What does Don Lavoie tell us about the implications of the knowledge problem for the plans of political entrepreneurs?

One of the questions that I have been contemplating in recent months is whether the tariff policies of President Trump could be part of a coherent economic plan. Can his policies be rationalized in terms of revenue raising objectives, the optimum tariff argument, provision of appropriate incentives to manufacturing industries to meet defence or employment objectives, or the pursuit of foreign policy objectives? Is it possible that he is assigning policy instruments to objectives in a manner consistent with a rational plan?

The presumption underlying such questions is that it is preferable for political entrepreneurs to endeavor to ensure that their economic plans are coherent rather than unprincipled, unpredictable, and capricious. Although that may be a reasonable presumption, there is another other option that should be considered. Perhaps it is appropriate for political entrepreneurs to refrain from engaging in economic planning.

I was reminded of that while reading Don Lavoie’s book, National Economic Planning: What is Left?  Don Lavoie was an economics professor at George Mason University, where he taught from 1981 until his death in 2001. This book was originally published by the Cato Institute in 1985 and was reprinted by the Mercatus Center in 2016.

In this book Don Lavoie explains, among other things, that political entrepreneurs are confronted with a fundamental knowledge problem when they seek to plan economic activities, The epigraph quoted above (from page 181) encapsulates an important implication of the knowledge problem.

Lavoie’s explanation of the information problem begins with the insights of F. A. Hayek. The data that a planning agency would require to engage in rational economic planning resides in the separate minds of millions of people. The data exists only in a dispersed form that cannot be fully extracted by any single agent in society. The only way that knowledge can be used effectively is by relying on competitive struggles in a market system.  (p. 56)

The most obvious implication is that it is impossible for markets to be replaced by comprehensive economic planning. However, more modest attempts to steer the market towards particular outcomes also obstruct the source of knowledge which is essential to rational decision-making. (p. 56-7)

Lavoie points out that the only way we can know whether we are squandering resources by over- or underinvesting in microprocessors or steel, for example, is via “the messages contained in the relative profitability of rival firms in these industries”. He adds:

“But this is precisely the information we garble when we channel money toward one or another of the contenders. Deprived of its elimination process, the market would no longer be able to serve its function as a method for discovering better and eliminating worse production techniques. Without the necessity of responding to consumers’ wants or needs, businesses would never withdraw from unprofitable avenues of production.” (p.181)

Lavoie notes that advocates of industry policy disagree on the directions in which the market should be steered. For example, Felix Rohatyn wanted to funnel aid to sunset industries while Robert Reich wanted to funnel it to sunrise industries. He sums up:

“It is the main conclusion of the argument that I have called the knowledge problem … that there are no rational grounds on which Reich could ever convince Rohatyn or vice versa on such matters as are involved in economic change. As a result, such battles are sure to be fought with weapons other than carefully reasoned argument.” (p. 200-201)

Lavoie notes that Rohatyn and Reich both argued that it is the responsibility of a strong leader to coordinate the actions of the rest of us. (p.190) The coordination they had in mind seems to be more akin to the coordination that military leaders impose by giving orders to subordinates than the coordination among individuals that occurs voluntarily and spontaneously in a free market.

Lavoie argues that economic planning is inherently militaristic: “The practice of planning is nothing but the militarization of the economy”. In making that point he notes that the theory of economic planning was from its inception modeled after feudalistic and militaristic organizations. (p. 230)

Some would argue that a degree of militarization is a price worth paying, or even desirable, to achieve a range of national objectives. Indeed, the conventional theory of democracy seems to entail top-down direction. Prior to elections, political leaders tell voters about their plans for education, health, social security etc. and are expected to implement those plans after they are elected.  

I am not aware of anything that Lavoie wrote that discusses the legitimacy of the concept of national objectives and the question of whether planning (and militarization) may be necessary in the pursuit of social objectives. However, he provided a highly relevant discussion of the concept of democracy in a book chapter entitled, ‘Democracy, Markets, and the Legal Order: Notes on the Nature of Politics in a Radically Liberal Society’. (The book is: Ellen Frankel Paul, Fred D. Miller, Jr., and Jeffrey Paul (Eds.) Liberalism and the Economic Order, Cambridge University Press, 1993.)

In that chapter Lavoie notes that Western liberals tend to view democracy and markets “as in some sort of necessary tension with one another”. We tend to think that “taking democracy too far undermines markets and that taking markets too far undermines democracy”. He attributes that view to “liberalism’s gradual drift into compromises with conservatism and socialism”.

Lavoie argues that liberalism needs to reinterpret its notions of markets and democracy so that they are seen to be essentially complementary. Our economics needs to take account of the cultural underpinnings of markets and our politics “needs to move beyond the model of the exercise of some kind of unified, conscious democratic will and understand democratic processes as distributed throughout the political culture”. The force of public opinion is best perceived as the distributed influence of political discourses throughout society rather than as “a concentrated will”.

