Free Market, Interventionism and Private Legislation (English translation)

GIOVANNI BIRINDELLI, 7.6.2013

(Original publication: Ludwig von Mises Italia)

1. The free market and interventionism are processes, not states

Fighting for the free market without simultaneously fighting for the philosophical idea of ​​law on which the free market is based, and therefore against the philosophical idea of the law that renders interventionism possible, is a largely useless effort.

Let us suppose, improbable as it may be (at least in Italy), that there exists a political force with a coherently liberal/libertarian economic program (allow me to use the first term in honour of Ludwig von Mises and Friedrich von Hayek, without elaborating here on the difference between the two terms). Let us also suppose, equally improbably, that this political force has the parliamentary majority needed to implement its program, namely to abolish fractional reserve banking, legal tender, the printing of money, the arbitrary fixing of interest rates, the suppression of freedom of contract, the redistribution of resources, the bureaucratization of economic relationships and any public expenditure other than what is strictly necessary to maintain a non-arbitrarily defined minimal State.

Now, even supposing that this political force could succeed in enacting such a program, if the philosophical idea of ​​law and the institutional structure deriving from it were to remain unchanged, economic interventionism would not be affected in the slightest. Indeed, economic interventionism, like the free market, is a process, not a state. The former is a degenerative constructivist process, the latter a spontaneous creative process, but both are processes, not states. This political force would have achieved a state which momentarily resembled the free market but which, because the philosophical idea of​​ law that renders economic interventionism possible (so-called legal positivism) remains the same, will immediately and necessarily begin to degenerate once more into ever-worse forms of socialism. Consequently, anyone who thinks that the battle for the free market is waged exclusively on economic terrain is making the same mistake, on a different level, for which the economists of the Austrian School reproach Keynesian or neo-classical economists: that of ignoring the time factor.

Law and economics are two sides of the same coin. The law understood as general and abstract principle which is the result, just as language and money are, of a spontaneous evolutionary process of cultural selection of successful customs and conventions (that is, of human action but not of human design), necessarily produces the process of the free market, which cannot exist without it. In other words, the law thus understood is a vise that restrains the State’s natural tendency towards expansion. In the same way, the ‘law’ understood as the particular measure, the result of an arbitrary decision by an authority (the representative majority, for example), necessarily produces the process of socialism (including, of course, its contemporary variant: economic interventionism), which cannot exist without it. To put it in other terms, the ‘law’ thus understood is a spring that sustains and exacerbates the natural tendency of the State to expand its dimensions and functions.

Consequently, fighting for the free market without also fighting at one and the same time for the sovereignty of law understood as principle (and thus for the institutional framework deriving from it) is mistaken from a scientific point of view: it is like trying to contain a volume of water inside a glass, without actually having the glass.

2. The separation of powers

The necessary and perhaps sufficient condition for creating that glass is the separation of powers. By this, of course, I do not mean the separation of ‘legislative’, executive and judicial powers: that is just a game of smoke and mirrors which bears the same relation to the separation of powers as legal inequality does to equality before the law, or totalitarian ‘democracy’ to democracy (or “demarchy” as Hayek called it, to distinguish it from the former), or the euro to money. The separation I am referring to is that between two powers which in contemporary totalitarian ‘democracies’ are mistaken for one another and combined together: political power (the power to approve particular measures) and legislative power (the power to discover, protect and defend the law, i.e. those general and abstract principles which under no circumstances may be violated by measures approved by those holding political power). In the words of Friedrich A. von Hayek, “What happened with the apparent victory of the democratic ideal was that the power of laying down laws and the governmental power of issuing directions were placed into the hands of the same assemblies. The effect of this was necessarily that the supreme governmental authority became free to give itself currently whatever laws helped it best to achieve the particular purposes of the moment. But it necessarily meant the end of the principle of government under the law. […] placing both powers into the hands of the same assembly (or assemblies) meant in effect return to unlimited government”[1].

The separation of powers would check the natural tendency of the state towards expansion because it inherently entails the distinction between the law and measures, and therefore a return to the sovereignty of the former. The existence of fractional reserve banking today, for example, is merely a question of a majority being in favour of it: with the separation of powers it would become unsustainable for reasons of principle, which are independent of any majority. Indeed, in order to maintain it, it would have to be demonstrated that misappropriation is a legitimate action in general, then make it permissible to anybody under any circumstances, not just the banks. On the level of principle (that is, of law) there is no difference between the custodian who rents to a third party the house entrusted to his care by its owner and the bank that lends to a third party the money whose owner has deposited in (thus maintaining its availability) and not lent to the bank. Mutatis mutandis, the same argument can be made for the printing of money, legal tender, arbitrarily fixing the interest rate and, more generally, for any other form of economic interventionism.

