“It is indeed better to have a good woman or man at the helm, but in politics usually the worst get to the top. The emphasis should be elsewhere; it should lay on establishing strong enough barriers or checks to stop the prince from abusing his power.”

In my previous column, “Overcoming the Contradictions of Liberal Democracy: Sociobiology and Social Engineering,” I promised to proceed with the analysis of the paradoxes of liberal democracy. The first one I explained was that the institutions of the Great Society might prove to be neither natural nor rational and could therefore be resisted or even rejected in democratic societies. My conclusion was rather disturbing: in a nutshell, “man has been civilized very much against his wishes”, as Friedrich Hayek said.

In this column I will discuss the following paradoxes that also make liberal democracy an unstable system, to wit:

  • That the democratic vote may result in communal decisions that nobody wants.
  • That the confusion of individual liberty with the enjoyment of sufficient means for self-fulfillment leads to the corruption of democracy.
  • That what is considered the normal venue for popular sovereignty—the nation—may often be the source of stifling tribalism.


The fundamental question of politics

One of the ideas of Plato that Karl Popper most decidedly criticized was that the object of political philosophy consisted in answering the question, who should rule and how to educate those who would govern. For Popper this was the wrong question: one should rather ask, how to control government, how to set up checks and balances to divide power.1 Popper’s main argument for this change of focus was the ‘paradox of liberty’. If one tried to vest power on whoever was the best and the wisest, as Plato wanted, there was the danger that this person could turn out to be a tyrant. At its extreme, the popular vote could be self-destructive: what if the people democratically willed to be governed by a populist strong-man? This is not as rare as one could wish; remember Austria’s vote for Hitler or Argentina’s for Perón.

Here we have another paradox of the kind I am grappling with in these columns.2 The starting point of this vicious circle is the realization that a large enough body of men cannot organize itself to govern directly for the good of all. To achieve common aims, power has to be entrusted to a sufficiently small number of people. Even so, disorder would threaten if these rulers fought for power: sovereignty should be undivided. This makes it imperative to choose the sovereign well: hence the Platonic question. But what if the sovereign abused its powers? Long experience tells us how transient the qualities are that may have led to the choice of a sovereign, if choice there was. In the end, whoever exercises undivided sovereignty can impose his or her fickle will on those who selected her, or use power to exploit a minority with the connivance of the majority, or simply indulge in corruption.

It is indeed better to have a good woman or man at the helm, but in politics usually the worst get to the top. The emphasis should be elsewhere; it should lay on establishing strong enough barriers or checks to stop the prince from abusing his power. Contrary to what so many political thinkers and constitutional lawyers have said over the years, sovereignty should be divided. That is the only way to break what one could call ‘the Leviathan paradox’.3

Imperfections of democracy

Many modern constitutions proclaim that sovereignty is ultimately vested on the people. In that case, the power of the people must also be divided if liberty is to endure. Democracy can therefore not be defined as the rule by majority vote. Neither does it imply that the vote of the majority is “an authoritative expression of what is right”. 4 Fundamental to our living under a democratic constitution is that we accept the result of votes because we want our free institutions to function in their own limited way, even though we may not agree with this or that decision.

Collective choices are subject to fundamental imperfections that are less present in market choices. This is because goods bought, sold, or hired in the economic market are divisible and they are so along two dimensions: they need not be acquired in large bundles; and their effects are mostly reduced to the people using them. Political goods, on the other hand, are indivisible in both dimensions: citizens have to acquire them in bulk; and political choices have huge external effects on third parties. Imagine us having to choose all the goods we may want to consume for the next four years in one go on the date of the general or the presidential election—food, housing, entertainment, holidays, education, health, whatnot, in one huge shopping cart; and that our choice should be fundamentally conditioned by that of all other consumers. This is what we inevitably must do in elections at the political market. The only reason for our participating in such awkward decisions is that some goods that we find indispensable, such as defense or justice, are by their very nature indivisible or too costly to divide.