Lavoie suggests that what we should mean by democracy is a distinctive kind of openness in society rather than a theory about how to elect the personnel of government:

“Democracy is not a quality of the conscious will of a representative organization that has been legitimated by the public, but a quality of the discursive process of the distributed wills of the public itself.” (p.111).

It seems to me that those who see merit in Lavoie’s view of democracy have good reasons to be skeptical about the worth of top-down planning to achieve national objectives. Individuals have different priorities and objectives that deserve to be recognized. National plans cannot solve the knowledge problem entailed in giving appropriate recognition to individual differences. 

Is it too soon to be asking in what part of the world will the next golden age be located?

 

The question posed above occurred to me as I was reading the final pages of Johan Norberg’s latest book, Peak Human: What We Can Learn from the Rise and Fall of Golden Ages.

Johan Norberg is a senior fellow at the Cato institute. He is a historian of ideas and a prolific author. If Norberg has a fan club, I might qualify for honorary membership. I have written about some of his previous books on this blog (here and here) and have read others.

Norberg explains what he means by a golden age in these terms:

“A golden age is associated with a culture of optimism, which encourages people to explore new knowledge, experiment with new methods and technologies, and exchange the results with others. Its characteristics are cultural creativity, scientific discoveries, technological achievements and economic growth that stand out compared with what came before and after it, and compared with other contemporary cultures. Its result is a high average standard of living, which is usually the envy of others, often also of their heirs.”

The author suggests that the most important precondition for a golden age is “an absence of orthodoxies imposed form the top about what to believe, think and say, how to live and what to do.” He doesn’t present the golden ages he has identified in utopian terms. He acknowledges that countries concerned all practiced slavery, denied women basic rights and “took great delight in exterminating neighbouring populations”.

As implied in the epigraph, Norberg argues that civilizations decline when they lose cultural self-confidence. He suggests that episodes of creativity and growth are often terminated because of the perceived self-interest of people who fear change and feel threatened by it. Free speech is replaced by orthodoxies and free markets are replaced by increased economic controls. The fears of those seeking stability and predictability often become self-fulfilling.

 In my view, Norberg has done an excellent job in explaining why golden ages have emerged and disappeared at different times in different parts of the world.

However, I think there may be an omission in the author’s identification of golden ages. I will briefly discuss that before focusing on the question of whether the Anglosphere is in decline.

Identifying golden ages

Norberg discusses seven golden ages in his book. Since he doesn’t provide a summary timeline showing their duration, I asked ChatGPT to construct the following:

• Athens: 480–404 BC
• Rome: 27 BC–AD 180
• Abbasids: 750–950
• Song dynasty: 960–1279
• Renaissance Italy: 1490–1527
• Dutch Republic: 1609–1672
• Anglosphere: c. 1688 onward.

If that timeline is broadly correct, it suggests that the largest gap between golden ages occurred between the end of the golden age of Rome and the beginning of the golden age of the Abbasids. What was happening at that time? Although the golden age of Rome may have ended around 180, following the death of Marcus Aurelius, the decline and fall of the Roman empire took a few more centuries. The last emperor of the Western Roman empire was deposed in 476. Plato’s Academy in Athens apparently continued to function until 532, when the seven last philosophers left to seek refuge with the Persian king. Interest in Greek philosophy grew in Persia during the 6^th and 7^th centuries, partly because of the presence of scholars associated with schismatic Christian sects.

As I was pondering what was happening between 180 and 750, I began to wonder whether India’s golden age might have been worth discussing in this book. While visiting India last year I read William Dalrymple’s book, TheGolden Road: How Ancient India Transformed the World. As well as discussing India’s impact on religion and culture throughout much of Asia, Dalrymple. points out that over the period from about 250BC to AD 1200, India was an important centre of commerce and trade, and an innovator in fields such as astronomy and mathematics.

India was the source of the numerical system with 10 digits including zero, that we use today. Norberg mentions that important contribution, but Dalrymple discusses it at greater length.

Another fascinating topic discussed by Dalrymple is the close relationship between the merchant classes of early India and the Buddhist monastic movement. Dalrymple emphasizes the importance of trade between India and the Roman empire. He notes that as the Roman empire crumbled, India’s trade with Europe was replaced by expansion of its trade with south-east Asia.

Is the Anglosphere in decline?

The Anglosphere refers to those nations where the English language and cultural values are dominant. Few would dispute that over the last couple of centuries the Anglosphere, first led by Britain and then the United States, played a leading role among nations in demonstrating the benefits of liberal democracy, free markets, technological innovation, and free international trade. Life in the Anglosphere has been far from ideal even in respect of those criteria, but there can be no doubt that we have been living in an age of widespread prosperity that is without historical precedent. As Norberg points out, the whole world has benefited from the spread of golden-age conditions fostered by the Anglosphere, with global extreme poverty declining from 38 to 9 percent in just the period since 1990.