One way to create the separation of powers is by institutional means. Hayek, for example, suggested that two separate assemblies be established: a governing assembly which would deal with the particular measures required for the administration of the (minimal and non-arbitrarily defined) State, and a legislative assembly which would not interface at all with government and from which political parties would be excluded: formed exclusively of scholars, its task would be to discover, preserve and defend the law (the general and abstract principle that no special measure, much less a constitutional one, may violate). This solution has many advantages. The most important is undoubtedly the fact that it offers the possibility of a certain and ever-increasing reduction of the dimensions of the State made possible by depriving of the right to vote, only for the governing assembly, all those people who, because they directly receive ‘public’ money and therefore derive a direct personal benefit from the expansion of the State, have a conflict of interests as voters. This privation of the right to vote would help restore a piece of democracy in the original sense of the term (“demarchy”) and would only be possible with the separation of powers. Despite these advantages, however, this solution has the disadvantage of being unrealizable in practice: why should those who hold unlimited political power come to an agreement to cut it by half?

3. Private legislation

Nevertheless, I believe that a form of separation of powers can be achieved by creating a private legislative structure parallel to the institutional framework; something similar to what has been done with Bitcoin in the monetary field, but without Bitcoin’s incongruencies. Although I do have my doubts about the idea that Bitcoin is money (unlike gold, it is not a commodity), the law defended by private legislators could be the ‘real’ law, the law that is generally known, acknowledged and respected even by those who in particular cases are in favour of violating it (or do not realise it is being violated).

Private legislation should be developed outside the current institutional framework but, paradoxically, not in contradiction to it. Indeed, even if the institutional and regulatory framework remained the same as it is now, a coherently liberal political force in parliament could commit itself to promoting the defence of certain general and abstract principles (i.e. laws) drawn up during the election campaign, and it could do so credibly by promising its potential voters that it will blindly follow the ‘suggestions’ of one or more external organizations it has approved (the private legislators) to whom citizens would be able to apply at their own expense to get rid of ‘legislative’ obstacles which limit their freedom or the realisation of their projects in cases in which they believe that these obstacles conflict with the principles the political force has committed itself to defending.

The fact that legislators can be scholars rather than ‘decision-makers’ and, above all, that they can be private entities, may seem a little odd to many people, but it is worth remembering that legislation as a matter of private study is anything but extraneous to the Western legal tradition: “The occupation of classical jurist was true art… Their fundamental objective was to discover the universal principles of law, which are unchanging and inherent in the logic of human relationships. It is true, however, that social evolution itself often necessitates the application of these unchanging universal principles to new situations and problems arising continually from this evolutionary process. In addition, Roman jurists worked independently and were not civil servants”[2].

Anyone who thinks that in the current situation it would be impossible for a non-totalitarian (i.e. coherently liberal) political force to be represented in parliament and that it is sheer folly to hope that such representation could have significant dimensions, is right. However, consensus for this political force should not be seen as a pre-condition for private legislation, but rather as a result of it: a coherently liberal political force that proposed the separation of powers through private legislation could significantly raise its consensus. Not only would private legislation be a way to directly involve citizens (with a strong use of Internet) in the legislative process, but above all it would be a form of unilateral and informal self-limitation of power. Because it in no way questions the philosophical idea of ​​law imposed by the Italian Constitution, Beppe Grillo’s 5 Star Movement (M5S) is no different to the other political parties in any significant respect with regard to the sovereignty of law. Nevertheless, the extent of the consensus (and the media attention) that M5S’s voluntary renunciation of the so-called ‘electoral reimbursements’ has received with confirms that if, on one hand, no political force has any incentive to spontaneously come to an agreement with the others to reduce political power by institutional means, on the other hand, a new political force has significant incentives to be the first to limit itself unilaterally and informally: these incentives, especially today when the demand for a limitation on political power is infinite and supply is practically non-existent, are the consensus that can be obtained in this way. Once the path to a unilateral and informal limitation of power has been opened by a political movement, that is, once this movement has proven that “it can be done”, the others are subsequently forced to follow suit, like it or not, by institutional means (see again the M5S ‘electoral reimbursements’ affair, which was followed by the commitment of the government majority to abolishing them, though not entirely). Private legislation could therefore be the first step towards a separation of institutional powers, which would be preferable, however, only on condition that it be accompanied by the privation of voting rights referred to above.

4. Conclusions

Systematically uniting the economic battle for the free market to the philosophical battle for the sovereignty of the law understood as principle is not a way to dissipate energies and thus weaken the first struggle, but a way to combine the necessary energies in order to win it. The philosophical battle for the sovereignty of law can be won in the trenches of the separation of powers. The countries on the edge of the abyss are missing yet another opportunity to learn from their mistakes: instead of reforming the institutions around the “new question’: How can we organize political institutions so as to prevent evil or incompetent rulers doing too much damage?”[3] they continue to want to reform them around the “old question [the most useless of all, ed.]: Who should rule?’ [4]: see, for example, the current debate for and against a presidential system around which proposals for constitutional ‘reforms’ current revolve in Italy. Private legislation is a parallel, market route to bringing the first question back into central focus and thus move from the sovereignty of legislators to the sovereignty of law understood as principle, and hence to the free market.


[1] Hayek, F. A., 1998, Law, Legislation and Liberty (Routledge, London & New York), Vol. 3, p. 101.

[2] Huerta de Soto J., 2006, Money, Bank Credit and Economic Cycles (Ludwig von Mises Institute, Auburn AL), p. 25.

[3] Popper, K., 2007, The Open Society and Its Enemies (Routledge, London and New York), p. 128, in italics in the original.

[4]  ibid, p. 128.

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