So that when some economists speak of the defects of the market while forgetting the defects of the State they are giving a distorted picture of social life. We may need to take political decisions by democratic vote but should not be under any illusion that the result will ever be perfect or reflect our several preferences fairly.

Electoral systems

Not only does the indivisibility of the goods produced in the political sphere make choice haphazard but the procedures to come to a choice are necessarily faulty. There are no perfect electoral systems.

Majoritarian systems magnify the results of the largest minority. When the winner takes all, as is the case in English Parliamentary elections or Presidential elections in the United States, the person chosen may have received a minority of the votes expressed. When the agent is chosen in successive ballots and choice reduced to the two candidates having topped the first, as in French Presidential elections, the strategic alliance of the smaller groups may win over the plurality.

Proportional systems give power to coalitions, which then apply none of the programs presented for the election Also, pure proportionality, as in Israel, magnifies the power of single-issue groups; corrected proportionality either excludes parties not having reached a preset minimum, as with the Liberals in Germany recently, or arbitrarily increases the representation of local Mafias, as in Sicily, or of regional nationalists, as in Spain.

The defects of electoral systems go much deeper than skewed weighting of the results. As Condorcet discovered in 1785, voters can come to different conclusions depending on the starting point.5 This makes the person setting the agenda decisive, as is shown practically by the disputes that surround the wording of the question in referenda. Kenneth Arrow went further in 1951. He generalized Condorcet’s result by actually proving that it is impossible for an electoral body to choose the best possible social arrangement for all situations and all conceivable preferences democratically!6 So that if a people were asked to choose the kind of society they would want to establish, they just could not do so without somebody dictating the result.

For more on this topic, see “Democracy is a Means, Not an End”, by Michael Munger. Library of Economics and Liberty, January 10, 2005.

If this were not enough, public choice theorists have pointed out a number of quirks in democratic decisions: such as whether it is rational to vote at all, given the minimal influence of each single vote on the final result; or how deforming the use of ‘left’, ‘right’ and ‘center’ is to characterize opinions and programs, or how demeaning the use of slogans in electoral campaigns. All these are consequences of the high relative cost for voters of informing themselves on political issues.

Rent seeking and agency problems

Two other kinds of shortcomings afflict democracy. Political rent-seeking is a destructive activity engaged in by groups of electors looking for favors or protection from governments in exchange for votes. Principal-agent problems arise because the elected often abuse their positions for their own profit at the expense of the people they are supposed to represent.

Rent-seeking is usually consequent on some government intervention in the market but not always so. For example, let us suppose that a municipal authority decides to restrict the number of taxi-cabs in the city. If the limited licenses were then auctioned or chosen by lot, the free market would have been interfered with but no unfair favor bestowed on anyone. However, if the license were to be assigned at will by the authority on whomever it pleased, the favored holder would receive a political rent. Other candidates would then be ready to lobby and misuse resources which otherwise could be applied to produce value. There could be a second round to rent-seeking if the authority in turn expected to receive a political rent, in the form of increased importance of the post, or even irregular gain in the form of bribes.7

The amount of political rents in modern societies can be gauged from the ever increasing number of regulations. Modern economies increasingly look like a Gulliver tied down by innumerable threads on the shores of Lilliput!

Most regulations favor incumbents and become barriers to entry in an industry. This is the case even with well-meaning impositions, such as the original allocation of broadcasting bands by the Federal Communications Commission on the basis of “public interest, necessity or convenience” and the prohibition to resell broadcasting licenses. Ronald Coase proposed to take the rent-seeking sting away by having licenses leased to the highest bidder and made fully transferable. In the 1980s the auctioning of radio waves was finally introduced.

Politicians wanting to protect large firms tend to prefer regulation to subsidies because subsidies attract new entrants into a market while regulation erects barriers to entry. George Stigler studied the demand for regulation in a 1971 article, where he argued that regulation is only apparently called for by public opinion; in fact it benefits incumbent companies.8 In other words, it is acquired by the regulated industry and “is designed and operated primarily for its benefit”.