However, Norberg notes that “many ominous signs of decline are clearly present in our time”. He mentions the “hubristic overreach” of U.S. attempts to reshape the Middle East through military interventions in Afghanistan and Iraq, the financial crash of 2008, and the growth of “crippling public debt”. He suggests that a series of crises, including the Covid pandemic, have fostered “a sense that the world is dangerous and that we need to protect ourselves from it”. He writes:

“Most worryingly, rich counties have experienced a major backlash against globalization and trade, and immigrants have become scapegoats, just as they were in so many other eras of decline, potentially shutting us out from our most potent source of constant revitalization.”

Norberg notes that both China and Russia “have recently taken a totalitarian turn and are working hard to devastate neighbours”. He suggests, nevertheless, that Russia and China will have a hard time trying to challenge the Anglosphere-led world order because it will be difficult for them to find reliable friends among advanced states. 

Unfortunately, in the short time since the book was written, the government of the United States has adopted an international stance that seems to be inconsistent with the continued existence of an Anglosphere-led world order. Countries that have long regarded themselves as allies of the U.S. are now forced to contemplate seriously how they can best protect their own interests if the U.S. pursues isolationist policies.

The book ends on a somewhat optimistic note. The author observes that there are roughly fifty prosperous, open societies around the world. If one of them fails, “that will not stop others from picking up the torch”. He adds:

“That prompts the question of where the next golden age will come from.”

After considering various possibilities, however, he suggests that “perhaps this is the wrong way to look at it because we now have a “truly global civilization” in which every literate person anywhere in the world can draw upon the accumulated knowledge of humanity and learn skills in any field. In that context, “no one country can hold a monopoly on the ideas that can make them prosper”.

I agree with the general thrust of that argument. The technology required for future golden ages is not deposited in a library that can be easily destroyed. However, the geographical location of societies that are open and prosperous is still an issue worth considering. It isn’t much consolation for citizens in the United States, Britain or Australia to know that their children and grandchildren may be able to draw upon the accumulated knowledge of humanity and learn skills in any field, if institutional change impinges adversely on their incentives to do such things. Opportunities for human flourishing depend on whether political entrepreneurs will restore and maintain sufficient economic freedom.

It is in that context that I ask: Is it too soon to be asking where the next golden age will be located?

I suggested an optimistic answer to that question in Chapter 6 of Freedom, Progress, and Human Flourishing. Looking beyond looming economic crises, I am still optimistic that the governments of most liberal democracies will eventually introduce institutional reforms to enable the drivers of progress to restore growth of opportunities.

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!"

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

 

In this essay I discuss the relevance of the concept of political entrepreneurship to an understanding of political outcomes that have substantially affected personal and economic freedom in different countries. The essay has a particular focus on authoritarianism. My understanding of that concept is based on  the view of Hans Eysenck that people who have an authoritarian personality are attracted to the possibility of oppressing others. People who have authoritarian values see such oppression as justified. Authoritarian governments oppress people by restricting their personal and economic freedom to a greater extent than other governments.

The essay focuses on political outcomes which seem incongruent with underlying cultural values in a range of countries. It suggests that political entrepreneurship has influenced the ideologies currently reflected in personal and economic freedom in those countries. It also considers the current role of political entrepreneurship in harnessing cultural and economic grievances to pursue a range of different ends in the liberal democracies.

The essay draws on some of my previous research on the extent to which cultural values can explain authoritarianism and on the influence of cultural backlash and economic grievances on political outcomes in liberal democracies. That research is summarized prior to considering the nature and relevance of political entrepreneurship.

Can cultural values explain authoritarianism?

My answer to that question is that cultural values do not fully explain authoritarianism – the ideologies of some governments are at variance with cultural values. The best way to explain how I came to that conclusion is by referring readers to the accompanying graph which shows levels of economic freedom and personal freedom for 85 countries. Please note that the personal freedom scale on the vertical axis is in reverse order with highest levels of personal freedom at the bottom. (The graph has previously been published in an article in The Savvy Street in 2023.)

Please focus on the labelling of data points. I have attached country labels only to those data points where freedom ratings are substantially different from predicted levels based on indexes of emancipative and facilitating values which were constructed using World Values Survey data. The methodology for constructing these indexes is explained in the Savvy Street article and on this blog (here and here).

The colour of the labelled points depends on whether freedom is greater than or less than predicted—green if greater than predicted, red if less than predicted. The size of the labelled points is larger if both personal and economic freedom are greater than or less than predicted.

It is clear from the graph that freedom ratings of most of the countries with low personal and economic freedom are substantially lower than predicted by corresponding emancipative and facilitating values. The countries in which both personal and economic freedom is less than predicted include China, Iran and Venezuela. It seems obvious that suppression of liberty in those countries is a product of the ideologies of the governments concerned rather than the cultural values of the peoples.  

The graph also shows that a substantial number of countries with relatively high personal and economic freedom are performing better in that regard than can readily be explained on the basis of prevailing values. Most of the countries concerned are not the high-income countries of North America, Western Europe, Oceania, and East Asia that come to mind when one thinks of countries with relatively high levels of economic and personal freedom.

