Where did Carl Schmitt go wrong in his critique of democracy?

 

I first became aware of Carl Schmitt about 30 years ago while reading Friedrich Hayek’s book, Law, Legislation and Liberty. At that stage I was left with the impression that while Schmitt still had influence among German legal philosophers, his views were mainly interest to people wondering how a respected academic could become a Nazi. Over the last year or so, however, I seem to be coming across increasing references to the relevance to contemporary politics of Schmitt’s views about friend-enemy distinctions and the autonomy of the political.

The Stanford Encyclopedia of Philosophy provides the following biographical information about Schmitt:

“Carl Schmitt (1888–1985) was a conservative German legal, constitutional, and political theorist. Schmitt is often considered to be one of the most important critics of liberalism, parliamentary democracy, and liberal cosmopolitanism. But the value and significance of Schmitt’s work is subject to controversy, mainly due to his intellectual support for and active involvement with National Socialism.”

My reading of the full entry about Schmitt in the Stanford Encyclopedia (written by Lars Vinx) reinforced the impression I previously had that Schmitt’s political philosophy is inherently authoritarian. However, the conclusion that Peter C. Caldwell reached in his literature review is ambivalent:

“What Schmitt’s real message is remains disputed. Fifty years after the first reflections on his work began to appear, his interpreters still battle over whether he was primarily a brilliant lawyer and theorist of constitutional democracy or a gravedigger of democracy and apologist for authoritarianism; an intellectual adventurer and opportunist or a serious analyst of modernity; a conservative trying to save what could be saved of the European heritage or an antisemite and Nazi.”

(‘Controversies over Carl Schmitt: A Review of Recent Literature’, The Journal of Modern History 77, June 2025)

The focus of this essay has been determined largely by a couple of books that I have read recently. I focus on three aspects of Schmitt’s critique of liberal democracy. First, I consider Adrian Vermeule’s synthesis of Catholic integralism and Carl Schmitt’s view that politics is war. Second, I consider the link between entangled political economy and Carl Schmitt’s concept of the autonomy of the political. Finally, I reconsider Friedrich Hayek’s view of Carl Schmitt’s legal philosophy.

Vermeule’s synthesis of integralism and Schmittian illiberalism

My initial source for the discussion of integralism was Kevin Vallier’s book, All the Kingdom’s of the World (2023). I recently reviewed Vallier's book in an essay entitled, ‘Are integralists opposed to natural rights?’, but neglected to mention Vermeule’s affinity with the political philosophy of Carl Schmitt.

Vallier refers to Vermeule’s article, The Ark of Tradition, which is a review of Schmitt’s book, Roman Catholicism and Political Form. Vermeule writes:

“My suggestion, which is consistent with Schmitt’s vision, but goes beyond what he articulates, is that the Church serves as a kind of ark, whose vocation is to preserve the living tradition of the Verbum Dei amidst the universal deluge of economic-technical decadence, and the eventual self-undermining of the regime.”

He goes on to quote Schmitt:

“Should economic thinking succeed in realizing its utopian goal and in bringing about an absolutely unpolitical condition of human society, the Church would remain the only agency of political thinking and political form. Then the Church would have a stupendous monopoly: its hierarchy would be nearer the political domination of the world than in the Middle Ages.”

My understanding of what Schmitt meant by “an absolutely unpolitical condition of human society”, is a condition in which people would no longer be interested in drawing “friend-enemy distinctions”. Schmitt claimed that life in a completely de-politicized world would be shallow, insignificant, and meaningless.

Such views seem to me to be mistaken and to have potential to cause a great deal of unnecessary misery. In fields of human endeavour such as business and sport, friendly rivalry obviously helps to make life meaningful for many people. However, friendly rivalry does not require friend-enemy distinctions. Opportunities for human flourishing are enhanced in societies where individuals tend to seek mutual benefit from voluntary (and friendly) interactions with other people, rather than seeking to benefit from the friend-enemy distinctions associated with coercive political processes.  

Lars Vinx notes: 

“Some interpreters have explained Schmitt’s hostility towards liberal de-politicization as being grounded in the view that a willingness to distinguish between friend and enemy is a theological duty.”  

That made me wonder, very briefly, whether a theologian could argue that it is necessary for Christians to be able to distinguish between friend and enemy in order to follow Jesus’s exhortation to love one’s enemies. Before wasting too much time, however, I reminded myself of Erasmus’s message about refraining from wars over theology, which seems to me to remain as relevant today as at the time of the Protestant Reformation. (If further explanation is required, please read something I wrote about Erasmus a few years ago.)

Autonomy of the political

In my recent essay entitled “How does entangled political economy help us to understand political entrepreneurship?”, I drew heavily on Richard E. Wagner’s book, Politics as a Peculiar Business,. However, that essay doesn’t discuss the link that Wagner draws between entangled political economy and Carl Schmitt’s concept of the autonomy of the political.

The concept of autonomy of the political describes power relations and the behaviour of those who hold political power in society. The surface impression is that a small number of rulers dominate larger masses of citizens, but power is ever present in society and can be manifested in a variety of different ways. Wagner’s concept of entangled political economy “rests on the twin autonomies of the political and the economic in society, and the interaction between those autonomies being a source of turbulence within society.”   

Wagner writes:

“For Schmitt, the autonomy of the political rested on exceptional circumstances and the friend–enemy distinction. Exceptional circumstances mean that a rule of law cannot be articulated that will cover every possible point of decision that might arise. The presence of exceptions is a point where the autonomy of the political enters into society. The friend–enemy distinction is a feature of the crooked timber of humanity that surely intensifies with increases in societal complexity and the hierarchical ordering in terms of status that comes in the wake of growing complexity.”

Schmitt argued that even if constitutional arrangements are crafted to support private ordering of societal interaction, the autonomy of the political will assert itself in the guise of exceptional circumstances. As the scale of the polity expands, consensual action tends to give way to factional action, wherein some factions gain at the expense of others. For example, whereas application of general rules and principles might require a few pages of tax codes, factional action to achieve concessions generates thousands of pages of tax codes.

To consider Schmitt’s proposed remedies for factional politics, I have looked beyond the references to Schmitt in Wagner’s book. My main source is the Stanford Encyclopedia entry written by Lars Vinx.