For more on these topics, see Rent Seeking, by David R. Henderson, in the Concise Encyclopedia of Economics and the EconTalk podcast, Don Boudreaux on Public Choice.

Sam Peltzman completed Stigler’s study by looking at the supply side and the equilibrium of the regulation market.9 He opened the black box of the politician-regulators’ motives and how far they dare go in unnecessarily increasing costs through legislation: costs and benefits in term of votes gained and lost by the supplier put limit (or set an optimum, as we economists say) to regulators’ interference.

The principal-agent problem arises through asymmetric information, when the person who proffers the service knows better than the one receiving it, thereby inducing the better informed to cheat. Arrow was one of the first economists to study the effect of information on market performance and the appearance of new market structures to correct its shortfall.10 The trouble is that correcting structures mostly fail to emerge in the political sphere. The asymmetry of information appears in all forms of government and is acute even in democracies, where periodic elections allow citizens to take agents to task. This is because the several regulations cost the generality of electors very little and they lack the incentive to inform themselves fully on the details of their effects.11

Preventing abuses of majoritarian democracy

These functional defects of democracy tell us that decisions by majority vote often lead to results that the majority did not want, either because the voters could not be bothered to understand the issues involved or because the results were hijacked by special interests at the expense of general welfare. But the trouble goes deeper. Unless checked and counterbalanced, majority decisions may result in the exploitation of minorities. As John Stuart Mill said in On Liberty in 1859:

The “people” who exercise the power are not always the same people with those over whom it is exercised; and the “self-government” spoken of is not the government of each by himself, but of each by all the rest. (Chapter I, paragraph 4.)

In a way, the defects just recounted should be taken as symptoms of deeper trouble. Democratic votes must always be examined in the light of their effects on individual liberty. The remedy must have two dimensions. One is to exclude fundamental freedoms—habeas corpus, freedom of thought and expression, property rights, freedom of association, and all the others—from invasion by majority decision. The other is to have majorities come as near as possible to unanimity, at least in what concerns the Constitution. These two limitations of majority decision could be interpreted as veto powers granted to individuals, an absolute veto of invasions of personal freedoms, and a modified veto in Constitutional matters.


Concepts of liberty

It was Isaiah Berlin who, in his deservedly famous essay “Two Concepts of Liberty”,12 most clearly drew the difference between ‘liberty from’ and ‘liberty to’. If one studies the essay carefully it soon becomes clear that Berlin added a third kind of liberty to the first two. For him there was first ‘liberty from’, what unfortunately goes under the name of ‘negative liberty’ and should be called ‘formal liberty’. Then came ‘liberty to’ or ‘possessive liberty’; and thirdly ‘status liberty’ or ‘national identity’. We will first examine the clash between liberty and wealth; and then, under a separate heading, that between liberty and identity. In sum, three kinds of liberty best summed up under the motto of the French Revolution: Liberté, Égalité, Fraternité. We want the first.

Formal freedom versus possessive freedom

I am formally free, says Berlin, “to the degree that no man or body of men interferes with my activity”. I am unduly coerced when other human beings deliberately interfere with me within the area “in which I could otherwise act”. Whenever I am prevented by human agency from attaining a goal I am deprived of some political freedom. There are some inabilities that do not imply political coercion. With slight irony he adds:

If I say that I am unable to jump ten feet in the air, or cannot read because I am blind, or cannot understand the darker pages of Hegel, it would be eccentric to say that I am to that degree enslaved or coerced. (Berlin, page 122)

Now, the process of moving from enjoying formal rights to wanting to be my own master is quite natural. The next step is more romantic: I will claim the need to discover my better self, to realize myself. Berlin quotes a passage of 1881 by the Hegelian philosopher T. H. Green:

The ideal of true freedom is the maximum power for all the members of human society alike to make the best of themselves. (page 133, note 1)

Ah! But for this I need to have resources at my disposal. If am desperately poor I am not free, most people believe. This is why I want ‘possessive freedom’ to be called ‘freedom to’.