The existence of countries in which freedom levels are substantially greater than predicted by facilitating and emancipative values suggests that government support for economic and personal freedom may precede or accompany the evolution of facilitating and emancipative values. The transition to high levels of economic freedom often takes place over an extended period. As market-friendly economic reforms promote the growth of economic opportunities, this could be expected to lead to the gradual evolution of facilitating values supporting higher levels of economic freedom. The growth of economic opportunities could be expected to encourage people to place higher value on personal autonomy and to become more trusting of others.

Milton Friedman observed that economic freedom “promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other” (Friedman, Capitalism and Freedom, 1982, 9). As economic development proceeds, the evolution of emancipative values provides additional support for personal freedom.

The correlation between economic and personal freedom is strikingly evident in the graph. There are not many countries with relatively high personal freedom and low economic freedom, or vice versa. Argentina—which stands out as the only country having high personal freedom despite low economic freedom—helps illustrate why that is so. In the published article, I suggested:

“In Argentina, the decline in economic freedom over the last 20 years has been accompanied by worsening economic prospects, which seem likely to lead, before long, to an economic and political crisis. Hopefully, the political response to the crisis will be to restore greater economic freedom and make personal freedom more secure, rather than to restrict personal freedom to suppress criticism of government policies.”

A few months after that comment was published, Javier Milei was elected president of Argentina and has successfully introduced policy reforms to expand economic freedom. (Unfortunately, I cannot claim that my essay was influential in bringing that about.)

Cultural and economic grievances as explanators of political change

In the preceding essay on this blog I discuss the question: “Is cultural backlash a major determinant of political outcomes in the liberal democracies?” My intial focus was on the view which Pippa Norris and Ronald Inglehart presented in their book, Cultural Backlash: Trump, Brexit and Authoritarian Populism (2019),  that the spread of post-materialist values has induced a cultural backlash among cultural conservatives. They suggested on that basis that the combination of authoritarianism and populist rhetoric is a threat to liberal democracy.

In my view, Norris and Inglehart were mistaken in attributing cultural backlash to the spread of post-materialist values. I argued that it would be more correct to attribute cultural backlash to the illiberalism of progressives who have been advocating what Yascha Mounk has described as the identity synthesis (see: The Identity Trap, 2023). The identity synthesis has provoked a backlash because it rejects neutral rules like equal opportunity and free speech in favour of action to promote the interests of particular groups that have suffered from discrimination in the past.

Some recent research by John Burn-Murdoch, published in the Financial Times ‘Why the Maga mindset is different’, March 7, 2025) has suggested that over the last 20 years the values held by people who identify with the right wing of U.S. politics has moved closer to the values of people in Turkey, Russia and China than to people who identify with the right wing of politics in Europe. It remains to be seen what impact, if any, this apparent retreat from classical liberal values will have on the institutions of liberal democracy in the United States. 

Norris and Inglehart acknowledge that economic grievances also play an important role in encouraging people to support policy remedies proposed by populists. In that context, I have referred to some research published in an essay on this blog that has highlighted the adverse impact that slower economic growth can have on life satisfaction, particularly of young people. I suspect that the longer-term slowdown in economic growth in the liberal democracies might be more important in generating support for populist policies than are grievances that can be related directly to the impact of import competition or immigration.

However, we live in a world where the policies that political leaders sell to voters depend on how voters perceive reality. Those perceptions are not always accurate. Some opinion leaders on both the progressive and conservative sides of politics attempt to sell voters a distorted view of reality. As I wrote that I was reminded of a comment I made in my review of Michèle Lamont’s book, Seeing Others, 2023. I suggested:

“On the question of factual accuracy, Lamont’s narrative, which suggests that the workers have reason to be angry with the wealthy one percent, seems to me to be just as questionable as Donald Trump’s narrative which suggests that the workers have reason to be angry about globalization and immigration. Neither of those narratives promotes an accurate understanding of economic reality.”

The concept of political entrepreneurship

Catherine De Vries and Sara Hobolt have suggested that competition between political parties in European countries is like competition in economic markets. In both contexts long-standing dominant players (firms or parties) may be challenged by disruptive new players. The central objective for both challengers and incumbents is the control of government and the delivery of public policies. Political entrepreneurs play a key role because a party that engages in successful political policy innovation can enjoy an effective monopoly on an issue and reap the consequent electoral benefits. (De Vries CE, Hobolt SB. Challenger Parties and Populism. LSE Public Policy Review. 2020; 1(1): 3, pp. 1–8. DOI: https://doi.org/10.31389/lseppr.3)

De Vries and Hobolt were writing about multi-party systems in which several political parties are competing for power. However, a similar form of competition occurs when an innovative political entrepreneur within a major political party challenges established leadership factions by offering a product that is more appealing to supporters of the party.

