Wealth or greed for their own sake does not define the liberal

In the halcyon days before the global financial crisis, when labour and capital were doing well, the terms Left and Right more or less meant something.

To be “on the Right” of politics meant supporting the conventional wisdom of that time: lowering taxes on the wealthy, cutting welfare to encourage workforce participation, celebrating the financial services sector and privatising government assets.

To be on the Left signalled, mainly, an affection for identity politics. So convincing had the ideas of the Right been that social democratic parties in the US, Britain and Australia pretty much adopted its program. The economic debate had shrunk to one of degree, not kind.

While the Left is still besotted with identity politics (given its elites now do quite well out of the status quo), confusion reigns for the Right. State support for the financial sector made a mockery of its free-market arguments. It turned out the reality was bracing competition for the many and institutionalised socialism for the elites.

The details have varied by nation but a new economic era appears to have emerged. It entails wage stagnation, anger at banks and a declining respect for major political parties and the institutions of democracy and business.

Some of this isn’t justified. Living standards and incomes have improved for most people, as the Productivity Commission recently noted. And digital techonolgies are improving our lives, often simplifying them, and doing so while making considerable savings.

But perceptions matter for politics. Credit Suisse’s annual wealth report shows the share of the world’s wealth owned by the top 1 per cent of households increased from 44 per cent in 2008 to just more than half last year. The number of millionaires (in US dollars) in Australia is poised to rise from 1.2 million this year to 1.7 million by 2022, the biggest percentage jump among 23 countries in the report. You can bet much of that arises from increases in asset prices, rather than effort or innovation.

Perceived problems aren’t all dollars and cents. Particularly for men, the economy is generating fewer of the stable, reasonably paid jobs in the mining, manufacturing and agricultural sectors that perhaps bestow more dignity than, for instance, delivering meals to rich people.

It also is failing to generate enough jobs full stop. More than 175,000 jobs are being advertised around Australia, yet 710,000 Australians are officially unemployed and a further 1.2 million don’t have a job but say they would like one.

The public is not angry about inequality per se; people are concerned by an economic system that appears to be allocating increasingly extreme rewards to a small group that bear little relationship with their intrinsic contributions. Senator Pauline Hanson was right, for instance, to question the salary of the ABC managing director, which is more than $890,000.

But that’s just one example of a phenomenon that extends throughout the public sector, where eye-popping salaries are the norm.

Author Nassim Taleb explains in his recent book, Skin in the Game, the sort of inequality people loathe, where the subject “appears to be just a person like you, except that he has been playing the system, and getting himself into rent-seeking, acquiring privileges that are not warranted, and although he has something you would not mind having (maybe a Russian girlfriend), you cannot possibly become a fan. This category includes bankers, bureaucrats who get rich, former senators shilling for (evil firms) and clean-shaven chief executives who wear ties.”

In the past decade, this sort of inequality has become more common. The quickest way to wealth in Australia is to join the swollen ranks of the political and financial class.

If the Right of politics hopes to remain electorally appealing, it must shed some of its simplistic arguments about the superiority of “the private sector”, where competition isn’t functioning. It must recognise a lot of what it championed before the crisis in the finance sector was rent-seeking and subsidised gambling.

Genuine competition and freedom have been the most effective tools to improve living standards. Being a liberal, in the classical sense, isn’t about celebrating wealth or greed for its own sake. Indeed, this would have been bizarre to the great liberal economists of the 18th, 19th and early 20th centuries.

The risk is voters blame free markets or capitalism for recent developments from which they instinctively recoil: the GFC itself, the royal commission findings or gouging by privatised airports and electricity providers.

The Right also needs to embrace utilitarianism. One barely hears the term today. For Adam Smith, and practically all economists who followed him, one dollar of income was worth more in the hands of someone earning $60,000 a year than it was for someone on $600,000.

Indeed, he expressly rejected the sort of “flat taxes” many on the Right today dream about. “It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion,” he wrote in his 1776 Wealth of Nations.

This concept appears to have been completely lost in the debate about the effects of free trade. We cannot measure the utility of individuals, let alone compare them across groups of people. Yet it should be clear that if a given policy delivers even bigger income gains to lawyers and bankers than the losses that arise to lower-income people, that policy, in a utilitarian sense, is a dud, even if its overall impact on “the economy” is positive.