Liberalism in Economics and Politics
Antonio Martino speaks to Charles Richardson

Antonio Martino is Professor of Economics and Chairman of the Department of Political Science at the Free International University in Rome, but is currently on parliamentary leave. He turned to politics in 1994, being elected to the Italian Parliament as one of the founding members of Forza Italia. He became Minister of Foreign Affairs until the change of government in 1995, and was re-elected to parliament in 1996.

He has been active in a number of international organisations, and was President of the Mont Pelerin Society from 1988-1990. Professor Martino has written 11 books and more than 150 papers on economic theory and economic policy. His most recent books are Economica e liberta ('Economics and Liberty') and Stato padrone ('Government, Our Boss'). The Centre for Independent Studies published his occasional paper Are We Winning? in 1990.

On 21 October, Professor Martino delivered the 15th annual John Bonython Lecture in Melbourne for the Centre for Independent Studies. While warning against excessive optimism, he argued that the prospects for liberty are better than they have ever been, and that 'From the point of view of the ideological confrontation, É we live in one of the happiest times in the contemporary history of mankind.'

The day before the Lecture, Professor Martino addressed a group of invited guests at lunch at the CIS offices in Sydney. After lunch, I spoke to him about his views on the current world situation.

Charles Richardson: Antonio Martino, Welcome to Australia.
Antonio Martino: Thank you.

CR: You've probably been asked this question many times, but it's the first thing one notices looking at your career: you had an established position as an academic, an intellectual – what made you decide to go into politics?

AM: Well, I enjoyed my work as an economist, I had an excellent relationship with my students and with my colleagues, but I thought that moving into politics gave me a greater audience for my views. It was an opportunity for preaching my views to many more people at the same time than I could as a professor.

CR: So you've always been keen to get your views across to the public?

AM: That's not entirely correct. As a teacher I always tried to teach technical economics, not propaganda. But of course teachers always want to get their views known and spread around, and going into politics meant going on television, it meant media opportunities for reaching a larger audience.

CR: And how did you find the difference in lifestyle that was involved?

AM: In terms of my self-interest, I don't know whether it was a judicious move. I think the experience has been very exciting and unique, and I'm not complaining. But as I said, I enjoyed being a teacher, and I miss that. I certainly don't have as much time as I did before to read and write that sort of thing. In terms of the political process, I may have contributed together with other people, to a change in the focus of political debate. The program we presented in 1994 was a program of radical change in a liberal direction, and that has shifted the focus dramatically.

CR: So you thought that was a particularly opportune time for getting your message across to the public?

AM: In 1994 for us it was an exceptional time; it was very exciting. We invented a new party. We got together the most radical pro-free-market program ever. We won the elections. We formed a government, and we started trying to implement the program. Then '94 came to an end, the government fell – and of course 1995 and 1996, they were exciting, but much less exciting.

CR: But you think that government did have some lasting achievements in that time?

AM: Yes, and had we had another year or two, we would have done things. Our Minister for Finance had already changed taxation on profits, exempting reinvested profits from any kind of taxation, which resulted in the creation of 300 new companies in a matter of a couple of months.

CR: I take it from your writings that you are optimistic about the prospects for liberalism and liberal policies – is that right?

AM: Yes. It depends on the time horizon, and it also depends on whether you're talking about ideas or policies. I'm very optimistic in terms of ideas. There is no comparison whatsoever between the intellectual climate today and that of twenty or thirty years ago. I am pessimistic about policies in the short term. Public spending is continuing to grow, taxation is continuing to grow, regulation is continuing to grow – but that regards policies in the short term. In the long term they will have to change their policies. They are not only intellectually bankrupt, they're financially bankrupt. So things will change.

CR: I wondered what you thought had been the most important influence in bringing about that change that you talk about in the public debate – has it been just that the objective conditions, so to speak, have shown up the bankruptcy of socialism?