Valentina Ausserladscheider has contributed to an understanding of political entrepreneurism by providing a framework to consider reasons for the political success of Jörg Haider, the leader of the Austrian Freedom Party, during the 1990s. Haider’s winning formula was based on a policy mix of authoritarian and and neoliberal policies, which was particularly successful during a time of economic turmoil and uncertainty. (See Chapter 9 of Culture, sociality, and morality : new applications of mainline political economy edited by Paul Dragos Aligica, Ginny Seung Choi, and Virgil Henry Storr, 2021).

Ausserladscheider emphasizes that the strategies of political entrepreneurs are not determined solely by voters’ ideological positions. Successful political entrepreneurs don’t offer the same policies as their competitors. They advance their political ambitions by focusing on niches in the marketplace of ideas that established parties do not satisfy, and on winning support by emphasizing the problem-solving capacities of their ideas. For example, the entrepreneurial strategy of far-right parties is their “nationalist and nativist core ideology”, leading to policies such as immigration restrictions that are claimed to solve a range of problems.

As illustrated by the example of Jörg Haider, the strategies that political entrepreneurs follow to attract support can result in political programs that offer a mix of libertarian and authoritarian policies.

The influence of political entrepreneurs

From a cursory inspection of the accompanying graph, people who have rudimentary knowledge of global politics would have no difficulty identifying political entrepreneurs who have historically been major players determining outcomes in many jurisdictions where economic and personal freedom seems substantially at variance with underlying cultural values. There are good reasons for that. Media coverage tends to focus on political leaders, the challenges they face and the policies they adopt.

The role of political entrepreneurship is not always obvious in liberal democracies where the institutions of representative government have been respected for many decades. However, it doesn’t make sense to assume that changes in public opinion will be automatically reflected in public policy even in countries with representative government. In general, the responses of political markets to new information (e.g. poll data about shifts in public opinion on particular issues) depend to a much larger extent on decisions by big players than do responses to new information in financial and commodity markets.

A better understanding of the reasons why political entrepreneurs behave as they do might help us to assess whether current political developments are likely to expand or constrain economic and personal freedom. Those outcomes depend on both the motivations of the individuals concerned and on the social and economic context in which they operate.

Like other humans, political entrepreneurs are motivated by a range of factors. It is usually unrealistic to assume that they are motivated solely by a desire to maximize social welfare (whatever that means), to maximize the number of votes they obtain, to maximize personal wealth, or to obtain the perks of the office. Given the nature of their occupation, however, it seems reasonable to assume that political entrepreneurs obtain more satisfaction than most other people from constructing ideological narratives and selling them, and from exercising the political power required to implement policies.

In some instances, ideological predilections may play a dominant role. For example, while social and economic context helps to explain why revolutions occurred in China and Iran in the 20^th century, the repression of individual liberty following those revolutions stemmed directly from the ideologies of revolutionary leaders - Mao Zedong in China and Ayatollah Khomeini in Iran.

Similarly, while the economic problems confronting the United States and Britain during the 1980s provided contexts in which substantial changes in the direction of economic and social policies could be contemplated, the responses of Ronald Reagan and Margaret Thatcher owe much to their respective commitments to economic freedom. The reforms currently being pursued by Javier Milei in Argentina seem to be similarly motivated.

Looking around the world, a range of different ideological predilections seem to be playing a role in policies advocated by political entrepreneurs. For example, we see ideological considerations playing a role among those seeking opportunities to expand the welfare state, to redistribute wealth, to promote “equity” for community groups which have suffered from discrimination in the past, to save the environment from CO2 emissions, to pursue international humanitarian goals, or to pursue nationalist goals by restricting immigration, raising trade barriers, and withdrawing from international organisations. Some of those policies have potential to impinge adversely on economic and personal freedom.

As we have seen earlier, even if political entrepreneurs are motivated mainly by a desire to exercise political power, the innovative aspect of their role requires them to focus on niches in the marketplace of ideas that established parties (or factions) do not satisfy. They seek to attract support from people who are discontented with current economic and social outcomes by emphasizing the 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.

In my opinion, the ability of some political entrepreneurs (from both conservative and progressive sides of politics) to persuade large numbers of people to accept false narratives is posing an increasing threat to liberty in the liberal democracies. False narratives pose a threat to liberty because they often provide a basis for false beliefs that problems can be solved by restricting personal and economic freedom. For example, the personal freedom of people who refused vaccinations for Covid was restricted inappropriately in many countries because of false narratives that unvaccinated people were likely to spread infection. And economic freedom is currently being restricted in some countries through imposition of higher import barriers on the basis of false narratives about the impact of free trade.

A few decades ago, people seemed to have been more willing to put their trust in political commentators who took pride in remaining politically independent and well-informed. Those commentators were able to expose false narratives to a greater extent than now occurs, and thus to limit the influence of political entrepreneurs who base their policies on falsehoods.