Wealth and liberty

If only the wealthy are really free and the poor are in fact slaves, then a free society must right the inequalities of wealth and income so that its members enjoy substantively equal freedom. If we do not have enough possessions to be ‘free’ to realize ourselves then society should supply us with the necessary means. This leads directly to the European Welfare State or to American benefits.

Some authors go further down this path. For Amartya Sen it is not the means or resources but what he calls “functionings” that should be as far as possible equalized: these include to be sufficiently fed, be in good health, avoid premature death, reduce infant mortality, even be happy, be recognized with dignity, and participate in the life of the community.13 As was to be expected, Sen goes even further, as far as to say that true liberty can be imposed on the individual:

The social-choice characterization of liberty compares whet emerges with what a person would have chosen, whether or not he actually does the choosing.14 (Sen, Rationality and Freedom, page 397)

Why should the persons enjoying those ‘rights’ give anything in exchange? And as to who has the duty to make those rights effective, the answer is not clear. If it is ‘society’ then it is nobody in particular.

Formal or procedural liberty, on the other hand, can be posited universally. Formal rights can easily be expressed as well defined duties that personally oblige all and sundry. The rule ‘thou shalt not kill’ imposes on all the duty to abstain from murder. Property rights can be expressed as the duty for everyone not to steal, swindle or deceive. Negative rights can be easily expressed as concrete obligations of well-defined people.

The Universal Declaration of Human Rights

These procedural liberties are the individual freedoms defined in the first part of the 1948 Universal Declaration of the United Nations, articles 1 to 21: life, liberty and security of person; presumption of innocence; respect of property, agreements and contracts; freedom of thought, conscience and religion; freedom of association, and so on. These are liberties that impose on all a clear duty to abstain from contrary actions.

Articles 22 to 30, however, proclaim social rights to Social Security, periodic holidays with pay, no less, an adequate standard of living, free elementary education, security in the event of unemployment or ill-health. The list is crowned with the declaration that “everyone is entitled to a social and international order in which the rights and freedoms set forth in this Declaration can be fully realized.” The ‘rights’ to adequate social services and good working conditions are no doubt a desirable development for Humanity but they are very different from the ‘liberties’ defining a personal space free from undue interference.15


Trade Unions

Additionally, Berlin distinguished a third kind of freedom often demanded: group dignity and self-rule.

I may be seeking not for […] security from coercion, arbitrary arrest, tyranny, deprivation of certain opportunities. […] What I may seek is to avoid simply being ignored, or patronized or despised […]—in short, not being treated as an individual, having my uniqueness insufficiently recognized. […] This is hankering after status and recognition. (Berlin, pages 157-158)

In the 19th and 20th centuries the demand for status at the expense of individual liberty took at least two forms: privileges for trade unions and the right of national self-government.

As to trade unions, in Britain they slowly gained privileges that made them special kinds of association. Unions were legalized in 1851 and gained exemption from liability for strike action with the Trade Disputes Act of 1906. This Act also legalized closed-shop clauses, whereby workers could be forced to join the shop union under pain of dismissal. The 1992 Trade Union and Labor Relations Act passed at the behest of Margaret Thatcher forbade closed shop arrangements, demanded a ballot before a union called a strike, and made ‘sympathy strikes’ illegal.

In the United States, under the inspiration of Franklin Delano Roosevelt, the 1935 Wagner Act legalized collective bargaining and closed shops, and set up the National Labor Relations Board. The worst anti-competitive features of this Act were corrected by the Taft-Hartley Act of 1947 allowing States to pass Right to Work Laws, whereby nearly half of American states are union free.

The paradox of nationalism

The presumption that there is an irrebutable right for nations to form their own state deserves a more extended consideration. Nationalism is a case of abuse of the principle of majoritarian democracy. Nationalists usually claim to be democratic or at least claim to be answering the wish of the sovereign people. However, nationalism is not freedom-loving by nature. At birth, nations have to be created out of disparate elements. In the course of their lives, nations must be maintained against centrifugal forces, since the principle of nationhood can be claimed by regions in the nation.

