time horizons. This will be the case, in particular, when a real social mobility remains possible. This mobility is, of course, related to the capabilities and motivations of individuals, but it also depends on the availability of goods and services provided by public authorities. The degradation of the latter, which would be the result of deregulation and State withdrawal, would be to the detriment of social mobility and at the same time contribute to accentuate inequalities. Structural reforms enhancing dualism in the labor market and breakdown of social cohesion can only generate mistrust, starting with that of hitherto protected workers who run the risk of falling into precariousness.

If norms are at the heart of social interaction and if no actor can be considered benevolent or omniscient, then a separation and reciprocal control of powers is necessary. They are both the expression of a necessary form of mistrust that does not relate to individual feelings but reflects a social requirement, a government mode and therefore a mode of regulation⁴.

7.2. Classical and bastardized liberalism

The particularity of the liberal doctrine is recognizing humans as they are, with their passions and interests, and to assert that, thanks to what some stress as the positive consequences of trade, it becomes possible to avoid the vagaries of power that lie in the vices and passions of those who govern. It is the development of exchanges between free and independent individuals and the recognized effectiveness of coordination mechanisms by the market that allow this liberty. The market then seems to be a substitute for the social contract. In this perspective, statesmen are above all called upon to comply with quasi-physical laws that govern the economy and society, instead of doing what they want, according to their will or desires. Concerned about the public good, they must ensure a precision adjustment designed in such a way as to avoid too many and sudden setbacks⁵.

However, while appropriate institutions and rules limit the arbitrariness of political power, they also limit the individual’s scope of action. Arbitrariness is the result of the laws of economics. Despotism is that of economics experts who would succeed in convincing policy makers to apply the norms that they lay down without discussion. The economy would then really dominate politics, less in the sense that the market dictates its law than in the sense that presumed laws of economics become intangible rules of action⁶.

The dilemma between liberty and intervention seems to find its solution in the principle of economic rules of reason to which everyone would have to conform. But the adoption of such rules, when it expresses an axiomatic vision of the working of society, empties individuals’ decision-making autonomy of any real content and hence the democratic ideal. This loss of autonomy is ignored by economists who think that it has only political or sociological significance, meaning that the result of individual actions is consistent with maximizing individual and collective well-being. Such is the essence of utilitarianism: it matters little to economists who adhere to this doctrine that rules may conflict with individual liberty if they create more utility and happiness for many. It is not certain that utilitarian calculus is efficient and that the role of individual liberty in wealth creation, particularly the liberty to make mistakes, should be overlooked. Conflicts of interest persist and liberty is at the heart of the process for resolving them. From this perspective, it constitutes a factor of economic efficiency. The relationship between the economy and policy makers is modified. While the defense of liberty joined with the defense of rules results in the praising of enlightened despots, the defense of liberty joined with the recognition of conflict, confrontation and trade-off gives meaning to the democratic choice and discretionary intervention⁷.

Contrary to a widespread view, liberalism does not oppose intervention. Classical liberalism cannot be assimilated to laissez-faire and to the belief in the natural harmony of individual interests.

Smith, at the dawn of the industrial revolution, intended to understand the springs of the emerging new society. He breaks with the mercantilist tradition and attributed global enrichment to the pursuit of individual interests. Yet, a closer look reveals that he is not an advocate of laissez-faire. He makes the principle of sympathy the guide for individual behavior, a principle which he neither confuses with benevolence or altruism, nor with egoism, which means that everyone behaves as others expect them to behave. In doing so, he underscores that a human being’s relationship with him- or herself is always mediated by others. Smith does not attribute the benefits of individual efforts to the exercise of a “natural liberty” that goes hand in hand with the “natural goodness of Man” and the “natural harmony of interests”, but to well constituted and necessarily evolving social institutions⁸. In the pure economic field, he bases wealth creation on the interaction between the division of labor and market extension, which can obviously not be reduced to the free interaction of markets in a world where any real institutions have disappeared. Referring to nations rather than individuals is by no means coincidental, as Smith questions above all how individuals manage to live together, in other words coordination conditions which, by definition, are not based only on the behavior of isolated and independent individuals.

Hayek, whom the proponents of bastardized liberalism claim to follow, refers to Smith, Locke, Hume or Burke and distances himself from the idea that every law is an evil or that every law is an infraction of liberty. His theory was never that of an integral laissez-faire. He admits that individual efforts could be effectively channeled to beneficial social purposes because of the evolution of institutions constituted to allow the expression of opposing interests and emergence of advantages arising from compromises⁹. The conceptual difficulty is that, according to his perspective, these institutions are supposed to result from a selection that is the product of the immemorial action of individuals free from all obstacles. He overlooks the breakthrough of the formation of the State of law whose mediation is essential to the exercise of liberty as well as the durability of power relations¹⁰. In this way, he opens the way, certainly despite himself, for the competition of laws defined in various territory, favoring the lowest fiscal and social bidder, which is the new figure of laissez-faire.