AM: I think that the factors involved in change are three – ideas, interests and circumstances. Now in terms of ideas we have been winning for a long time. The change has been brought about by circumstances and by the fact that interests have been at times captured in favor of a change. The great demonstration was in England with Thatcher and then in the United States with Reagan.

CR: Do you think that enthusiasm for those changes is confined to one side of politics, or do you see that the parties of the left have played their part in change as well?

AM: Mainly the parties of the left have changed. Look at my country at the beginning of the sixties. The parties of the left at that time advocated policies that no-one advocates today – central planning, nationalisation, et cetera. However, I think the change has not gone entirely in the opposite direction – we still have quite deep political differences between us and them. In some cases the parties of the left have become defenders of freedom, even economic freedom, and the parties of the right are the conservatives, those who defend the status quo, but not in my country.

CR: In Australia and New Zealand the experience I think has been that the parties of the left, although philosophically they may not have much of an appreciation of liberalism, they are I suppose temperamentally more able to contemplate radical change, whereas the parties of the right, which you might have expected to be more sympathetic, tend to shy away from reform in any direction.

AM: Historically, this has been the public perception. Historically, the perception in many countries was that you had on the one side the party of change, even revolutionary change, and that was the left, and on the other side you had the party that defended the status quo, the conservative party, and that was the right. But this doesn't necessarily mean that they behave accordingly. However, I am aware, for example, that Roger Douglas and the Labor Party did a lot to change things in New Zealand.

CR: Well that's right. There's also in many areas of the left more of a tradition of promoting individual liberty once you get beyond the economic sphere.

AM: You see, this is interesting. In my country this was more the case in the past. If you forget about economic liberties and look at civil liberties, the public perception was that the libertarians were on the left whereas the law and order people were on the right. Today, again, everything has changed. On the right you have the party of change, you have the party of economic freedom, and you also have the party of civil liberties. You know, our judicial system is in a state of chaos; we have the possibility of keeping people in jail for years before they are tried and sentenced. We want to change that, and in the left there are many people who oppose that change. So even from that point of view, in my country things have changed.

CR: That is interesting. Do you find that that sort of view is now widespread on the right, or are there still interests on the right that fit more into the old conservative mould?

AM: You are absolutely right. There are both kinds on both sides. However, what I am saying is that predominantly you now find people defending civil liberties on the right, whereas there are law and order types on the left – which is strange in terms of the historical record.

CR: Yes, it is. There is a common perception that, with the fall of communism and the end of the Cold War, there is something of a realignment going on among political parties in the west. Do you think that is still continuing, and that we are going to see further changes?

AM: We are witnessing It seemed at one point after the fall of the Berlin Wall that communism was dead, that the old-fashioned socialism was dead, that everybody would be in favor of some kind of liberal or market system. And now you have 13 out of 15 countries in the European Union with socialist governments, you see the communists back in power in Russia, you see a lot of

CR: Indeed you might say that the fact that we've got socialist governments that still have to pursue, broadly speaking, free market policies –

AM: Well, conservative policies, not necessarily free market.

CR: At least a long way from the old ideas of central planning.
AM: In the seventies, it would have been inconceivable to have a socialist government with a balanced budget. But that's what these European governments are doing. It was inconceivable to have socialist governments that preached monetary stability. Being worried about inflation when the inflation rate was 5% or 3% – at that time, inflation was 20% or more

CR: 4% was utopian then

AM: Yes, impossible. Or take taxation: income tax rates now, when they change, they go downward, not upward, and this is done also by left wing governments. So you have a lot of changes. Socialism in the old way is no longer.

CR: Do you think that the economic and monetary union in Europe has been a beneficial influence?

AM: Many people in Europe say that if inflation rates have gone down, if budgetary imbalances have been reduced, if interest rates are lower, all this is due to the convergence criteria that monetary union has imposed on them. I don't think this is true. I think more has been done to force countries to move in that direction by international forces that have worked here as they have done elsewhere. The decline in inflation rates, the decline in budget deficits, the decline in interest rates, is not something uniquely European. It is happening in countries that have nothing to do with Maastricht. So it must be other international factors.