In recent years, however, mainstream media has become increasingly polarized. The rise of social media seems to have aggravated the problem. Many exchanges of views about political issues on social media consist largely of recitations of false narratives promulgated by political leaders.

Some commentators who are independent and well-informed can still be found in both mainstream and social media, but prevailing cultures may need to give greater respect to the search for truth before those people will have sufficient influence to discourage political entrepreneurs from promoting false narratives.

Conclusions

Authoritarian and libertarian political outcomes don’t just appear out of nowhere. Underlying cultural values that have evolved over long periods of time go some of the way toward explaining levels of economic and personal freedom in different countries. However, political entrepreneurship also plays an important role.

The role of political entrepreneurs is most apparent in those countries where underlying cultural values are less supportive of economic and personal freedom. Political entrepreneurs have played an important role in some of those countries in promoting either more or less freedom than would be expected on the basis of underlying cultural values.

The role of political entrepreneurship has been more constrained in those liberal democracies where the institutions of representative government have been respected for many decades.

However, the ability of some political entrepreneurs (from both conservative and progressive sides of politics) to persuade large numbers of people to accept false narratives is posing an increasing threat to personal and economic freedom in the liberal democracies. Polarization of the media means that such claims are now less subject to independent scrutiny than they were a few decades ago.

Recent political developments are raising the question of whether cultural change in some liberal democracies has emboldened some political entrepreneurs to challenge conventions regarding government respect for judicial rulings on the legality of their activities. Governments that do not perceive themselves to be bound by judicial interpretation of laws and constitutions are unlikely to have much regard for individual liberty. Any government which claims that its actions are beyond legal challenge because they reflect the general will of the people is showing obvious signs of authoritarianism.

Addendum

Chris M Sciabarra has given me permission to publish the following comment, which he has provided by email:

"I just read the essay and enjoyed it; I'll have to give a bit more thought to it. You make some very good, persuasive points, though there are some claims that I need to process a bit more. I think the whole concept of political entrepreneurship has some weight here. I wonder how, for example, it might mesh not only with public choice thinking, but also with Hayek's insights about how the 'worst get on top' when political power becomes the only power worth having. If that's the case, then political entrepreneurship in a populist age morphs into a kind of political con game that attacks the very roots of liberal democracy---something you acknowledge in your conclusions.

One of the issues that concerns me is that while there was a backlash against the "identity synthesis" of illiberal progressives, I don't think that was the key factor that influenced the outcome of the election. Incumbent parties lost all around the world, whether they were perceived as 'right'- or 'left'-leaning. In the US, of course, Trump won over Harris. In the UK, the Conservative Party was defeated. The Liberal Democrats lost in Japan, while in France, a coalition of left-wing and centrist parties gained ground. And so forth. I think that inflation, stagnant wages, housing affordability, etc. led most incumbents to defeat because whoever is in power is the party that takes the blame for the conditions on the ground. 

That said, I also think that the "identity synthesis" on the illiberal left has only been replaced by a different kind of "identity synthesis" on the illiberal right, given the right's embrace of nationalism and, in many cases, a virulent form of nativism, riding on profound anti-immigrant fervor. Not to mention the illiberal right's obsession with scapegoating the smallest of minorities---like transgender-identifying people, who make up about 0.6% of the population. This is as much of an illiberal right-wing play on identity politics as anything we've seen on the left." 

Chris has now posted a more extensive review on Notablog . 

Notablog is also worth visiting for other reasons - including the opportunity to take a break from worrying about authoritarianism to listen to the "Song of the Day". 

An interesting diagram

I think the following diagram captures very well the illiberal cultures on the authoritarian socialist and authoritarian nationalist sides of politics, and the overlap between them.

Stephen Hicks posted the diagram on X and asked if anyone could tell him where it came from so that that he could give credit. I would also like to give credit to the person responsible for constructing this.

 

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.

Was British colonial government as bad as modern critics would have us believe?

 

Nigel Biggar acknowledges that British colonialism contained evils and injustices, but he judges it to have been much better than its modern critics would have us believe.

Biggar directs the McDonald Centre for Theology, Ethics, and Public Life at Oxford University. His aim in writing his recently published book, Colonialism: A MoralReckoning, was to provide a moral evaluation of British colonialism, rather than a history of it.

 As indicated in the passage quoted above, Biggar argues that many of the modern critics of British colonialism have an unscrupulous indifference to historical truth. He suggests that the controversy over empire is really about the present, rather than about the past. The real target of today’s anti-colonialists is “the Anglo-American liberal world order that has prevailed since 1945”. They denigrate the historical record of “the West” in order to corrode faith in it. He writes:

“What is at stake is not merely the pedantic truth about yesterday, but the self-perception and self-confidence of the British today, and the way they conduct themselves in the world tomorrow.”

Everyone who has regard for human rights, rule of law, and democracy should encourage British people to continue to be forthright in their advocacy of these ideals.

