Philosophical economics: From individualism to libertarianism

Note: Please see the explainer to this series at the start of the first instalment.

Capitalism as it is practiced today is dominated by American and Anglo-Saxon attitudes and sensitivities. But the US as well as the UK and the British Empire where capitalism in its modern form emerged are very individualistic societies. And over time both the UK and the US have become more individualistic. But has individualism gone too far? Have we gone from an individualistic society to a selfish one?

Adam Smith famously realised that individualism and self-interest can be benevolent forces in society when he argued that “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest”. Indeed, there is plenty of empirical evidence that more individualistic societies tend to have a more dynamic business environment with more companies being started, some of which become major employers and global players. As a result, more individualistic societies tend to have a higher standard of living when measured as GDP per capita.

Conversely, and I emphasise that this is simply an observation of correlation, not causation, we know that countries that become richer adopt more individualistic values and practices. The results are the charts below that show that over time, the 77 countries examined in the underlying study have seen individualism increase. The sharpest increase in individualism has been recorded in Anglo-Saxon countries like the US and Canada.

Individualism is rising globally

Source: Santos et al. (2017)

The problem is that humans are not solitary beings but ‘social animals’. Humans have been living together in larger and larger groups over time. They have done so because if people can work together as a team, tribe, village, or nation, they can achieve much more than any individual can. Societies are benefitting from economies of scale as is evidenced by the huge gap in output between large cities and smaller cities, let alone rural areas.

But if humans act too individualistic and with disregard for their fellow citizens, their actions become selfish and what used to be a win-win becomes a win-lose relationship. If there are too many free riders and cheaters in a group, the group will start punishing the cheaters because if they don’t trust and cooperation among members of the group will break down altogether. The crucial thing is to strike the right balance between individualism and collectivism.

Obviously, it is a matter of degree and reasonable people can disagree, but I would argue that individualism has gone too far in certain parts of the world, most notably the US. Over the last 65 years, the country has gone from ‘ask not what the country can do for you, ask what you can do for the country’ via Bowling Alone to I alone can fix it.

The result was a corresponding breakdown in trust between Americans. In the late 1980s, 50% of Americans said that most people can be trusted and 47% said one needs to be very careful in dealing with other people. By 2022 that had changed to 37% saying most people can be trusted and 63% saying that one needs to be very careful (source: World Values Survey).

The breakdown in trust and the increase of the more selfish individualism as exemplified by Donald Trump and the glorification of modern-day robber barons (more on that in a future instalment) has changed US society and in my view is becoming a danger to it.

I know, slippery slope arguments are unproductive because they never convince anyone, but every time I talk about the need to rein in individualism in favour of collective action and ‘the greater good’ I get accused by some random American (it usually is an American) that I am a socialist or communist and that if I don’t like the way things are I should go and live in Cuba or North Korea. So let me give you a slippery slope argument in reverse (not that I will change any card-carrying Ayn Rand cult member’s mind…).

Libertarianism is the political structure of the ideal individualistic society. True Libertarians argue for the abolition of all forms of government power with the exception of external defence against enemies (and some would even doubt that). They would argue for the abolition of the Federal Reserve and the reintroduction of the gold standard, and other things that I have addressed before.

If you want details of how a libertarian society could look like, take a look at the platform of the Libertarian Party in the US. I think many readers will nod along with most of the points they make.

Now, let’s look at how libertarianism works in practice. Unlike communism and socialism, libertarianism has never been tried at the national level, but it has been tried at the local level. And it went downhill even faster than communism and socialism as explained here.

In my view, libertarianism is to the right what communism is to the left. A dangerous ideology that ignores human nature and causes enormous harm wherever it is put into practice. The fundamental flaw of communism and socialism is that it sees people only as social beings whose sole purpose is to advance the greater good of society. It completely ignores individual needs and desires.

Libertarianism makes the same mistake in reverse. It sees people as individuals who should be allowed to follow their own needs and desires without regard for others. Whether it is about free speech even if it is a lie or harmful to others or the right to do whatever they want with their money. Libertarians deny the existence of the communal and social nature of humans and by doing so, they undermine society and people’s ability to live together as a group.

Their world is a dog-eat-dog, winner-take-all world. It’s ‘I don’t care if Trump undermines democratic norms and institutions as long as I get my tax breaks’.

Business elites and investors are moving back to a strict shareholder value maximisation doctrine where any other consideration than the bottom line of a company should be ignored. So what if the environment gets polluted or clients get ripped off and customer service is abysmal? As long as that keeps the costs down, I am ok with it because it maximises the market cap of the company. That is the perversion of the original shareholder value concept designed by Michael Jensen.

But in the US public discourse, libertarianism has moved from the fringes to being a significant voice in public discourse that influences government policies and business practices.

The more business leaders and politicians focus on setting animal spirits free or (to use a phrase coined by Elon Musk) to ‘let the builders of America build’ without considering the wider societal implications, the more they increase inequality and undermine the social fabric of society. And this paper argues that a breakdown in trust in more individualistic societies creates more inequality. And guess what, at some point, people reach breaking point. You only need to look at history to understand what happens to societies when inequality becomes too high and trust between people breaks down. It most definitely is not good for business and the market cap of any listed company.