Schmitt’s views about the problems of democracy and the need for strong political leadership are similar to those of Max Weber and Joseph Schumpeter (discussed in earlier essays, here and here). However, while Weber and Schumpeter defend liberty, Schmitt regards constitutionally guaranteed freedoms as concessions of the state to the individual.

Weber and Schumpeter emphasize the importance of constitutional procedures, but Schmitt’s view of constitutions seems ambivalent. Schmitt understands democracy as the self-rule of the people. He argues, however, that since the will of the people is not necessarily reflected in the majority view, representative government is not necessarily any more intimately connected with the principle of democracy than a dictatorship in the name of the people. 

Schmitt denies the possibility of changing the fundamental nature of an established constitution via use of rules contained within it. Nevertheless, he acknowledges the possibility of suspending a constitution through a sovereign decision on the exception. He also acknowledges that a people, in a renewed exercise of their constituent power, might legitimately choose a non-liberal and non-parliamentarian form of democracy. 

Friedrich Hayek’s view

Hayek held similar views to Schmitt concerning the ability of the majority in a representative assembly with unlimited powers “to confine its activities to aims which all members of the majority desire, or even approve of”. The majority can only be kept together by “paying off each of the special groups by which it is composed”. (LLL, V3, 138)

In a footnote to that passage, Hayek suggested that in the 1920s “the weakness of the government of an omnipotent democracy was very clearly seen by the extraordinary German student of politics, Carl Schmitt.” However, Hayek added that “Schmitt regularly came down on what to me appears both morally and intellectually the wrong side.” (LLL, V3, 194-5)

The passage quoted in the epigraph at the top of this essay appears in Volume 1 of Law, Legislation and Liberty (p 71). It is immediately followed by the assertion that “long before Hitler came to power” Carl Schmitt “devoted all his formidable intellectual energies to a fight against liberalism in all its forms”. (Hayek’s perception that Schmitt was so clearly opposed to all forms of liberalism has been disputed. Some of Schmitt’s writings apparently give the impression that he was trying to save Europe’s liberal heritage.)

Later in the same paragraph, Hayek explains that Schmitt’s final formulation of his central belief about the law entailed “concrete order formation”. Schmitt posits that law is fundamentally a form of political and social organisation grounded in a community’s values, and that the state is the embodiment of the community’s legal order. Hayek argues that under that view of law, individuals are “made to serve concrete purposes”.

Hayek contrasts Schmitt’s view of law with his own view that law consists of “abstract rules which make possible the formation of a spontaneous order by the free action of individuals through limiting the range of their actions.”

While Schmitt saw the state as giving expression to the values of the dominant community group, Hayek saw law as consisting of rules of just conduct that have evolved to protect individual liberty.

Conclusions

Carl Schmitt is remembered as a prominent German legal and political theorist who became a Nazi. However, Schmitt’s political affiliations have not prevented frequent reference being made to views about friend-enemy distinctions and the autonomy of the political in contemporary discussions about political institutions.

This essay has focused on three aspects of Schmitt’s critique of liberal democracy: Adrian Vermeule’s synthesis of Catholic integralism and Carl Schmitt’s view that politics is war; the link between Richard Wagner’s concept of entangled political economy and Carl Schmitt’s concept of the autonomy of the political; and Friedrich Hayek’s view of Carl Schmitt’s legal philosophy.

Schmitt argued that if economic liberalism succeeded in bringing about an absolutely unpolitical condition of society – a condition where people were no longer interested in making friend-enemy distinctions – the Catholic church would be able to dominate the world. He reasoned that that this religious organisation would dominate in those circumstances because it would be the only agency still engaged in political thinking. I am puzzled as to why he thought a religious organisation would be last to abandon the habit of making friend-enemy distinctions. It seems to me that criminal organisations would be likely to pose a greater obstacle to establishing an unpolitical utopia because friend-enemy distinctions are more intrinsic to their activities.

Schmitt presented a valid argument that constitutional arrangements crafted to support private ordering are prone to corruption by interest group politics. The autonomy of the political exerts itself as some groups argue for exceptions to general rules to obtain benefits at the expense of others.

Other political theorists have proposed stronger executive government as a remedy for problems that interest groups pose for the functioning of liberal democracies. However, Schmitt proposed more extreme remedies. For example, he suggested that under exceptional circumstances a government could make a “sovereign decision” to suspend a constitution.

Friedrich Hayek acknowledged that Schmitt had clearly seen the weakness of omnipotent democracy in the 1920s, but suggested that he “regularly came down on the wrong side” in proposing remedies.

Hayek argued that under Schmitt’s final formulation of his beliefs about the law, individuals are made to serve concrete purposes determined by the state. By contrast, Hayek viewed law in terms of abstract rules of just conduct that have evolved to protect individual liberty.

In my view Schmitt went wrong in his critique of democracy by seeking authoritarian remedies rather than changes in the rules of the game to address the specific problems that he identified.

How does Entangled Political Economy help us to understand political entrepreneurship?

 

After I finished reading Richard E. Wagner’s book, Politics as a Peculiar Business, the thought crossed my mind that I should encourage people to read what I was about to write about it before reading the other essays I have recently written about political entrepreneurship. The titles of the other essays are:

Can the concept of political entrepreneurship help us to understand authoritarianism?

What role does political entrepreneurship play in institutional change?

Should we expect our political leaders to be great and good?

I have been writing essays about political entrepreneurship to improve my understanding of the topic. In the process I have felt like that a blind man trying to build up a picture of an elephant in his mind by approaching it from different angles. After I finish writing this essay, I might be able to turn my mind to considering how best to present my understanding of the concept and its relevance to liberty and human flourishing.

Entangled Political Economy

The full title of Richard E. Wagner’s book is Politics as a Peculiar Business: Insights from a Theory of Entangled Political Economy (Edward Elgar, 2016).  

Wagner refers to the ancient Indian parable of the blind men and the elephant in suggesting that political economy is best approached from the standpoint of plausible reasoning rather than demonstrative reasoning.

Plausible reasoning starts from the standpoint that the object of inquiry cannot be known in full detail to the inquirer.

By contrast, demonstrative reasoning begins with a set of assumptions about human behavior, and then analyses the implications of those assumptions. The conventional welfare economics approach to the role of government - with its assumption that government acts like an omniscient and benevolent dictator attempting to maximize the well-being of citizens by correcting externalities and providing public goods – provides a relevant example of demonstrative reasoning.