Walras’ liberalism is not based on the promotion of laissez-faire, contrary to what a quick reading of his theory of general economic equilibrium might suggest. He intends to define a state of the market – indefinite free competition – which refers to an ideal society in which the State and money are absent. But, outside of this purely virtual situation with respect to which comparison has no meaning, he knows how to establish the real conditions of evolution¹¹. He even defends liberal socialism, denounces those who intend to suppress the State to replace it with private enterprises as well as those willing to impose, despotically, the scientific rules of free competition, without considering the necessary time for adaptation.

Finally, Keynes on his part intends to address the doctrine of laissez-faire and not liberalism¹². His reflections and proposals for State intervention cannot be interpreted as opposition to the foundations of market economy. They are oriented toward the search for technical improvements of modern capitalism through collective action. Intervention is based on discretionary choices intended to correct the weaknesses of global regulation, attributable to market failures. The challenge, based on an essentially liberal reference, remains not to disturb the allocation of resources as determined by individual choices, but to effectively combine regulation and incentives, State sovereignty and the freedom of individual choice, although the conditions for such combination are never really explained.

Confusion arises from the latter imprecision. Modern economic theory does not escape it. This theory proposes an essentially axiomatic representation of market economies, which has the apparent merit of making a clear division between liberty and intervention, unambiguously defining individuals’ areas of choice and of being, in principle, opposed to the doctrine of laissez-faire. But it most often reduces intervention to the application of intangible rules. Individual sovereignty only makes sense where it obeys the founding axioms of rules and presumed optimal behaviors. There is no place for conflict or controversy, in short for discussion between free individuals. The recognized sovereignty is that of representative individuals who are supposed to know the delicate rules of the working of markets. Intervention is justified by the gap between imperfect competition equilibrium and social optimum. It consists of applying specific prescriptions intended to fill this gap. Rules enacted and imposed by authorities replace the failing market.

According to this perspective, reference should be made to the economist-king (and omniscient), the expert who has become an enlightened despot. Passions would be extinct. Individual interests and collective interest would be safeguarded. Classical liberalism concedes here to neo-liberalism that would be more appropriate to call bastardized liberalism. The State does not disappear, but mutates. The liberal State gives way to the corporate or managerial State that mimics a failing market when its functions are not simply captured by predators claiming the free market.

The world thus imagined, but also in one way or another imposed, is based on the will of the emancipation of individual interests of any collective constraint. Such an emancipation has nothing to do with the separation between civil society and the State, which is inefficient and proceeds from the liquidation of the political framework if not the legal framework. All that is left are individuals defined by their rights and interests¹³.

7.3. The State and the common good

There will always be two ways of considering public action: defining it with regard to an optimum that it may or may not meet, or setting it the goal of managing inevitable conflicts. The first view denies contradiction, and the second recognizes it as unavoidable. The economic policy debate is a perfect illustration. There is some sort of connivance between those who think they can define an economic policy perfectly fulfilling objectives defined by public authorities and those who deny the effectiveness of this economic policy to rely instead on the interplay of private economic interests when this is not, simultaneously, under the control of reputed independent or impartial experts or on the intervention of rating agencies charged with judging the quality of private and public borrowers. They all believe in the existence of an ideal world. The only difference between them lies in the configuration of this world and in the designation of omniscient and impartial figure: the civil servant or consumer, shareholder and worker, whereas none of them is as such. Contrary to these reductive visions, the lack of information and conflicts of interest, inherent in societal life, require arbitrations that are the responsibility of public authorities.

Seeking the common good involves the construction of institutions aimed at reconciling individual and general interest and thus requires the recognition of the complementary and non-exclusive roles of the State and markets. The figure of individuals free from any attachment, in fact from any relationship of subordination to the most powerful can only develop under the reign of the Rule of Law and that is the essential contribution to the common good¹⁴.

