In the forthcoming columns I would like to tackle a fundamental problem of political philosophy: popular sovereignty and individual freedom are often at loggerheads, which endangers the survival of both. This is especially noticeable in Europe at present, where the recent crisis has brought to light previously hidden flaws in the Welfare State, to the confusion and dismay of voters and politicians. And all around the world the sudden check in growth has revived the self-destructive hostility towards globalization. These are muddy and perhaps dangerous waters to explore, but let me take the plunge.


“Liberal democracy suffers from a deep contradiction: people are discontent with our societies while they expect and demand boundless improvement from their progress.”

Democracy is an unstable system that often does disservice to individual liberty. With this stark assertion I want to pose two problems that have been with the friends of democracy from the very earliest times—going back to the Athenian followers of Pericles when traduced by Plato, to Alexis de Tocqueville and John Stuart Mill when concerned with the enlargement of the franchise, down to Friedrich Hayek and James Buchanan when proposing remedies for the demagoguery of our day. The first is that government of the people, by the people, for the people has more than once been on the point of perishing from the Earth. The second is that democracy, though the political corollary of individualism, has in practice often tyrannized the individual. One explanation for the recurring instability and frequent oppressiveness of democratic politics is that they are due to the natural attrition of human arrangements. A better answer is that they are the consequence of systematic flaws in our political systems. Democracy as practiced is flawed. Democratic life is beset by paradox. These imperfections must be brought into the open and remedied if we want liberal democracy to survive.

Let me give two samples of the confusion and contradiction that beset present day political life: the crisis of Welfare and the denial of capitalist growth.

The failure of the Welfare State

The financial crisis that started in 2007 is perceived in Europe as the writing on the wall for the original idea of the Welfare State. Financing pensions, health, and education on egalitarian lines is now seen as a system of social service with all the wrong incentives: demand runs wild, quality of service deteriorates and taxpayers groan under their weight.

The trouble is that a majority of voters seem to want a Welfare State that they now know is unsustainable. For many years they were content to sell their birthright for a mess of potage but suddenly now they fear they will go hungry: their pensions are being cut, the queues before the hospitals grow longer, and an increasing number of their young go uneducated.

These troubles do not affect Europeans only. In the United States, public opinion is divided regarding the unstoppable growth of Government debt. The need to reduce the deficit of the Federal Treasury is widely acknowledged, though there is disagreement about the speed of the consolidation. There is even a plan in the United States to extend entitlements along the lines of the failed European experiment. This does not stop a majority from wanting to put new debt-financed programs in train, be they as expensive as so-called Obamacare. When the minority tries to resist lifting the debt ceiling to fund such new entitlements, the Federal Government is able to bring public opinion on its side by showing that new debt is needed to cover ordinary expenses such as military pensions or civil servants salaries: the world turned upside down.

People love to hate the market

The hostility to the market always present in democratic politics has become acute with the 2007-2011 financial crisis. How acute can be gauged by the general denial of the positive effects of globalization on poverty. The commonplace assertion is that the expansion of capitalism is making the poor poorer and the rich richer all around the world. This is contrary to fact. If poverty is defined in absolute terms as the state of people living below a certain threshold of consumption, then the story of globalization in the last thirty years is astoundingly positive. In an academic article crowning a long effort to measure world poverty, Xavier Sala-i-Martin, with the help of Maxim Pinkovskiy (2009)1 , shows that, if the poverty threshold is defined as living below $1 a day, “the total number of poor thus defined has fallen from 403 million in 1970 to 152 million in 2006″—a reduction of 251 million poor in thirty-six years. The same trend is revealed for higher thresholds of poverty. That figure is especially telling since the data have been observed in the midst of a growing world population, which should have led to an increase in the number of poor. It cannot be a mere coincidence that those years have been marked by a steady expansion of international trade and foreign direct investment, in other words, by increasing globalization.2 Time has proved Milton and Rose Friedman right when in Capitalism and Freedom (1962, 2002) they pointed at capitalism to explain the prosperity of the free part of the world. Globalization is the spread of liberty and the story of economic freedom is one of falling poverty and inequality, together with a marked progress in welfare.

Despite these observable facts, intellectual opinion and political belief go the other way. Religious leaders, intellectual elites and ordinary people ceaselessly denounce the worsening state of the poor and root for political intervention to control the free market, precisely the institution that makes for the reduction of poverty and the increase in wellbeing.