The analytical framework of Entangled Political Economy recognises that both “polity and economy are areas of practical action that operate in similar but not identical fashion.”

The author suggests that human nature has “a bi-polarity about it that generates both polity and economy.” The political side of human nature entails recognition that we are social creatures who live in close proximity and engage in cooperation and conflict. The economic side entails recognition that we need “to make a livelihood” and desire “to be self-directed as against being conscripts in someone’s army”.

I am not persuaded that “bi-polarity” is the best way to capture the idea that humans are “political animals” whose interactions with other members of the species are not always motivated by personal benefit. It seems to me that human nature inclines individuals to seek to flourish by making wise and well-informed choices about all aspects of their lives that they are able to influence, including their interactions with others. 

However, as public choice theorists have noted, most people lack sufficient motivation to allocate the time and effort required to make well-informed choices in relation to national politics because their individual choices are unlikely to have much impact on national outcomes. Wagner’s view of entangled political economy draws on that public choice literature.

I certainly agree that political economy should focus on the full range of interactions among persons and entities within society. As Wagner notes, that perspective has important implications for social change:

“The framework of entangled political economy accommodates recognition that societies change only through individual action inside those societies, and with those actions spreading within the society according to the receptivity of other members of that society to those changes.”

Although Entangled Political Economy is based on a description of different kinds of interactions among individuals in the real world, it represents a departure from the way many economists have previously thought about the interaction between politics and economics. Wagner reminds readers that it has been customary to “envision a polity as a kind of lord of the manor who overseas what is denoted as economy.” He points out that discussion is usually in terms of “additive political economy” in which polity and economy are denoted as independent entities and polity intervenes in economy to correct “market failure”. He argues:

“The Progressivist vision of political presence and dominance throughout society is abetted by the vision of additive political economy because that vision provides rationalization for unlimited political action.”

Political entrepreneurship

 Wagner argues that it makes sense to view politics as a peculiar form of business because it has many characteristics in common with business. Both are sources of livelihood for people, entail competition, and are supported by administrative educational organisations. Both must attract investors to provide capital. Both involve entrepreneurship.

The main difference between political entrepreneurship and market entrepreneurship arises because of the difference between dyadic and triadic relationships. Dyadic relationships involve two people; triadic relationships involve three. Wagner observes that market relationships can be reduced mostly to a set of dyadic relationships where both parties benefit. Political relationships typically require a set of triadic relationships where two people exchange mutual support and a third is forced to provide financial support.

Wagner explains:

“Within the triadic relationships associated with electoral competition … a political entrepreneur can construct a supporting coalition by crafting a transactional structure that entails gainers and losers, while at the same time generating a supporting ideological cover that softens and conceals the redistributive character of the transaction.”

The difference between market and political competition has implications for the qualities required for successful entrepreneurship in different contexts. Wagner suggests that while puffery is an understandable part of market competition, “electoral competition is mostly about puffery”. Systemic lying is a feature of political competition. Sentiment tends to play a larger role, relative to reason, in political competition because of the absence of a direct connection between the individual elector’s choice and the outcome obtained. Voting is like ordering a meal at a restaurant and being served the same meal as everyone else, irrespective of what you ordered. Wagner notes Vilfredo Pareto’s view that ideological articulation can induce people to support measures that they might have opposed in a market setting. Voters generally embrace policies that enable them to feel good about themselves.

Wagner argues that little substantive work is accomplished through elections and political campaigns. The substantive work of policy choice takes place “outside electoral politics and entails the interactive elements necessary for constructing and maintaining deals.” He suggests a parliamentary assembly can be viewed as an “investment bank” because it is “a hub for making deals” involving selection and funding of projects. In that context:

“Entrepreneurs are thus competing among themselves to seize the future. Successful entrepreneurship offers both fame and fortune.”

In reading Wagner’s account of political entrepreneurship, it occurred to me that the significance of electoral competition in the United States is greater than he portrays it to be. That perception is based partly on my (somewhat cursory) observation of the presidential election in 2024 and the performance of the Trump administration in its first 100 days in office.

The 2024 U.S. election and its aftermath may be atypical, but similar political entrepreneurship has been on display in some European elections.  As discussed in a previous essay, political entrepreneurs tend to focus on niches in the marketplace of ideas. They seek to attract support from people who are discontented with current economic and social outcomes by emphasizing alleged problem-solving capacities of their ideas. Their success in attracting a loyal support base of customers who are willing to help them to sell their narrative depends to a large extent on the strength of competition from politicians selling different narratives, and on the extent of resistance by journalists and members of the public who consider their narratives to be incorrect, or that their policy proposals are unworkable, unconstitutional, unethical, or otherwise unhelpful.

I also observed that the discussion of entangled political economy in Politics as a Peculiar Business seemed more relevant to countries with parliamentary systems of government than to those with presidential systems, where much business seems to be done via “executive orders”. However, that is not intended as criticism. It may reflect the greater role of “executive orders” in the U.S. in the years since the book was published.

How can entanglement be contained?

One of Wagner’s aims in writing the book was “to explain how an entangled political economy can generate its own momentum to transform a constitution of liberty into a constitution of control”. He refers to the credit market as providing an example of how this occurs. Private ordering of credit markets is vulnerable to entanglement for two reasons. On the demand side are market participants who are dissatisfied with how they fare in privately ordered credit markets. On the supply side are “political figures who want to catapult themselves from background to foreground in the cosmic drama that is human society”.

Another example relates to the Fifth Amendment of the U.S. Constitution which provides for just compensation when the government takes private property for public use. However, Wagner observes that “history over the past century or so has increasingly run in the direction of governments taking property for what are private uses and paying only partial or token compensation”. A clear constitutional provision is not necessarily “sufficiently strong to deter rapacious interest groups from using government as an instrument of predation”.

Wagner refers to Vincent Ostrom’s observation that government involves a Faustian bargain: “instruments of evil – power over other people – are to be employed because of the good they might do, recognizing that evil might also result.” 

How can we minimize the potential for evil to result? Wagner suggests that the alternatives are “parchment” and “guns”.

“Parchment” refers to constitutional rules. Constitutional rules may remain effective if supported by public morality – sufficient numbers of people being willing to refrain from use of the powers of the state to enrich themselves at the expense of others. This approach relies on education and related processes to cultivate virtue and wisdom.