However, political self-government, which ideally is a communal corollary of individual self-government, can normally only be organized within a nation-state. Liberal democracy and nationalism are antithetical but citizenship needs a nation to function politically. Here is a contradiction, if there ever was one!

The spread of nationalism

That people, not least free people, are naturally organized in nations is a relatively modern concept. There are three special moments when the idea of a nation bloomed. The first moment was during the French Revolution, when a people in arms pushed back the armies of Europe and then victoriously invaded the Continent. The second was at the end of the World War I, when at the behest of President Wilson, the right of each nation to become a state was proclaimed. The third was on the occasion of the Bandung Conference of 1955, when the idea was launched that the countries of the Third World had a right to become independent states on a par with the older nations of Europe that had lorded over them. At each of these three moments the idea of the nation and the right of a people to become a nation-state was presented as self-evident but soon showed deep contradictions. The French revolutionaries worshiped at the altar of Universal Reason but then tried to impose French civilization on the peoples they allegedly freed. The European nations born of the splitting of the Austrian, Russian, Ottoman and German Empires discovered that they were multinational themselves and were soon at war within their own borders and with their multifarious neighbors. The new Third World States had no compunction to stamp out all freedoms within their new and somewhat artificial borders in the name of national liberty. As Isaiah Berlin noted:

It is this desire for reciprocal recognition that leads the most authoritarian democracies to be, at times, consciously preferred by its members to the most enlightened oligarchies. (Berlin, page 157)

Kedourie and Gellner

An outright rejection or a melancholy understanding of nationalism has characterized the writings many an enlightened thinker, especially after the shambles brought by the Wilson doctrine between the two World Wars. Those who have most deeply lamented the havoc brought by nationalism in Europe and later in the world at large usually come from countries that used to be a part of 19th century multinational Empires. Joseph Schumpeter was an old style Austrian gentleman who never really felt at home in America. I have heard the Hungarian Anthony de Jasay suspend his condemnation of the State when I extolled the Hapsburg Empire in his presence. The nostalgia for non-nationalistic days was especially keen in assimilated Jews, such as the Viennese Karl Popper and the Estonian Isaiah Berlin, as also the two writers whose views I want to consider now.

Elie Kedourie was an Iraqi Jew who found it impossible to live in the post-Ottoman Middle East. Ernst Gellner was the son of German speaking Jews who had fled Bohemia. Both writers found a home in Britain, then a land free of nationalistic fever though undoubtedly patriotic. I attended their classes at the London School of Economics and had many a conversation with them when writing my thesis on Mill. They both wanted to find an explanation for the phenomenon of unbridled nationalism, which had so impacted their lives.

Kedourie considered nationalism a venomous ideology born of the philosophy of the Enlightenment.16

Nationalism is a doctrine invented in Europe at the beginning of the nineteenth century. It pretends to supply a criterion for the determination of the unit of population proper to enjoy a government exclusively of its own, for the legitimate exercise of power in the state, and for the right organization of a society of states. (Kedourie, page 9)

This doctrine had its roots in Kant’s idea that the individual was free only when moved by her own conception of the good, with no regard to consequences and impervious to rewards. Self-determination justified all actions in search of the moral life, both of the individual and the nation. This doctrine, he added, became a part of the political rhetoric of the West and then of the whole world.

Gellner thought that nationalism was more than an ideology. He thought that the kind of society created by industrialization was fertile ground for the spread of nationalism, which was not a contingent intellectual development but a necessary consequence of the new mode of production: the population became mobile, literacy spread, individuals lost their local ties, expectations became egalitarian, Government became centralized, the State was able to mould their peoples and regiment them. The role of ideology was only to help stateless intellectuals and politicians exploit those conditions.17

Gellner did not want to deny that “humanity has always lived in groups” and that “a certain amount of patriotism is a perpetual part of human life”. But for him nationalism was a very concrete kind of patriotism transformed by the social conditions of the industrial world. Nationalism transformed a constant trait of humanity, to live in groups, in a powerful political force taken over by the State.