What are these? One is the increasing mobility of capital. We have in essence a filtering mechanism, in Nozick's terminology, which penalises countries that mismanage. So they have been forced to reduce inflation rates, budget deficits and interest rates, because otherwise they would have been penalised by capital outflows. And that's how financial prudence and monetary stability have been forced on the world.

CR: I think that's absolutely right – yet despite that, particularly in the last few months, we've seen freedom of capital flows being attacked from all quarters as responsible global financial turmoil.

AM: And we haven't seen nothing yet. We will see more of it, because in many countries, large segments of public opinion believe that the freedom of capital movements, especially short-term capital movements, is destabilising. Of course this pleases old-fashioned, big government types, and also pleases nationalists all over the world. The truth of the matter is that if you try to restrict short-term capital movements, you may end up restricting direct investments, which are the only hope for developing countries to grow. If you don't allow the movement of capital in the short term, it's very difficult to allow the movement of capital in the long term.

We should ask ourselves why this crisis has happened. The answer in many countries is that their financial system was either unregulated or, and this is very important, uncompetitive. Being uncompetitive means banks were sheltered from international competition and behaved inadequately and created the financial crisis that we see.

CR: So obviously you don't think that restrictions on capital flow are the solution – what should governments be doing?

AM: To a large extent, optimum investigation of the banking system has not been done. We don't yet know what exactly should be done. I believe that that's where we should try to find the solution. I think opening up the banking system to international competition is a necessary but not sufficient condition for avoiding the repetition of this kind of crisis.

CR: Do you think there is worse to come – is the world headed for another Depression?

AM: Well, let me first of all say, I don't rule out the possibility of having inflation and unemployment higher than they have been. I don't exclude the possibility of having a recession. We've had recessions for a hundred years; the world hasn't changed, there's no reason why there shouldn't be another one. But in my view we don't have the evidence that a recession is unavoidable. So it may happen, but what I hope is that governments do not repeat the mistakes that made the Great Depression such a dramatic phenomenon. We have learnt from that. In a sense a Depression is like smallpox – you can only have it once.

CR: I hope that's true. So you think that liberalism will weather the current problems?

AM: I think liberalism will keep on fighting. There is no such thing as victory. You can have temporary periods in which we have the upper hand, and periods in which we seem to be losing, but the fight between the party of authority and control on the one hand, and the party of freedom and responsibility on the other, will always continue.

CR: What do you think of the prospects for extending that freedom to countries that currently lack it? We've seen in the last ten years a remarkable extension in the reach of democracy and political liberty – do you think that will continue?

AM: You have to look at each country separately. In Russia, for example, it seems to be undergoing a process where instead of evolving towards free markets it's going back to a situation of chaos, which may well precede a revolution, whether communist or non-communist. On the other hand, look at China. In China there are signs that liberalisation may not be halted after all. It may not go as fast as we would hope, it may not lead automatically to greater political liberty, but it's not being destroyed.
As to the Eastern European countries, some of them are doing very well, some of them are doing less well than they could have done – the Czech Republic, for example, had a period of slowdown in its change because of the fall of the last government under Vaclav Klaus and the result of the elections. But then there are hopeful signs in other countries, for example Poland. I think that in general it's the poor countries that will probably change more rapidly.

CR: What is your view on the expansion of the European Union – do you support the admission of the Eastern European countries?

AM: You see, many people today address this problem by saying we should pursue the enlargement but not give up the deepening of the Union. In my view, if the enlargement of the Union was incompatible with the so-called cohesion policies, then we would give up structural policy and allow enlargement. I think that what we should fear the most is an inward-looking European Union, with lots of barriers against its neighbors, that spreads instability around itself and becomes a potential source of conflict rather than autonomy. I think the ideal should be that anybody who wants to join should be able to do so.