“Guns” refers to an approach that looks primarily to “a kind of opposition of interests to limit government predation”. Wagner suggests that “guns” may complement “parchment”. He writes:

“The basic principle behind this approach is for governmental action to require some concurrence among different participants with opposed interests.”

Wagner suggests that when it becomes habitual for people to use politics in a predatory manner that may “promote alternative beliefs as to what comprises just conduct”. He concludes that “parchment and guns … would seem to be nonseparable ingredients of constitutional order in the final analysis.”

Wagner tells us that his reference to guns is metaphorical, so what he has in mind may not necessarily be violent. For example, those who believe themselves to be victims of predation have an incentive to form associations to protect their interests in the courts and may be able to exert countervailing power the political arena.

While I believe that entangled political economy offers important insights about interactions between participants in politics and markets, I would have liked the author to explore more fully the macroeconomic consequences of increasing entanglement. Perhaps that would have led to a more optimistic conclusion.

In Freedom, Progress, and Human Flourishing I suggested that although most liberal democracies are heading for major economic crises in the years ahead there are reasons to be optimistic “that governments will eventually introduce institutional reforms to enable the drivers of progress to restore growth of opportunities.” (See Chapter 6, particularly p. 120)

My optimism presupposes the emergence of political entrepreneurs who understand the nature of the problems that need to be addressed and can marshal the political support required to carry out appropriate institutional reforms to correct those problems.

Conclusions

The discussion of entangled political economy in Richard Wagner’s book, Politics as a Peculiar Business, is helpful to an understanding of the context in which political entrepreneurship occurs in the liberal democracies.

Entangled political economy focuses on the full range of interactions among persons and entities within society. It emphasizes that societal change occurs only through individual actions. Entangled political economy represents a departure from the view of those economists (and governments) who have envisioned a polity as a kind of lord of the manor who overseas an economy.  

Wagner argues that politics has many characteristics in common with private business, but it is characterized by triadic relationships rather than dyadic relationships. Market relationships can be reduced mainly to sets of relationships between two people, both of whom benefit. Politics typically requires sets of relationships where two people exchange mutual support and a third is forced to provide financial support.

The author suggests that the main work of political entrepreneurs – interactions to construct deals - takes place outside electoral politics. He suggests that parliaments can be viewed as kinds of investment banks because they are hubs for making deals involving selection and funding of projects.

In my view the significance of electoral politics and deal-making by executive arms of governments is greater than Wagner portrays it to be. However, my view has been strongly influenced by events since 2016, when his book was published.

Wagner argues that entangled political economy generates its own momentum to transform a constitution of liberty into a constitution of control. He is pessimistic about the prospect for entanglement to be contained via constitutional rules and moral conduct. He suggests that habitual use of politics in a predatory manner promotes an alternative view of what constitutes just conduct.

In my view, Wagner might have come to a more optimistic conclusion if he had more fully explored the macro-economic consequences of increasing use of the powers of the state for predatory purposes. Economic crises may eventually bring about appropriate institutional reforms if political entrepreneurs emerge who can marshal the political support required to implement them.  

Why is cheap domestic gas a bad policy choice?

 

This is a guest post by my old friend, Geoff Edwards. I refer to him as my old friend not because of his age (he is not much older than me) but because I have known him for a long time. Geoff was my supervisor when I began working in the Bureau of Agricultural Economics in Canberra in 1967, and found a way to give me some interesting research projects to work on. Several years later, Geoff left the Australian public service to pursue an economics career in academia.

The post has its origins in an email message that Geoff sent me a few days ago suggesting that the “east coast gas reservation” plan, recently announced by Peter Dutton, the Leader of the Opposition in the federal parliament, was bad policy. The plan seeks to reduce the domestic price of gas by delivering to the domestic market “an additional 10 to 20 per cent of the east coast’s demand – gas which would otherwise be exported for use in other markets for consumers in those countries.”

Since this proposal was announced at the beginning of the current Australian election campaign, I should make clear that while I agree with Geoff that Dutton’s gas plan is bad policy, I don’t consider Dutton’s Liberal Party to be a greater source of bad policies than any of the other political parties contesting this election. That explains why I have chosen the quote from The Wisdom of Henry Hazlitt to put at the top of this post.

Here is the guest post by Geoff Edwards:

Peter Dutton says his government would separate the domestic price of gas in eastern Australia from the export price.

For efficient resource use for tradeables, whether meat, steel or gas, prices within Australia need to be driven by prices in world markets.

That is fundamental to the liberal trading order long supported by Australia.

Seeking to make the price of gas used in Australia independent of the price in international trade is a policy of distorting the gas market and the broader economy.

Not efficient. Not liberal. Not smart.

High gas prices perform the valuable, albeit sometimes painful, role of discouraging use of environmentally-negative gas in electricity generation and directly.

And imagine the ammunition the domestic subsidy policy would provide to Australia's powerful friend in the US to expand trade restrictions.

In order to relieve pressures on households and small businesses without introducing damaging, incentive-destroying market distortions, cash payments targeted to those judged most in need would be a better way to go.

Geoff Edwards

Kew, Vic, 3101

Addendum

Several comments have been received on Geoff's post other than those below. 

First, here is an exchange between Bernard Wonder and myself on LinkedIn:

Bernard: "Geoff's suggested payments to households could be funded by a reformed resource rent tax."

My response:

It could be funded that way. However, the introduction of such a tax is somewhat complex because the states own the resource (onshore) and mining companies are sensitive to the sovereign risk issues associated with governments extracting a larger slice of rents than companies agreed to pay prior to their investment.

Bernard: "Sounds like a sacred cow, Winton."

My response:

Geoff’s proposal could be viewed as an alternative to the current government’s approach of providing a subsidy to all power users. It is funded from general revenue, which has been boosted by high international gas prices.

Second, an email to Geoff from Neil Bryon:

"I completely agree re Dutton’s gas policy.

Albanese’s house battery proposal is also bad policy, but in a different way - using taxpayer funding to subsidise wealthier citizens to install a very inferior technology.

EV (car batteries) are 4-8 times the KwH capacity of fixed house batteries and a fraction of the cost/unity of storage capacity. If anyone did want a battery to store PV solar power during the day to use at night, (I do not) by far the best and cheapest is a battery on 4 wheels (except Tesla who won’t / can’t do vehicle to house or vehicle to grid). All the Japanese Korean Chinese and most European EVs will.