Nationalism and patriotism

Now, the fact that we may reject the excesses of nationalism from the point of view of individual freedom does not mean that we overlook the existence and force of patriotic feelings. It is one thing to give in to aggressive uses of power to form nations or increase their territory and quite another to feel a deep attachment for one’s country. I personally do not think that Spain is superior in its past history or present state to other countries in the world or in Europe, but if I were asked whether I would be ready to take up arms to defend her from an unwarranted attack my answer would be Yes.

It is the artificial creation of national states that lays the ground for the invasion of personal liberties. Moving borders often leads to the shedding of blood, as Europe discovered to its cost during the 20th century. Attempts to build new nations by carving up or forcefully joining old and settled societies, gives rise to the kind of tensions we are today witnessing in the European Union.

Provisional conclusion

In my next column, after analyzing the contradictions brought by money and finance in democratic societies, I will try and outline the barriers we could set up to limit the negative effects of the paradoxes I have been studying on liberal democracies.

How to reconcile our peoples to living in open societies; how to make our citizens accept constitutional barriers to majoritarian votes; how to limit the power of envy in market economies; how to tame nationalism when it deforms natural patriotic feelings; how to create stable moneys: such is the task that lies before me in concluding this study of the paradoxes that continuously unsettle our liberal democracies.


Popper, Karl R. (1957): The Open Society and its enemies, volume I The Spell of Plato. Routledge and Kegan Paul, London.

Readers of my previous column may have noticed that, in this column, I have decided to consider nationalism as a separate source of paradox. For a whole family of political paradoxes, see Popper (1957), volume I, chapter 7, note 4 on page 265.

See Popper (1957), volume I, chapter 7: “The principle of leadership”

Popper (1957), volume I, chapter 7, page 125.

Condorcet, Jean Marie Antoine de Caritat, marquis de, (1785): Discours préliminaire de l’Essai sur l’application de l’analyse … la probabilité des décisions rendues … la pluralité des voix. Imprimerie Royale, Paris.

Arrow, Kenneth J. (1951, 1963): Social Choice and Individual Values. Wiley, New York.

Buchanan, James M. (1980, 1999): “Rent Seeking and Profit Seeking”, in The Logical Foundations of Constitutional Liberty in The Collected Works of James M. Buchanan“, volume 1, pages 103-115. Liberty Fund, Indianapolis.

Stigler, George J. (1971): “The Theory of Economic Regulation”, The Bell Journal of Economics and Management, volume 2, number 1 (Spring).

Peltzman, Sam (1976):” Toward a More General Theory of Regulation”, Journal of Law and Economics, Number 19.

Arrow (1963) studied the emergence of institutional structures and professional mores as spontaneous corrections of information asymmetries that helped approximate the medical service market to one free of principal-agent problems.

Arrow, Kenneth J. (1963): “Uncertainty and the Welfare Economics of Medical Care”, American Economic Review, vol. LIII, no. 5 (December).

Berlin, Isaiah (1958, 1969): “Two Concepts of Liberty”, in Four Essays on Liberty. Oxford University Press.

Sen, Amartya K. (1992): Inequality Reexamined. Clarendon Press, Oxford.

Sen, Amartya K. (2002) “Liberty and Social Choice,” in Rationality and Freedom. Harvard University Press, Cambridge.

The inclusion of these rights must have been in part due to the influence of Eleanor Roosevelt, who was a member of the Drafting Committee. Another delegate who did not see his proposals accepted was the member for the USSR, Andrej Vychinsky, the prosecutor of the Moscow Trials of 1936 and 1938. He abstained in the final vote because the text included no measures to protect workers from hunger, did not guarantee media independent of the capitalist press and did not protect the rights of minority nationalities.

Kedourie, Elie (1960. 1961): Nationalism. Hutchinson University Library.

Gellner, Ernst (1983): Nations and Nationalism. Blackwell, Oxford.


*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.