This formula, on which the agreement should be easily made, takes on a different connotation with the assertion that markets need regulation and the State competition and incentives. This means that the State must respond to market failures, but while being organized in such a way as to mimic it as though it were efficient. In any way, what we witness is an elimination of the State within its own specificity. We expect the State to be a paragon of virtue, the virtue that would make it possible to achieve a free market if it could exist. The objective is, of course, to undermine corporatist interests but also and above all to be emancipated from the injunctions of the voter who is poorly informed on economics if not malicious, hence the resorting to independent administrative authorities rather than governments¹⁵. Consumers maintain their advantage over voters in that they are provided with rational expectations. Here, the common good is nothing other than the reflection of a general market equilibrium and its corresponding social optimum, that is, of an imaginary world¹⁶.

This particular common good concept is alien to Keynes for a simple reason: he does not believe in the existence and especially the stability of anything like a full competition system. Thus, for him the State has a specific function, which is a regulatory function distinctly different from the resource allocation function. He does not believe in the possibility of establishing a tight frontier between these two functions, but recognizes this regulation requirement that implies that the State should know how to take advantage of public action to undermine the deleterious effects of distortions in the private sector, for example, by accepting an increase in public debt to offset the effects of the clearing of private actors’ debt when it has become inevitable. The nation-state thus conceived is the architect of the common good that constitutes stability, and is at the same time an area of solidarity, a condition for this stability. It can and must, moreover, belong to a global system of recognition of the common good implying that the gains obtained in international trade should not only be mutual, but shared equally among all nations, far from imperial solitude.

The role of the State, in its various interventions, is to guarantee the control of the long term by enabling, what may seem paradoxical, the slowness necessary for gestation of future events. This complex and multiple role falls within the democratic time. Economic analysis is, therefore, not aimed at establishing rules or institutions by justifying their optimal nature. Its purpose is to lay down the terms of political arbitrations likely to enhance structural changes by maintaining a relatively regular macroeconomic evolution. These arbitrations can only be the result of a debate with the challenge of distinguishing between the role of markets and that of the State. Public and critical debate is essential to public policy, if only because it is impossible to determine the role and scope of the market in advance using a beautiful, abstract and general formula, and generally whether the latter aims to subject any activity to the market law or to withdraw, on the contrary, any prerogative from such activity.

The Rule of Law requires the representation of citizens, and that of different or even divergent interests. The stepping back of a representative system in favor of a competent administration or independent administrative authorities might imply the risk of a withdrawal of the Rule of Law itself.

The independence of administrative authorities is an illusion. These authorities are the modern expression of an administrative State as opposed to a State of justice. General will is certainly neither infallible nor always detectable. It can be monopolized by pressure groups. However, it cannot be expressed through administrative authorities who end up becoming spokespersons for pressure groups, including those that are ideological in nature. With such authorities applying rules imagined by economists and intended to reflect undisputed and undeniable knowledge, economic power tries to take precedence over political power and circumvent it. Withdrawal of the welfare state is the expression of this return to the past. No doubt government agencies are needed. However, they should not escape a form of State supervision, whether executive, legislative or judicial power, since they are established not to impose a pseudo-scientific truth, but to make arbitrations between divergent objectives or interests.

When the State or its divisions obey specific rules assumed to be those of the efficient market, they become the forerunners of private interests. Global stability is no longer really on the agenda. Political power is once again subject to economic power, whereas the principle of the Rule of Law lies in the separation of the two.

When, on the contrary, the State lays down general and abstract rules, this should be done with the objective of creating the conditions for a fair arbitration of conflicts of interest inherent in societal life. It then performs a function of mediation essential to the accomplishment of the common good with macroeconomic regulation being one of the aspects. In general, there is no market that can work without mediators. Companies, financiers and public authorities are the mediators. The State has the political power to establish the conditions for implementing these mediations, notably by being the architect of company, financial, social, tax and budgetary law¹⁷.

7.4. Liberal democracy

Democracy has ambiguous relations with liberalism, which come from the difficulty they both find in recognizing their role in politics. Reducing democracy to a requirement of equality and making political bodies the guarantors of such equality, which becomes a single objective, can lead to forms of denial of individual rights. It contradicts the essence of liberalism, including the exercise of individual liberty and thereby denies the existence of conflicts. Sovereignty of the people or general will imposes decisions assumed to reflect general interest, which is then confused with the interest of each.

Liberal democracy is a special blend that breaks with the double ambiguity of democracy and liberalism by not reducing the former to the requirement of equality or the latter to the requirement of individual liberty. It is not the government of the best or most learned. Liberal democracy is the means of expression and conciliation of divergent interests at the same time as the process for defining justice that transcends individual interests. It favors compromise as well as slow and gradual adjustments that are a guarantee of coherence and sustainability of society and the economy. It satisfies a need if not a requirement for moderation. The life of a democracy is by no means made of confrontation with an ideal model: it is first an exploration of a problem to be solved. Before being a mode of government, it is an institutionalization of the conflict between the just and unjust, between the legitimate and illegitimate, without this being obscured by the recourse to expertise. Attempting to subject decisions solely to the rationality of individual calculation, and private rate of return alone, means contravening the democratic dynamic that feeds on the confrontation of interests.