My general point is that governments are notoriously weak at choosing technology winners ( e.g. many now think NBN was a white elephant once 5G arrived)."

Third, an email to Geoff from David Player:

"Burning gas is a bad thing as it increases the amount of CO2 in the atmosphere which in turn increases the temperature of the Earth, and Global Warming is bad.

BUT

If burning gas significantly reduces the amount of coal being burned, it is the better of the two evils.

Burning coal releases lots of very nasty gases into the atmosphere, while burning 

gas is relatively clean.  Apart from the CO2 of course!"

Is Alexander Hamilton's ideal of a modern commercial republic still relevant today?

 

Alexander Hamilton was one of the Founding Fathers of the United States. He served as secretary to the Treasury from 1789 to 1795 during the presidency of George Washington.

I knew little about Alexander Hamilton’s contribution to American economic policy before reading Samuel Gregg’s book, The Next American Economy: Nation, State, and Markets in an Uncertain World, 2022. Gregg suggests that America faces a choice between a form of state capitalism – top-down interventionism focused on achieving political objectives such as greater economic security for specific groups and “national security” – and a free market economy. He argues that in making the case for free markets it is helpful to take another look at the ideal of a modern commercial republic as espoused by Alexander Hamilton.

Centralization of powers

Prior to reading Gregg’s book, I knew that Hamilton had argued successfully for greater centralization of government powers than prevailed in the original confederation. On that basis, I had entertained the idea that he might possibly have been responsible for much that is wrong with the U.S. today.

Gregg presents a more positive view of Hamilton’s contribution. He suggests that integration of the states into a more unified commercial republic made it easier for Hamilton to apply principles of free trade among the states and between the U.S. and other countries.

Gregg’s line of reasoning poses a challenge both to libertarian globalists, who see national governments as the source of barriers to the functioning of free markets, and to economic nationalists who want governments to prevent foreign economic competition because they see it as a threat to national sovereignty. He challenges libertarian globalists by suggesting that “failure by the government to smooth the economic ups and downs which are part of life in a market economy risks opening the door to political movements that have no particular regard for human freedom”. He challenges economic nationalists by suggesting that tariffs and other measures that protect of American industry from foreign competition are harmful to Americans.

 It isn’t necessary for libertarian globalists, like myself, to abandon utopian thinking in order to see merit in effective unilateral action by national governments to promote free trade. At a national level, the case for free trade rests on it providing individual citizens and their descendants with the prospect of better opportunities than would otherwise be available to them.

To eliminate the excesses of statism, it is necessary for political leaders to exercise statecraft (or what Adam Smith and David Hume referred to as “the science of the legislator”). As Gregg puts it Smith and Hume recognized that:

 “the knowledge furnished by … integration of moral, political, and economic inquiry needed to be brought to bear upon society by statesmen and governments in the interests of its improvement”.

Gregg notes that although Edmund Burke’s involvement in economic policy was “attuned to political realities” he leaned strongly towards promoting greater commercial freedom within Britain’s empire and between Britain and other nations.

America’s Founding Fathers, including Alexander Hamilton, were also influenced by Adam Smith and David Hume.

Hamilton’s vision of a commercial republic

Samuel Gregg explains how Hamilton advanced his vision of a commercial republic in his contributions to the Federalist Papers and in his role as secretary to the Treasury. Hamilton’s vision of a modern civilized nation combined republican government and a private enterprise economy, with merchants subject to the discipline of competitive markets. He hints that character traits that make for commercial success – industry, innovation, economy, self-restraint, honesty, prudence – are also republican virtues.

Hamilton argued for free trade between the states and for revenue tariffs only on international trade. He suggested that tariffs “force industry out of its more natural channels into others in which it flows with less advantage”. He maintained that trade policy should be driven by national interest and was adamantly opposed to use of trade sanctions as an instrument of foreign policy.

What next?

Samuel Gregg ends his book by acknowledging that he doesn’t know whether there is a real possibility that an American commercial republic could emerge to shape America’s future. He hopes that it could on the basis that he can “see no reason why America cannot embrace the habits, incentives, and disciplines associated with markets while also grounding them in the language, norms, and virtues of the American experiment”.

Since 2022, when Gregg’s book was published, it has become clearer that the U.S. is likely to continue, for a few more years at least, down the path towards greater international trade protectionism.  The choice that the two major political parties are offering voters in the 2024 presidential election certainly does not include a candidate offering an alternative to higher trade barriers.

Unfortunately, the adverse impacts of increased trade protectionism in the U.S. cannot be guaranteed to result in a strong impetus for policy reversal. The U.S. economy is sufficiently large and diverse that increased barriers to international trade are likely to have relatively minor adverse impacts by comparison with those that would occur in most other countries if they followed similar policies.

It looks to me as though trade liberalisation is unlikely to occur in the U.S. until influential politicians come to see merit, from a foreign policy perspective, in supporting multilateral efforts to encourage trade among countries that have more than minimal regard for free market principles.

Meanwhile, Samuel Gregg’s book will hopefully be widely read in other countries where some current political leaders may be more receptive to Alexander Hamilton’s vision of a commercial republic based on free market principles.

Conclusion

Samuel Gregg’s book, The Next American Economy, urges Americans to adopt the ideal of a modern commercial republic, as originally espoused by Alexander Hamilton. Hamilton argued for the U.S. to adopt, unilaterally, the principle of free international trade on the grounds that this would serve the economic interests of Americans and promote republican virtues.

Unfortunately, American political leaders do not currently seem to be in the mood to re-endorse Hamilton’s vision of a modern commercial republic.

Hopefully, Gregg’s book will be widely read in other countries where some political leaders may be receptive to messages about the contemporary relevance of the role that free market polices played at an early stage in the economic and social development of the United States.

Addendum

A year has passed since I suggested: "The U.S. economy is sufficiently large and diverse that increased barriers to international trade are likely to have relatively minor adverse impacts ...". A year ago, I had no idea that the 2nd Trump administration would generate so much uncertainty about future tariff levels, or that it would raise tariffs to such an extent that it might start a trade war. 