CR: A few months I had the pleasure of talking to Sir Alan Walters, and he I think had the view that the European monetary union was something of a continental plot against British and American interests – I take it you don't see things quite that way?

AM: No, I don't think it's a plot against British and American interests, I think it's a plot against sanity. It's an insane scheme, which I hope will fail before reaching the final phase. If it succeeds, it's a plot against Europe, because at least in the beginning it will induce a recession, because we will have a restrictive monetary policy, which we have to have to make the euro accepted by international markets, we will have no fiscal policy, because our hands are tied by the stabilisation criteria, we will have sclerotic labor markets, labor markets that are much more rigid than labor markets in the countries that we compete with, and the euro is likely to be introduced at a high exchange rate. If you take these four factors into consideration, I do not know of any economist, whatever his views, willing to say that you can have that and not have a recession. So it's crazy –

CR: Might that provide, though, some pressure for reforming labor markets?

AM: No, what I fear is that since we have 13 left-wing governments out of 15 countries, it will lead to the abandonment of fiscal prudence, the abandonment of restrictive monetary policy, a resumption of easy money and deficit spending policy with an inflationary outcome.

CR: So do you still see monetary union as a desirable thing in the long term?

AM: Monetary union is highly desirable, if it's done in a non-coercive way. You see, what makes this scheme dangerous is that the euro is a fiduciary currency that is going to be introduced coercively. At a certain date, national currencies disappear and the euro has to be accepted. Since it is a fiduciary currency, it is a currency that depends on the trust it commands on the part of those who have to use it. There is a danger of rejection of the euro on the part of the users. If that happens, all the European central banks will do is raise interest rates, which would make for recession.
What should have been done is introduce it in a non-coercive way. Suppose that tomorrow the European Union creates a new currency, and leaves each individual member country free to choose whether to use this new currency in place of the national currency, in which case the national currency will disappear and people will be forced to use the new one, or you can have both, the member countries could allow their citizens the choice between the national currency and the euros. In this case, what you would have is a system of competing currencies; since it's not introduced coercively, there could be no rejection, there would be need for a restrictive monetary policy, there would be no risk of recession.

CR: I guess the reason governments shy away from that is the prospect of citizens having to deal with prices in two different currencies simultaneously.

AM: But they already do. At an international level they do already. What happens is that at the beginning this new currency would be considered only by high-level transactors, say, people who deal in international transactions, banks, financial companies, and large companies. Then, as it became accepted, smaller companies may consider transacting in the new currency. And then, in a number of years, it would reach down to the household level. But it should be a gradual process over time, so people would learn that it is a stable currency, that it is trustworthy and can be used safely.

CR: Is there any prospect of governments accepting that?

AM: If we had such a system, then it would be a most effective constraint on government, because if they abused their monetary sovereignty people could quit the national currency and use the European currency, and that would deprive them of a source of revenue.

CR: It may be, though, that technology will bring us to that sort of situation anyway, with the ability via the internet to make transactions in US dollars or whatever –

AM: The old ideal of the cashless, chequeless society, which people started to talk about 20 years ago, is now a technological reality, with cashcards and so on eroding the governmental monopoly, I think you're quite right there. And I think technology is a great source of hope for the future in all countries.

CR: And not just economically, but the power of technology for political freedom is enormous.

AM: Yes.

CR: I take it that you're convinced of the interdependence of political and economic freedom – that in the long run they do support each other?

AM: Yes, provided you define them properly. I think that political freedom cannot exist without economic freedom – there is no doubt about it. I think that economic freedom can exist for a very short time without democracy, but that is the exception rather than the rule. Normally, without democracy, economic freedom doesn't survive. However, I make one point: if you define political freedom as meaning majority rule, majority rule can be inimical to economic freedom, like any other system – without extraordinary precautions.

Charles Richardson is Editor of Policy.

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