In my view, it is important to differentiate the theory of intellectual coherence between liberalism and libertarianism from the much more dubious possibility of a political alliance. In my view, liberal and libertarian ideologies have much in common. But that commonality is unlikely to lead to a political alliance anytime soon.
At the level of ideology and political theory, libertarians and liberals have much in common, probably more than libertarians and most conservatives do. Both groups value individual liberty; both believe that the government should generally stay out of religious and "values" issues, which should be left to individual choice (though there are some countervailing strands of thought on this among some "communitarian" and feminist liberals); both place no special value on tradition; and both want to maximize individual happiness and utility. Some conservatives also share these values, but there are a great many who do not because their version of conservatism stems from either an adherence to traditionalism for its own sake or fundamentalist religious principles.
Setting aside foreign policy (about which libertarians have deep internal differences), this ideological commonality can translate into some important areas of agreement on public policy. In particular - as a matter of ideological theory - liberals and libertarians should be able to agree to restrict government efforts to undermine "personal" liberties and also to oppose the many government interventions into economic affairs that redistribute to the wealthy and/or middle class at the expense of relatively poorer segments of the population. Such policies are extremely common, especially given that the poor have relatively little influence over the political process.
In practice, however, real-world liberal politicians are unlikely to move in this direction in the near future because of the Democratic Party's heavy dependence on interest groups - such as public employees unions - that have a vested interest in extending the size and scope of government regardless of whether the poor are harmed. For this reason, I doubted that the "libertarian Democrat" movement promoted by Daily Kos and others would ever amount to much. In principle, ideological liberals should support such libertarian economic policies as reducing farm subsidies, free trade, school vouchers, eliminating pork, and eliminating Social Security and Medicare payments that go to relatively wealthy seniors. All of them would increase personal freedom, and curtail government redistribution from the relatively poor to the relatively rich. In practice, the Democratic Party is unlikely to embrace any of these because of its dependence on powerful interest groups that find them inimical.
In addition to these interest-based concerns, many liberal intellectuals and policy analysts are simply unwilling to place any major emphasis on those non-civil liberties issues where they agree with libertarians. For example, most liberal intellectuals will, if pressed, agree that farm subsidies, porkbarrel spending, and the like are bad. But few consider their elimination a major priority. For reasons that I don't fully understand, most of them are much more enthusiastic about those parts of the liberal agenda that require expanding government than those that imply contraction. This has slowly changed over the last thirty years, as more liberal thinkers have begun to appreciate some of the virtues of markets and civil society. But the pace of change has been quite slow, and there has even been some backsliding in recent years.
There is, perhaps, a deeper problem here: most liberal intellectuals are reluctant to attribute flawed government economic policies to inherent shortcomings of the political process as opposed to the machinations of specific "evil" or "greedy" politicians and interest groups. There is a strong tendency to believe that most such flaws could be cured if only the "bad guys" such as George Bush were removed from office. I hope that, over time, liberal thinkers will bring to government economic policy the same kind of skepticism and realism that they apply to government policy on civil liberties; few of them believe that government could be trusted to regulate our sex lives or engage in warrantless searches merely because the Democrats are in office rather than the Republicans. But this too will be a slow and gradual process, if it happens at all.
None of these points precludes alliances of convenience between liberals and libertarians on particular issues. And it is possible that liberal thought will over time move further in the relatively promarket direction outlined above (and also by some "New Democrat" groups). For the foreseeable future, however, there is unlikely to be a broad libertarian-liberal alliance.
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