I expect that the tariffs imposed by the 2nd Trump administration will have substantial adverse impacts on the U.S. economy, particularly during the next couple of years while the economy is adjusting to these new price distortions. The price increases resulting from the tariffs is likely to generate expectations of higher inflation that the Fed will presumably try to contain via tighter monetary policy. That would be likely to result in a recession even without taking account of the impact of foreign retaliation on U.S. exports. 

It now does seem possible that the Trump tariffs might have a sufficiently large adverse impact on the U.S. economy to generate political pressure for some kind of policy reversal.

Does stakeholder capitalism contribute to human flourishing?

 

Many people reading this are likely to view the use of stakeholder terminology by business leaders as little more than a public relations tool. That is certainly how I have viewed it in the past. If you are a business owner, or executive, who wants to encourage employees, suppliers, customers, and community members to feel loyalty to your business, it makes sense to acknowledge that they may also have a stake in seeing it prosper. And it does no harm to remind governments of their stake in the prosperity of your business via its contributions to tax revenue.

However, I have recently come to associate stakeholder terminology with stakeholder capitalism. That ideology has close links to the concept of corporate social responsibility (CSR) and the increased tendency of businesses to seek rewards from governments for pursuit of environmental and social goals (ESG). Reading about stakeholder capitalism has added to my previously expressed concerns that such interactions between business and governments are leading liberal democracies more deeply into a corporatist quagmire.

Stakeholder capitalism

Michael Rectenwald’s book, The Great Reset and the Struggle for Liberty, has persuaded me that in advocating stakeholder capitalism, Klaus Schwab, the founder of the World Economic Forum (WEF), has in mind a corpus of ideas and policies that are fundamentally opposed to free markets and classical liberalism. Moreover, the WEF may have sufficient influence among powerful elites to eliminate the already dwindling influence that classical liberalism has been having on public policy.

Rectenwald’s book was written in response to a book by Klaus Schwab and Thierry Malleret entitled Covid-19: The Great Reset, which was published in 2020. Rectenwald draws attention to the open espousal of policies opposed to free markets in that book. Schwab and Malleret welcomed the possibility that governments might take advantage of the pandemic “to permanently increase their role”, and eliminate classical liberalism, which they refer to as neoliberalism. They write:

“COVID-19 is likely to sound the death knell of neoliberalism, a corpus of ideas and policies that can loosely be defined as favouring competition over solidarity, creative destruction over government intervention and economic growth over social welfare. For a number of years, the neoliberal doctrine has been on the wane, with many commentators, business leaders and policy-makers increasingly denouncing its “market fetishism”, but COVID-19 brought the coup de grâce.”

They go on to predict:

“Shareholder value will become a secondary consideration, bringing to the fore the primacy of stakeholder capitalism.”

Klaus Schwab has been advocating stakeholder capitalism for over 50 years, and has been influential in having that concept endorsed at international meetings of powerful people from business and government. The first Davos Manifesto, signed in 1973 states:

“The purpose of professional management is to serve clients, shareholders, workers and employees, as well as societies, and to harmonize the different interests of the stakeholders.”

The 2020 Davos Manifesto is titled: “The Universal Purpose of a Company in the Fourth Industrial Revolution”. It includes similar sentiments to the 1973 Manifesto, but goes on to state, among other things:

“B. A company is more than an economic unit generating wealth. It fulfils human and societal objectives as part of the broader social system. Performance must be measured not only on the return to shareholders, but also on how it achieves its environmental, social and good governance objectives. Executive remuneration should reflect stakeholder responsibility.”

Some CEOs would welcome a long muddled list of performance objectives because it offers them the opportunity to “do their own thing” and provide ready-made excuses for poor performance. Others would prefer to see governments pursue social and environmental objectives by more efficient mechanisms, and to have their own performance judged according to more tangible benefits to shareholders. How does the WEF propose to encourage compliance with its Manifesto?

The WEF’s ESG Index

The WEF published a report in 2020 setting out metrics for measuring company performance with regard to ESG goals. The title of the report is  Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.

A mechanism for grading companies in terms of their environmental, social, and governance practices and plans might be thought to offer useful information to investors and consumers who concerned about the environmental and social impacts of their decisions. However, Rectenwald points out that it also has potential implications for interactions between business and government:

“Woke planners wield the Environmental, Social, and Governance (ESG) Index to reward the in-group and to squeeze non-woke players out of business.”

Ideological reach

In a recent Newsweek article, Jon Schweppe asks, Why did corporations go ‘woke’? His response, in brief, is that “this is part ideology, part price of admittance to an elite club, and part protection racket – doing everything one can to avoid upsetting the mob”.

Rectenwald’s book suggests to me that the WEF should come to mind following any mention of “ideology” and “an elite club” in this context. The corporate partners of the WEF include over 1000 of the world's largest business organisations. The annual meeting of the WEF in Davos is an invitation-only event but is widely reported in the media. Many notable political leaders, journalists etc. have been members of the Forum of Young Global Leaders, which is reserved for people under 40 years of age who show promise of global leadership. In addition, the WEF’s Global Shapers movement, a training camp for young change-makers (under 30 years old) has over 10, 000 active members.

Implications

Rectenwald points out that because ESG is “an impressionistic, qualitative, metric” it exposes business leaders and companies to the whims of woke arbiters. He cites the recent experience of Elon Musk who has been unfairly besmirched because he may have benefited from an emerald mine owned by his father in South Africa during the apartheid era. He sums up:

“In today’s political economy, satisfying shareholders, employees, and customers to earn profits has become less important for corporations than ingratiating the woke cartel and the governments that support it.”

Rectenwald’s book goes on to discuss possible implications for individual liberty of potential innovations such as an individual carbon footprint tracker, but in this essay I want to stick with the implications of stakeholder capitalism.

The Hayek quote at the beginning of the essay suggests another important implication of stakeholder capitalism. The quoted passage is from Law, Legislation, and Liberty (v3, p 82). The context of the quote is a paragraph in which Hayek is responding to the idea that large corporations should be required to consider the public or social interest. He suggests that “as long as the large corporation has the one overriding duty of administering the resources under its control as trustee for its shareholders its hands are largely tied; and it will have no arbitrary power to benefit this or that particular interest”. The paragraph ends by suggesting that obliging large corporations to consider the public interest gives them uncontrollable power that “would inevitably be made the subject of increasing public control”.

There is also reason for concern that obliging corporate managers to adhere to ESG will make them less accountable for productivity performance of enterprises because it will be difficult for company boards to assess the veracity of claims that performance has been adversely affected by ESG. Wokeness can be expected to provide a cover for inefficiency.