Why such deliberate blindness to the benefits of economic freedom enjoyed by growing numbers around the world? Again it seems that this is more than a passing fad or a mere coincidence. It shows that liberal democracy suffers from a deep contradiction: people are discontent with our societies while they expect and demand boundless improvement from their progress.

The politics of market control

This contradiction between opinion and behavior often turn democrats into collectivists, because it fosters mistrust of trade, rejection of competition, fear of price changes, aversion to new wealth, in short, general suspicion of the free market. This leads to democracy being proposed as a system to control spontaneous social change politically, rather than as a system to transmit individual choices. When later voters notice the corruption implicit in political log-rolling or in the sharing out of ‘pork’ this view of democracy leads to, they pine for more republican politics where politicians look for the common good, whatever that may be.

Economic competition is based on free agreements for mutual gain; politics (and politically governed markets) are about extracting rents. I shall have something to say later in these three columns about the fundamental distinction between the positive-sum games of the free market and the negative-sum games of rent seeking, a distinction that ordinary voters find difficult to make.

Four paradoxes of modern democracy

Ailments such as those evidenced in the above two examples are no accident or mere coincidence. Their causes may be concealed but they still bear witness to deep contradictions in democratic life and practice.

There are many sources of paradox in our democracies. I will turn my attention to four, which I want to deal with in this and the next few essays.

  1. 1. The first one is that the ideals of individualism and citizenship may be discounted as not fully in harmony with our human nature; in fact, they may be rejected as not natural at all.
  2. 2. The democratic vote may result in communal decisions that nobody wants, as coming at the expense of personal preferences; the nation, though the natural venue for popular sovereignty, may often be the source of stifling tribalism.
  3. 3. Thirdly, the confusion of wealth with freedom and poverty with serfdom will tempt many to portray formal liberties as an in-egalitarian sham.
  4. 4. And last, money, which Hayek saw as ‘one of the greatest instruments of freedom ever invented by man’, repeatedly suffers from financial disorders that endanger liberty, as the crises of the 1930s and the first decade of the present century show.

The paradox of the liar

It is my view that these four contradictions are not incurable. They are in the character of semantic loops one encounters in ordinary discourse and in computer programs. These loops can be solved by separating planes of meaning, so that self-reference is avoided. One of the oldest is the “paradox of the Liar”, which runs thus:

“Epimenides the Cretan says that all Cretans are liars.”

Many authors solve this contradiction by separating levels of propositions, even visibly with inverted commas, thus:

“Epimenides, the Cretan says: ‘all Cretans are liars’.”

This sentence is true if in fact Epimenides said as much, whether he was contradicting himself or not.

Each of these four paradoxes of democratic life suffers from a self-reference that has to be cut so that they escape the vicious circle that afflicts them. This is done by moving the discourse to a ‘meta-plane’. Let me explain this perhaps obscure expression taken from the discussion of semantic paradoxes at the beginning of the 20th century.3 The solution just proposed for the Liar paradox consists in separating the miscreant proposition into two parts: one within the single marks, couched in what is technically called the ‘object language’; and the rest expressed in what is called the ‘meta-language’. The meta-language sentence passes judgment on the object sentence and by excluding self-reference avoids the paradox.

The four paradoxes of liberal democracy that I want to discuss in these columns belong to the same class of semantic paradoxes as that of the Liar.

  1. 1′. If the modern economy is seen as unnatural or irrational because it breaks with tradition or has not been politically designed, then it will be rejected as undemocratic, though it is the result of the free actions of innumerable individuals.
  2. 2′. If whatever the majority decides is right then majoritarian democracy can vote itself out of existence.
  3. 3′. If liberal democracy is based on the principle that all men are equal, then the free market, based on the principle of free individual choice, will be rejected as leading to undemocratic inequality.
  4. 4′. If by democratic decision money starts to be issued in excess, then its role as a symbol of value may be fundamentally undermined.

Semantic paradoxes are not mere logical curios. They often become ‘existential’, in that they embody a shocking or absurd trait of reality. Living with such paradoxes becomes unbearable. Solving them becomes a way to approach the truth. Hence, the very evolution of social life leads to habits or institutions appearing on a meta-plane that help societies escape such vicious circles.

The object of this column and the next ones is to sketch ways to free democratic life of deformities such as the ones listed here. The object is to make democracy more amicable to individual freedom. I shall explore solutions to the four paradoxes based on creating or cultivating meta-planes of meaning to solve deadly contradictions, along the following lines.