Conflicts cannot be reduced to behaviors composed of cheating or opportunism, even if recognizing their existence is desirable: they are inherent in the inevitably unexpected consequences of an evolution made of creative destruction. They go hand in hand with a legitimate feeling of distrust, if not suspicion, in individuals confronted with the effects of uncertainty and irreversibility. If there can and must be mistrust with regard to policy makers, this is because it is never reasonable to entrust the solution of problems to a single authority whatever. “Liberal” mistrust is embodied in the separation of powers.

Making mistrust a foundation of political institutions conceived as a place of expression and resolution of conflicts cannot be confused with the idea that it would be possible to reduce the feeling of mistrust by restricting the political choice space. The attempt to put the choice of reputed impartial experts at the place of the choice of policies, along with the demand for total transparency of the information that would be provided by “well-designed” institutions, contributes to such confusion¹⁸.

Denying the existence of conflicts is not only absurd, but can keep on exacerbating them thus leading to extreme situations. It is up to the State to establish conflict resolution methods, and to conceive the rules of arbitration between opposing interests or objectives. But it is not just any State. This State can only be a State that substitutes the settlement of disputes by the Rule of Law to their settlement solely by force. Political power constituted as such can only be dissociated from economic power. This is what makes the difference between the Rule of Law and seigniorial domination. If we go further, the Rule of Law opposes a doctrine that subordinates public authorities’ action to intangible economic rules that would act much as rules of law while they aim to establish a wrongly assumed optimum order where any conflict would be prohibited: what the neoliberal trend of the 1980s and 1990s tried to institute. This State enables the existence of civil society that is subordinate to it, meaning that it guarantees individuals the freedom to contract but also to contribute in laying down common rules, notably through the judges¹⁹. Finally, this State is a social State including a labor law that recognizes the existence of conflicts of interest between employers and employees and at the same time fosters the means of responding to them by enhancing the role of representation, action and collective bargaining in order to reconcile equity and efficiency.

This Rule of Law is today threatened by the absolute domination of the market and the return to an authoritarian, if not despotic, form of State. The inadequately regulated use of economic liberties, as has been the case in recent years, can only lead to a weakening of its ability to regulate the economic activity and also a strengthening of administrative centralization.

7.5. The challenge of globalization

The challenge of globalization lies in the difficulty of reconciling trade expansion, safeguard of States in their regulatory functions and political democracy. In the abstract, globalization would go hand in hand with democracy provided that States are eliminated and replaced by a world government. Globalization could go along with the safeguard of States on condition that the latter choose to apply rules that replace democratic debate and choice, meaning de facto the abandoning of borders when they delimit the scope and independent powers of regulation²⁰. Finally, States could continue to exist within a democratic context provided that globalization is renounced. There is no certainty that either of these choices is ultimately viable and it is likely that the required arbitration is not really decided as the proposed partition might suggest. This is, in any case, what is suggested by the institutional compromise reached, in the past, at Bretton Woods, which at the end was able to reconcile the requirement of international openness with the largely conserved sovereignty of States and acceptance by the latter of the rules of democracy.

Globalization reduced to an extension of market relations is a denial of the role of States whose margins of action are gradually transformed to the detriment of cooperation and the common good. Market rules replace regulatory public interventions. They are assumed to elude the democratic debate that has become worthless. Every government must comply with market requirements. The attractiveness of its territory and increase in its trade surpluses become its sole objective. To this end, it practices a restrictive monetary policy, decreases corporate taxes, makes the labor market more flexible, initiates deregulation and privatization, renounces all industrial policies and comes to free trade agreements that can go as far as giving enterprises the power to impose social and environmental rules through the mode of trade disputes resolution. The conditions for an economic war are in place, even though some, dreaming of the effects of “soft trade”, thought they were abolishing borders by creating the famous common rules.

The choice to prioritize rules relative to the democratic debate in favor of globalization is far from guaranteeing success in terms of growth and well-being. Disequilibria continue to exist and can increase. They are first perceived at the level of States and can cause interstate as well as internal social conflicts that render the arbitration carried out unstable.