I acknowledge that stakeholder capitalism may have some positive implications for human flourishing, that should be offset against the negative implications discussed above. For example, in my book Freedom, Progress, and HumanFlourishing, I note that the difficulty that governments have been experiencing in agreeing upon concerted international action to combat climate change was ameliorated by the actions of business organisations in planning for a carbon free future.

Nevertheless, as I also argue in that book, there is more reason to be concerned about the implications of declining productivity growth than about climate change. By further reducing productivity growth, stakeholder capitalism seems likely to cause a great deal of economic misery.

Unfortunately, major economic crises will probably need to be endured before political leaders inspired by classical liberalism emerge once again to implement the public policy reforms that are needed to restore free markets.

To what extent do international differences in economic freedom reflect people's values?

 

This is a companion piece to the preceding post in which I considered the extent to which international differences in personal freedom reflect people’s values.

The extent to which international differences in economic freedom reflect different values is of interest because it has bearing on the extent of popular support likely to be given to policy proposals involving expansion or restriction of economic freedom. If people feel that existing economic policy regimes are aligned with their personal values, they are less likely to support radical change.

The accompanying graph suggests the existence of a positive relationship between an index of facilitating values and economic freedom. As suggested in the label of the horizontal axis, the index of facilitating values reflects the priority that people in different countries place on autonomy, and the extent of interpersonal trust in different countries.

Indexes

I am not aware of any other index of values facilitating economic freedom similar to the one I constructed in preparing the graph, even though there has been a substantial amount of previous research undertaken on cultural values supporting economic growth and institutional change. (Nicholas Moellman and Danko Tarabar have referred to some relevant literature in their article, ‘Economic Freedom Reform: does culture matter?’, Journal of Institutional Economics (2022), 18, 139-157.)

The priority people place on autonomy seems likely to be important in facilitating economic freedom because respect for individual autonomy implies respect for individuals engaged in commerce, particularly innovators. Trust of strangers seems likely to be important in facilitating economic freedom because it reduces the tribal instinct to seek to use the powers of the state to advance the interests of group members at the expense of other groups.

I have used Christian Welzel’s autonomy index to measure autonomy. This index uses three items in the World Values Survey (WVS) which ask respondents their views about desirable child qualities. Autonomy is considered to be valued more highly by those who independence and imagination as desirable child qualities but do not consider obedience as such a quality. (See: Christian Welzel, Freedom Rising, 2013). I used an updated version of the index based on the latest round of the WVS (2017-2022).

Welzel’s generalized trust index was used to measure interpersonal trust. This index gives higher weight to trust of strangers than to trust of family. I reconstructed the index for the latest round of the WVS by combining items covering close trust (trust of family, neighbours, and people you know personally), unspecified trust (whether most people can be trusted) and remote trust (trust of people you meet for the first time, people of another religion and people of another nationality). Unspecified trust was given double the weight of close trust, and remote trust was given three times the weight of close trust.

In constructing the facilitating values index, autonomy was allocated 75% of the weight and generalized trust was allocated 25%. Those weights were chosen on the basis of regression analysis using the autonomy and generalized trust indexes as explanatory variables to explain economic freedom. (Researchers seeking further information about the methodology used in constructing this index are welcome to contact me.)

 The Fraser Institute’s economic freedom index incorporates a large number of indicators relating to size of government, legal systems and property rights, sound money, freedom of international trade and regulation.

Discussion

My focus is on the outlier data points in the accompanying graph, and particularly on those countries which have substantially lower or higher economic freedom than might be predicted on the basis of values facilitating economic freedom.

One of the first things readers may notice in the graph is that values facilitating economic freedom are shown to be higher in China than in the U.S. and Australia. That may seem surprising if Geert Hofstede’s analysis, or your knowledge of cultural heritage, has led you to expect Chinese people to be much less individualistic than Westerners. If you need to be persuaded that many Chinese people have an individualistic perception of human flourishing, you might like to read an article I wrote on that topic in 2021.

While you are thinking about China, you might like to compare economic freedom in that country with that in Singapore, Hong Kong, and Taiwan. The most obvious reason why the latter jurisdictions have greater economic freedom is because they have adopted market-friendly ideologies.

Similarly, adoption of market-friendly ideologies explains why Albania has substantially greater economic freedom than Iran and Libya, and why Chile has greater economic freedom than Argentina and Venezuela.

Conclusion

The existence of values facilitating economic freedom helps to explain why some countries have higher economic freedom than others. However, it seems that a substantial part of international differences in economic freedom can be explained more directly in terms of prevailing government ideologies which either support or oppose free markets.

How authoritarian are American political leaders?

 

A few days ago, I took the Political Compass test for a second time. The test, devised by politicalcompass.org , requires individuals to respond to questions which indicate where their views place them on scales labelled Authoritarian - Libertarian and Left - Right. My position had not changed since I last took the test 7 years ago (see below) but as I looked around the site, I noticed the chart (reproduced above) which suggests that the main contenders in the U.S. 2020 election held relatively authoritarian and right wing views (with Biden somewhat less authoritarian than Trump).

Does the political compass make sense?  The horizonal axis measures economic freedom, with people at the right end favoring more economic freedom. That corresponds, more or less, to the conventional left-right spectrum. The vertical axis measures personal freedom, with people whose views place them at the top end favoring greater restriction of personal freedom. It seems to me that the positioning of a person on a political compass incorporating a personal freedom axis is much more informative than attempting to position them on only one axis.  However, the labelling adopted is not ideal. To be considered a libertarian, in my view it is necessary to advocate economic freedom as well as personal freedom.

I was somewhat surprised by the placement of both Biden and Trump as favoring a relatively high level of restrictions on personal freedom. I don’t follow American politics closely enough to dispute how accurate that placement might be within that context.

However, by international standards, it would make little sense to view Biden or Trump as advocates of authoritarian policies. The policies they have advocated in their efforts to win votes have not been greatly different from those currently prevailing in the United States. By international standards, people in the U.S. have relatively high levels of personal and economic freedom.

The results of the latest Human Freedom Index, published by Cato and the Fraser Institute, can be used to illustrate the point. The Human Freedom Index is the result of painstaking efforts to compile a vast amount of data relating to economic freedom and personal freedom in 165 countries.