The focus of criticism

Biggar documents why modern critics of British colonialism are unfair in claiming that it was characterised by racism. He highlights three main examples:

The critics emphasize British links to the slave trade in the 17^th and 18^th centuries, but overlook the leading role that the British government played in ending slavery in the 19^th century.

The critics emphasize instances of appalling racial prejudice but ignore policies that were driven by the conviction of the basic human equality of the members of all races.

Some critics slanderously equate the actions of British colonial authorities with those of the Nazis by claiming that they were engaged in genocide. They don’t acknowledge the efforts of colonial authorities to protect native peoples from harmful encounters with settlers.

Benefits of British colonialism

Biggar also documents many benefits of British colonialism. One of the points he makes is that it “brought up three of the most prosperous and liberal states now on earth – Canada, Australia, and New Zealand”. My friends in the United States can take comfort from the fact that the American revolution served to educate the British about the desirability of allowing those former colonies to govern themselves.

More generally, British colonialism promoted free trade, created peace in the colonies, developed public infrastructure, made foreign investment attractive, disseminated modern agricultural methods, disseminated medical knowledge, and “provided a civil service and judiciary that was generally and extraordinarily incorrupt”.

I will focus here on the quality of the civil service and judiciary.

Quality of governance

As a classical liberal, I am inclined to the view that less governance is better than more, and that governance imposed by foreigners is particularly obnoxious. Could it have been possible for the quality of governance offered by the British to have been better than the alternatives on offer during the colonial periods?

That seems likely to have been the case in many instances. Biggar notes that many local rulers in India wanted the British to secure power to obtain advantage over their rivals - they preferred British rule to indigenous alternatives including ongoing local wars. It is not obvious that any real-world alternatives to British colonialism in Australia and New Zealand (e.g. colonization by another European power) would have provided greater protection to indigenous peoples. In the absence of British colonialism in Africa, it is likely that the slave trade would have persisted to a greater extent, aided by the expansion of militant Islam, and internecine wars that were an ongoing source of slaves.

It is not difficult to understand why people working for British colonial administrations in the 19^th and 20^th centuries developed a reputation for being largely incorruptible. It is even possible for me – a person who subscribes to the private interest theory of regulation - to understand that when organisations develop a culture that is strongly opposed to corrupt behaviour, individual members tend to obtain a great deal of satisfaction – a sense of mission - from upholding that culture.

Biggar notes:

“Back in the closing decade of the eighteenth century, Lord Cornwallis’ insistence that officials in the East India Company should live on their salaries, give up private trading and resist bribes ‘helped to create a civil service that became widely regarded as incorruptible and just, one that even Indian nationalist newspapers would later regard as ‘absolutely above suspicion’ and ‘the high water mark of morality in the public service of the country’, and as beyond being ‘bribed to do anything.”

Biggar devotes quite a few pages of his book to quoting subjects of colonial rule who were full of praise for British colonial rulers. He also notes that in the 1950s several million Chinese voted with their feet to leave the communist Chinese mainland and live under British colonial rule in Hong Kong.

Conclusion

The modern critics of British colonialism have no reason to be concerned that it is about to make a comeback. Their reason for seeking to denigrate it is to undermine the ongoing efforts of people in Britain, and some of its former colonies, to promote the ideals of a liberal world order. Nigel Biggar’s book makes an excellent contribution to public discussion of the issues by pointing out that many of the critics have an unscrupulous indifference to historical truth.

Where have the supporters of capitalism gone?

 

Cartoon by Peter Nicholson from “The Australian” newspaper: www.nicholsoncartoons.com.au

Some erstwhile supporters of capitalism probably don’t realize that they have gone missing. They still support private ownership of property and businesses, and may claim to see merit in the profit motive. However, they overlook that capitalism also involves “prices, production, and the distribution of goods that are determined mainly by competition in a free market”.

The quoted words are from the Merriam-Webster definition of capitalism. Use of a definition from an American dictionary seems appropriate because the supporters of capitalism who have gone missing seem to me to be mainly Americans. That is unfortunate because Americans were once the world’s strongest supporters of capitalism.

In Australia, most of the people I hear talking about capitalism seem to use it as a term of disparagement. The people who support capitalism talk about free enterprise and economic freedom.

I have the impression that it is fairly common outside of America for supporters of capitalism to avoid using the word because it is commonly viewed as a term of disparagement. That may stem from the word’s origins. When I was growing up, someone told me that Karl Marx had invented the word. That is not correct. Marx rarely used the word. He preferred to describe capitalism as “the capitalist mode of production”. Nevertheless, even in America the term was apparently considered to be a socialist expression until well into the 20^th century.

In the latter half of the 20^th century, the strongest supporters of capitalism had no qualms about using the word. Milton Friedman used the word in the title of a book, Capitalism and Freedom. Friedman made it clear that he was writing about “competitive capitalism – the organisation of the bulk of economic activity through private enterprise operating in a free market”. Ayn Rand used the word in the title of a book, Capitalism: The Unknown Ideal. She defined capitalism as “a social system based on the recognition of individual rights, including property rights, in which all property is privately owned”.