  1. 1”. Our personal instincts as to what is natural should not lead us to disallow unpredictable social evolution on a higher plane because its results feel artificial.
  2. 2”. People who use their democratic rights to destroy liberal democracy should not necessarily be given full leeway but be made to abide by the higher rules of a Constitution.
  3. 3”. The equality demanded by democrats should be limited to equality before the law by a meta-rule.
  4. 4”. Money creation should be anchored by some well-grounded meta-rule so that credit does not grow excessively by feeding on itself.

I shall note in the conclusion of these essays that ladders onto higher planes allowing democracies to escape from vicious circles tend to develop spontaneously with economic growth and cultural progress. With the passage of time, institutional fire-walls tend to appear that break the loops of democratic life. History shows that people can learn to be democratic in ways that are not inimical to personal freedom.


Freud on culture as unnatural repression

Late in life, Sigmund Freud published one of his most striking essays, Civilization and its Discontents. 4 I am not the only one to have felt when reading this work that Freud was still under the impression of the cruelty of World War I and the harshness of its aftermath when thus taking stock of human culture in 1930. The legend has it that, when sailing into New York for the first time in 1909 he turned to Jung at his side and said, “They don’t realize that we are bringing the plague”.5 The plague was the spreading of the belief that civilized repression was to be exorcised if mankind would be rid of its unhappiness. Was he perhaps ruing the day when he let loose the devils of the libido and blamed repression for the neuroses of mankind?

Man’s discontent goes deep, says Freud. Humans are perpetually faced with the omnipotence of destiny and the futility of their own striving. In childhood they crucially depend on others and are naturally open to the religious impulse. Their anguish is prolonged in adult years by the unavoidable presence of three sources of human suffering: the supremacy of Nature, the decay of our own body, and deficient human relations in the family, society and the state. The latter are especially painful since we devised those institutions, he says, for our happiness, welfare and protection. Freud was thus questioning even the benefits of arrangements purposely devised by thinking men.

All this, however, does not explain “the strange hostility of so many men against culture”. For Freud, a second cause could be found in our disappointment with the technical advances of the age.

In the course of the last generations, humanity has realized extraordinary progress in the natural sciences and their technical applications. [… ] Man is justly proud of such conquests but has begun to suspect that these recently acquired powers [… ] have not made him happier.

Freud coined a cruel expression to describe the continuous dissatisfaction of humans despite extraordinary increases in the power of technology:

Man, so to speak, has come to be a god with artificial limbs, magnificent enough [… when he dons] his prostheses but these do not grow from his body and sometimes cause him considerable distress.

A god with prostheses! Such was the second step in his diagnosis of man’s hostility towards culture.

Freud wanted to go deeper, however, in his explanation of the discontents of civilization. The third and more fundamental cause was that man’s sexuality and aggressive instincts were savage and violent and had to be repressed for social life to be possible.

Whoever remembers the horrors of the great migrations, the invasions of the Huns, of the moguls under Genghis Khan and Tamerlane, the conquest of Jerusalem by the pious crusaders, and even the cruelties of the last World War must humbly accept the reality [of human aggressiveness].

The necessary repression gave rise to the neurosis of civilized man, who often relieved it by reverting to blind participation in communal life. The aggressive tendencies of mankind could be channeled in defense of the tribe. These small groups had

… the very appreciable advantage of permitting the satisfaction of instinct through the hostility against outsiders [… ] thus easing the cohesion of the members of the community.

Echoes of Thomas Hobbes in his extoling of social repression: man was freest before culture, but this natural liberty “had no value because the individual was barely capable of defending it”, was Freud’s conclusion. It went in the same direction as Hobbes: free institutions were not in harmony with man’s primordial nature.

Hayek’s three sources of sociability

For more on Friedrich Hayek’s writings, including his Law, Legislation and Liberty, see the EconTalk podcast episode Boudreaux on Reading Hayek.

The Freudian idea that the institutions of the free society inevitably clashed with the true nature of man was subtly changed by Hayek. The text to be read and reread in this regard is his pithy “Epilogue” to Law, Legislation and Liberty,6 titled “The three sources of human values” (1982). It is there Hayek rejected the general view that human institutions were either of biological or of rational origin.