It is interesting to see the relative position of various countries in a comparable scatter diagram showing economic freedom and the x axis and personal freedom on the y axis. In the diagram below, which I have labelled “Ideological Map of the World”, the values on the personal freedom axis are in reverse order to make it comparable to the political compass. The horizontal and vertical lines drawn on the diagram are positioned at median levels of economic and personal freedom.

The position of the U.S. is clear from the chart. The levels of both personal freedom and economic freedom in the U.S. are comparable to those of other liberal democracies, and far greater than in China or Russia.

My libertarian friends in the U.S. may have good reasons to view their national political leaders as excessively authoritarian, but they are competing for the votes of people who, by international standards, enjoy relatively high levels of personal and economic freedom.

Could polycentric defence protect us from monsters?

The accompanying photo depicts the views of a couple of protesters who were opposed to Australian involvement in the United States led invasion of Iraq in 2003. I still don’t support defacement of the Sydney Opera House but, in retrospect, the actions of the protesters seem more defensible than those of the Australian government at that time. The government attempted to justify the invasion on the flimsiest of evidence that Iraq still possessed weapons of mass destruction, and then sought to blame its decision on poor intelligence. The net impact of the invasion was to further destabilize the Middle East, including by generating a new terrorist organisation.

The Iraq invasion is part of a pattern of pathetically unsuccessful military operations in which Australia has participated, in partnership with the US, over the last 60 years. Few readers will need to be reminded of similarly unsuccessful military adventures that occurred in Vietnam and Afghanistan.

Nevertheless, a case can be made that involvement in those conflicts has served Australian interests by encouraging US governments to view this country as a staunch ally in pursuit of well-meaning global objectives. Australia is a sparsely populated country that is not easy to defend, so it is understandable that Australians should seek to have great and powerful friends who share similar values, who might come to their aid if they are bullied by a monster in their region. That strategy might come unstuck, however, if public reaction in the US to adverse outcomes of military interventionism results in adoption of an isolationist policy by the US government. Hopefully, the US will find a better approach to foreign relations, rather than resort to isolationism.

Christopher Coyne’s book

I was intensely interested in the consequences of military interventionism during the Vietnam war, but have not spent much time thinking about such  matters since then. The question I have ask above, of whether polycentric defence could protect us from monsters, was prompted by my reading of Christopher Coyne’s book, In Search of Monsters to Destroy.

Anyone seeking a better understanding of why so much US military intervention has been counterproductive should read Coyne’s book. From my perspective, one of the most illuminating contributions that Coyne makes is to draw attention to the relevance of Friedrich Hayek’s views about the hubris of economic planners to the “nation building” efforts that have followed military intervention.  Hayek pointed out that economic planning often has unintended consequences because economic planners can never have “the knowledge of particular circumstances of time and place” that is reflected in the decisions of individuals in a market system. Similarly, nation building efforts have unintended consequences because the architects of such efforts lack the knowledge of how to design and implement policies supporting rule of law, property rights, free speech etc. in settings with different belief systems, values, and ideals.

Rather than attempt a comprehensive review of the book, I want to focus here on polycentric defence, the approach Coyne suggests as a potential path forward. (Several podcasts are available for readers interested in hearing Christopher Coyne discuss his book. I recently listed to his discussion with Jeffrey Sachs and was pleasantly surprised by the extent to which Sachs agreed with Coyne.)

Polycentric defence

Christopher Coyne claims that his position is inherently non-isolationist:

“It is not a retreat from the world, but a call for global engagement by means other than militaristic imperialism and the associated hubris which assumes the world can be controlled by Western government elites”.

He advocates a culture of peace which requires “shedding the belief that the military operations of the nation-state are the central source of security in a free society”.

As an alternative to the current “monocentric order” where there is only one centralized decision-making unit with a monopoly on the use of violent force, he proposes a polycentric system “involving numerous decision-making units – each with autonomy in action – operating within a shared set of rules”.

I see this as a utopian ideal, but one that is worth moving toward. Coyne points out that polycentric defence already exists to some extent because ordinary citizens engage in a diverse range of security activities, individually and in collaboration with their neighbours, to protect themselves against violence and plunder. He reminds readers that non-violent action has sometimes been used successfully against foreign invaders as well as internal usurpers. He also notes that polycentric defence already exists at an international level because nation-states exercise autonomy in decision-making.

The main point that Coyne is making is that a culture of military interventionism has had perverse consequences, unintentionally eroding liberal values and creating enemies abroad. He suggests that we view the search for a stable peace as an ongoing project “entailing self-governing individuals engaged in an active process of discovery, experimentation, and practice to navigate conflicts without resort to violence”.

 What about Ukraine?

In the epilogue to his book, Christopher Coyne expresses disappointment that the Russian government’s invasion of Ukraine in February 2022 has “led to renewed calls for the reassertion of American empire”. He regards that response as “speculative, first best theorizing about international relations” which could potentially devolve into violent conflict between nuclear powers.

My view is that this time it is different. The West’s supply of arms to Ukraine to help it defend itself against Putin’s aggression is far removed from the examples of military interventionism that Coyne discusses in his book. It would obviously be crazy to attempt to destroy an invading monster with nuclear weapons at his disposal, but it would be equally crazy, it seems to me, to avoid giving the victims of his aggression the support they need to defend themselves.

Conclusions

Christopher Coyne makes a strong case that much of the military interventionism of the United States and its allies has had the unintended consequence of eroding liberal values and creating enemies. Attempts to impose the institutions of liberal democracy on people with different belief systems, values, and ideals were doomed from the outset.

Coyne suggests moving away from this interventionist culture, which assumes that the world can be controlled by Western government elites, to a system of polycentric defence. It seems to me that the appropriate answer to the question of whether a polycentric defence system can protect us from monsters depends on how we view polycentricity. It is difficult to see how the governments of the liberal democracies could abandon centralized decision-making on national defence without weakening the ability of their citizens to defend themselves against the autocratic monsters outside of their borders. However, a system in which nation-states exercise autonomy in decision-making on national defence is not far removed from what we have at present. Rules of just conduct that have evolved via diplomatic efforts within this system have done much to promote peaceful coexistence among nations. A system in which nation-states exercise autonomy can do much to protect us from monsters when nation-states are willing to act in concert to punish overt violations of international law.