Where have America’s supporters of capitalism gone? Johan Norberg prompted me to think about that question as I was reading his latest book, The Capitalist Manifesto: Why the Global Free Market Will Save the World. This book is a follow-up to In Defence of Global Capitalism, which Norberg wrote about 20 years ago. Globalization has now become a dirty word to many erstwhile supporters of capitalism, but Norberg remains a strong defender of global capitalism.

Who opposes the free market?

One of the most interesting contributions of Norberg’s new book is his account of the changing opposition to the ideal of a global free market. Norberg wrote In Defence of Global Capitalism to counter the arguments of left-wing activists who mistakenly believed that free trade, foreign investment, and multinational corporations were making the world’s poor even poorer. George Monbiot, Oxfam, Bono etc. eventually began to see some merit in free trade, but opposition then migrated to economic nationalists on the conservative side of the political spectrum.

Norberg suggests that the opponents of globalization share an underlying misconception that it is a zero-sum game – someone’s gain is another one’s loss:

“The worldview is the same, the roles are just reversed – twenty years ago free trade was considered bad because we exploited them, now it is considered bad because they exploit us.”

Norberg seems to assume that most readers will already understand why free trade is a positive-sum game – beneficial to both importers and exporters. He uses colourful illustrations to reinforce the point:

“Free trade allows the farmer to grow a new mobile phone in his wheat field, the textile worker can sew a new motorbike and the author can (if lucky) write a holiday trip to Tuscany.”

The author argues that free enterprise is primarily about “opening the dams of human creativity – to let everyone participate and test their ideas and see if they work”.

The opposition of economic nationalists to free trade is associated with the narrative that during the early years of the 21^st century, cheap imports from China caused deindustrialization and wage stagnation in the United States.  Norberg’s most important contribution seems to me to be in challenging that narrative. He makes the point that the loss of jobs in manufacturing is attributable largely to automation rather than import competition. He suggests that the slow-down in wages growth in the US dates from the mid-1970s, reflecting a necessary correction of cost levels because wages had previous been growing faster than productivity. The Rust Belt apparently lost more jobs in the decades before globalization reached the US, than it has in recent decades. The share of manufacturing jobs in the US declined more rapidly prior to 2001, when China was admitted to the World Trade Organisation (WTO), than it has in the decades since then.

 Fear of China

Economic nationalists suggest that the involvement of China in international supply chains has been particularly problematic because of the theft of technology. Norberg points out that China has been by no means unique in that respect. The US itself apparently once had a policy of smuggling inventions and bribing European artisans to reveal their secrets. There is evidence that the Chinese government has a relatively good track record in following WTO rulings relating to disputes about intellectual property and government subsidies.

Norberg acknowledges the potential for Chinese investment in digital and physical infrastructure to pose a security threat because the Chinese government views Chinese companies as its agents. He points out that this does not mean that the US and its allies were wrong to encourage China to open up to the outside world. He suggests that if China had not opened up, it is much more likely that the Chinese people would have generally perceived Westerners as irreconcilable opponents. He fears that use of trade barriers to isolate China could strengthen the most reactionary and nationalist forces in China.    

Leviathan’s helpers

Where have the capitalists gone? Many business owners and executives now seem to spend less time on conventional entrepreneurial activities than on seeking to ingratiate themselves with politicians and bureaucrats who are engaged in active industrial policy.  

The chapter in The Capitalist Manifesto entitled “Picking Losers” should be of particular interest to Jim Chalmers, Australia’s Treasurer. In his article in The Monthly (Feb 2023) Chalmers wrote:

“As the influential economist Mariana Mazzucato has explored in her work, markets built in partnership through the efforts of business, labour and government are still the best mechanism we have to efficiently and effectively direct resources.”  

Johan Norberg has quite a lot to say about Mariana Mazzucato’s naïve views. I will not attempt to provide a summary here because it might spoil the fun for readers. However, I particularly liked this sentence:

 “Governments are bad at picking winners, but losers are good at picking governments.”

That observation seems particularly relevant to Australia at present.

Concluding remarks

In focusing on reasons why support for capitalism has declined, I have failed to mention many of the virtues of capitalism discussed in The Capitalist Manifesto. For example, I was particularly interested in what Johan Norberg had to say about the relationship between capitalism and various aspects of happiness, in his chapter on “the meaning of life”.

I began by noting that many supporters of capitalism are reluctant to use the word because socialists have historically used it as a term of disparagement. I commend Johan Norberg for writing a capitalist manifesto. In doing that he is following in the footsteps of great advocates of economic freedom who had no qualms in talking about the virtues of capitalism.

In this book, Norberg has provided an interesting account of how many erstwhile supporters of capitalism have come to oppose global free markets. The most important contribution of the book, in my view, is the challenge it offers to the narrative that cheap imports from China have caused deindustrialization and wage stagnation in the United States.