Culture is neither natural nor artificial, neither genetically transmitted nor rationally designed. [… ] The structures formed by traditional human practices are neither natural in the strict sense of being genetically determined, nor artificial in the sense of being the product of intelligent design. (Hayek, page 155)

First, he did accept that “man has been civilized much against his wishes” and that there was discontent in our civilization due to a feeling of helplessness of individual men and women to control the forces that shape their lives.

Secondly, he did not rest content with Freud’s classification of the sources of civilized discontent into neurotic repression and technical artifice. Even in closed societies of a primitive kind there was control and invention, but these were accepted and welcomed. There was another source of discontent that was felt as impersonal and often sinister. The institutions of civilized life evolved spontaneously through purblind competition. They were opaque and even incomprehensible to the individual.

These new rules were not supported by the awareness that they were more effective. We have never defined our economic system. We were not intelligent enough for that. We have stumbled into it has carried us to unforeseen heights and given rise to ambitions which may yet lead us to destroy it. (page 164)

Thirdly, Hayek did not deplore the emergence of rules that disciplined human nature, much to the contrary: “Freedom was made possible by the gradual evolution of the discipline of civilization which is at the same time the discipline of freedom” (page 163). This is what led Hayek to say that “the morals which maintain the open society do not serve to gratify human emotions” (page 160). The reason why many institutions of the modern world are misunderstood or indeed rejected by modern man is that indeed they are not ‘natural’, nor are they ‘rational’ in the sense of being consciously devised for a defined purpose.

One must remember that one of the reasons why Hayek wrote this Epilogue was to correct “the errors of sociobiology”. For Hayek, that school was mistaken in believing that the customs and the institutions of human beings could be ‘reduced’ to their genetic nature, that is to say, biologically deconstructed. Also, one must not forget that the purpose of Volume I of Law, Legislation, and Liberty, titled “Rules and Order” was to reject what he called ‘constructivism,’ the belief that it was rational and possible to design institutions from scratch as if they were the artificial limbs Freud so tellingly described. In sum, the principle on which Hayek based his analysis of institutions was that encapsulated in Adam Ferguson’s famous phrase that “nations stumble upon establishments, which are indeed the result of human action, but not the execution of any human design.”7

All this means that humans do not fully understand the nature and effects of the institutions of civilized life and that attempts to order them from top to bottom are nugatory. The evolution of the economic order in the progress of our civilization goes very much against the grain of the customs and beliefs of the tribal life we have only partially outgrown. Neither does it conform to the demands of Cartesian logic.

[… F]rom the toleration of bartering with the outsider, the recognition of delimited private property, especially in land, the enforcement of contractual obligations, the competition with fellow craftsmen in the same trade, the variability of initially customary prices, the lending of money, particularly at interest, were all initially infringements of customary rules. (page 161)

We live in anguish (or discontent, as Freud would have said) because the rules which “maintain the open society do not serve to gratify human emotions”.

The basic tools of civilization—language, morals, law, and money—are the result of spontaneous growth and not of design, and of the last two organized power has got hold and thoroughly corrupted them. (page 163)

Popper and the abstract society8

All this Karl Popper had stressed many years before. When discussing Plato’s reactionary philosophy in his The Open Society and its Enemies (1945, 1957) he came to the, for him, surprising conclusion that Plato was right in saying that the ancient Greeks “were suffering under a severe strain, and that strain was due to the social revolution which had begun with the rise of democracy and individualism.” (1957, page 171). Life in the tribe accords better with our inherited traits. When society moves away from functioning like an organism the result can be unsettling.

An open society may become, by degrees, what I should like to term an ‘abstract society’.[… ] We could conceive of a society in which men practically never meet face to face—in which all business is conducted by individuals in isolation who communicate by typed letters or telegrams, and who go about in closed motor-cars.

True, Popper had added that relationships, which in a closed society were set by accident of birth or place in social hierarchy, changed in an open society to becoming personal objects of choice. But, as Popper concluded,

[A]lthough society has become abstract, the biological make-up of man has not changed much; men have social needs which they cannot satisfy in an abstract society. (pages 174-175)

The moral rejection of efficient markets

The instinctive rejection of the ethics of the Open Society has an unexpected effect: it leads ordinary people to fret against the conclusions of economics even when they are well established and tested. This makes the life of the classical economist a frustrating experience. Our science of economics seems to oppose the fond beliefs and moral principles of ordinary people, so that markets go unloved and suffer continuous interference.