Globalization that goes hand in hand with the maintenance of State sovereignty, but in the absence of democracy, has two aspects: on the one hand, States of developed countries (mainly European) that comply with the rules of neo-liberalism and on the other hand, States of emerging countries which, on the contrary, retain their intervention capacity but impose a strategy favoring investments and exports rather than domestic consumption, because of a political authoritarianism that contains the people’s demands. However, it should be obvious that the success of this State strategy is based on the existence of sufficient external demand especially for consumer goods, which is itself subject to the existence of a large middle class in developed countries that meet the requirement of the democratic game.

The success of globalization can only result from a compromise that maintains the regulatory capacity of States as well as interstate agreements or associations of States such as the European Union. Although it is inevitable that performance gaps appear along with trade imbalances, they should however be contained. This is the price of the viability of the global economy. It is likely that it requires the development of a relative equality of situations, not only within each country, but also between countries.

Some people imagine that companies could and should assume the social and environmental responsibilities that States would be compelled to abandon because of lack of financial resources²¹. The agreed discourse is based on the idea that companies are the only source of wealth creation and welfare gains through the paying of wages and taxes, as if the regulatory actions of the State were no longer important and it would have the legal capacity to take on such responsibilities²². Yet, the proclamation of corporate social and environmental responsibility cannot be a substitute for intermediation that establishes the responsibility of each company, today diluted because of the absence of a clear legal framework with an organization of business having increasingly unclear boundaries. The reality is that the ability of companies to sustain their strategy in the long term and respond to social challenges depends on the ability of States to impose the forms of governance and rules of law that permit it.

In fact, the impending danger is twofold. Not only does unbridled globalization weaken the regulatory capacity of States, but it also encourages States to compete in terms of legal, social or environmental norms or to re-establish customs barriers to protect themselves. States that maintain real power proceed or can proceed as such, be it China or the United States. Thus a European Union may be disintegrated precisely because of the choice it has made to stay closer to the dreamed globalization.

7.6. An open and equitable society

Economic liberalism cannot be confused with the doctrine of a mythical market economy of which any political dimension is prohibited. On the contrary, it only takes on its full meaning if the State remedies market failures. It is inseparable from the democratic requirement, which is none other than the requirement to solve the inevitable conflicts of objectives and interests by means of political debate and arbitration. Ignorance of this political dimension of liberalism at the level of international relations presents the risk of a failure of globalization when national political choices, rather than helping to reduce disequilibria, will consist of deferring the effects on other countries and exacerbate rather than circumscribe conflicts. Although globalization is not responsible for the ills that beset the various countries, it might not be viable for long periods because of lack of political means by the community of States to resolve the conflicts it causes and to promote equity.

Carrying out arbitrations and resolving conflicts is only really possible in a world where relative equality prevails between individuals, a guarantor of social cohesion. It is this social cohesion that creates the conditions for a sustained wealth creation. It also strengthens current generations concerned about the wellbeing of future generations. Liberal society is clearly made of identity and conflict of interest. There is an identity of interest because social cooperation gives everyone a better life than what they would have by seeking to live only through their personal efforts. There is a conflict of interest because people are not indifferent to the way in which the products of their collaboration are distributed. Arbitrations, that are made under the veil of ignorance implying that the authors of just principles are unaware of their position in future society, do not necessarily lead to immediate mutual gains. They produce winners and losers, but they should not drive anyone toward abandoning the constitutive rules of social cooperation²³.

Thus the veil of ignorance, which makes the attitude of solidarity credible, is torn apart when society is divided into categories each of which become aware of their specificity. The disappearance of a large middle class resulting from the application of intangible rules intended to mimic the perfect market and dismantling of the welfare state, particularly its social insurance and transfer mechanisms, produces this division, explains the refusal of solidarity and makes the economy more unstable at the risk of interrupting growth or, more exactly, development with growth being only a quantitative measure, which is questionable. It could signal the fate of a globalization accompanied by an increased social fragmentation, a withdrawal of everyone into their own ethnic and religious community or simply community of interest, jeopardizing justice as equity and democracy.

The social philosophy at the heart of Keynes’ message was based on the conviction that unemployment and the widening of inequalities were the main scourges of the society he had before him. The purpose of social protection, as then implemented, was not only to address equity concerns, but also to enhance the efficiency of market economies by evening out fluctuations that could become chaotic. The new social philosophy, resulting from political choices referring to bastardized liberalism, is the exact opposite. Inequalities become a normal characteristic of a society that is supposed to give priority to innovation. The level of social protection is indexed to that of activity under the assumption that a market economy freed of all state constraints would be inherently stable. This assumption ignores the very nature of market economies, which is to create novelty. It also ignores that novelty is a source of disorder and, finally, that this disorder cannot be controlled without public intervention.