In a recent clear-sighted essay, Clark and Lee9 underline the fact that the conclusions of economic analysis are often rejected out of hand because of the ethics seen to sustain it. The political economy of the market, whether right or wrong in its factual conclusions and predictions, is felt to be downright immoral by many. It is said to be based on greed, to be devoid of human feelings, even to undermine the very morality of hard work and self-disciplined calculation that made its success. These misguided beliefs are nourished by the clash between ordinary morality and the impersonal ethics of the market, or what Clark and Lee call ‘mundane morality’, as distinguished from ‘magnanimous morality’. The latter

… can best be defined in terms of helping others in ways that satisfy three characteristics—helping intentionally, doing so at a personal sacrifice, and providing the help to identifiable beneficiaries. (Clark and Lee, page 3)

Mundane morality, on the other hand, while being essential for the existence of society, is much less attractive to ordinary people and in fact often not recognised as morality at all. This is because, contrary to magnanimous morality, it has three characteristics that contrast with the three set out above: it is self-interested, profitable for both sides, and dispersed anonymously.

Now we can see why mundane morality is seen under such an unfavourable light by people who do not recognise that it has much more general and beneficent effects in society than personal magnanimity. In sum,

[i]t is much easier to understand the persistent criticism of markets, and of the invisible hand justification for them, once the strong emotional attachment to magnanimous morality is considered. (pages 7-8)

Moving to a meta-plane

As I said when setting out the first paradox to be considered in liberal democracy, it is a dangerous mistake to limit oneself to holding that the rules of social life must be either natural or rational. This will make the habits and institutions of the modern economy look artificial because designed by nobody and that situations resulting from the free decisions of individuals will be rejected as undemocratic.

The best way to free society from this vicious circle is to place the basic tools of civilization—language, morals, law, and money—on a higher plane, as we did with the propositions of the meta-language in the Liar’s paradox. They must not be seen as part of the object language and therefore to be judged according to the rules of our biological makeup. They may be corrected and reformed by reason but very carefully since our reason is itself the result of culture and can with difficulty understand the byways of spontaneous evolution.

In sum, our personal instincts as to what is natural should not lead us to disallow unpredictable social evolution on a higher plane because its results feel artificial, and we should wield the instrument of our reason with some care and diffidence.


Maxim Pinkovskiy and Xavier Sala-i-Martin: “Parametric Estimations of the World Distribution of Income”. Working Paper 15433, October 2009, National Bureau of Economic Research. Other measures of poverty show a similar degree of reduction. They also find that various measures of global inequality have declined substantially and measures of global welfare increased.

Of course, there is more than a single cause to such progress, the main additional one being medical advances, but there is no need here to underline the reciprocal relation between freedom and scientific progress.

These reflections have been inspired by the articles on “Paradoxes”, the “Liar paradox” and “Meta-languages” in J. Ferrater Mora (1982): Diccionario de filosof¡a, vol.3. Alianza Editorial, Madrid.

I am using the 1979 Spanish translation in vol. XXI of Freud’s Collected Works, published by Amorrortu Ediciones, Buenos Aires, pages 89-104.

The source given in the Wikipedia article on Sigmund Freud is Jacoby, Russell (2009-09-21). “Freud’s Visit to Clark University”. The Chronicle Review. (Retrieved 25 October 2013).

Friedrich A. Hayek, Law, Legislation, and Liberty Volume 3: The Political Order of a Free People. The University of Chicago Press, 1982.

Adam Ferguson: An Essay on the History of Civil Society (1767). Available online at the Online Library of Liberty.

The matter of this and the next paragraph I have expounded in more detail in my chapter titled “Happiness is not within the Government’s remit: The philosophical flaw in happiness economics” of the book edited by Philip Booth: … and the Pursuit of Happiness. Institute of Economic Affairs (London): 2012.

Clark, J.R. and Lee, Dwight R. (2011): “Markets and Morality”. The Cato Journal, vol. 31, no. 1 (Winter), pages 1-25.


*Pedro Schwartz is Professor Extraordinary in the Department of Economics at the University San Pablo CEU in Madrid, where he teaches the History of Economic Thought and directs the Centre for Political Economy and Regulation. A member of the Royal Academy of Moral and Political Sciences of Spain, Schwartz is a frequent contributor to European press and radio on the current financial and corporate scene. Schwartz is the author of two previous books, La economía explicada a Zapatero y a sus sucesores and En Busca de Montesquieu: la democracia en peligro, and he has a book forthcoming in English, Democratic Capitalism: Progress and Paradox.

For more articles by Pedro Schwartz, see the Archive.