The Liberal Economy: The Car Without an Engine Goes to the Mechanic

This article was previously published as part of The Reconstruction Papers. The entire book is available in print and as a PDF.

Recent events show, as argued basically everywhere for the last decade, a liberalism that is in crisis; originally, this was a political crisis, and now it is also an intellectual one. The Democrats, America’s liberal (and progressive and sometimes even socialist) party lost the trust of voters on a number of issues, but most clearly the economy: inflation, weak hiring, low wage growth, and the “vibecession” brought Donald Trump into power with extremely dire consequences. What, then, do liberals have to say about the economy?

Plenty. You’ll hear about slopulism and Abundance, about healthcare, about housing, about a million other things. But the technocratic tinkering with small-bore policy areas seems deeply unsuited to meet the moment. All around the globe and for the better part of a decade extreme right wing parties, in almost all cases profoundly illiberal and antidemocratic, are making substantial gains in elections and public opinion. This is the greatest crisis for liberalism since the Great Depression, when socialism and fascism both seemed seconds away from power and liberals such as Friedrich Hayek called for abandoning the, by then, stale and unpersuasive dogma of laissez faire classical liberalism and adopting a new and improved version that could face the challenges of the time.

What would this look like in the United States in 2026?

In memory, mirror, and membrane

The main criticism of liberalism is that liberals lack a theory of power. Liberalism sees itself as the enjoyment of a life of peaceable private cultivation absent the onus of public duty. The critique is that the private and civic life of individuals is also profoundly shaped by values and economic relations. Liberalism is seen as not able to formalize the relationship between wealth, power, and culture. This point was best made by one of liberalism’s most prominent, and dare I say most insightful, critics: the Nazi jurist and political thinker Carl Schmitt. His ideas, largely for the worse, are currently very influential on liberalism’s opponents.¹ Schmitt, somewhat surprisingly, was also an economic thinker, and the key concept he thought liberalism lacked was the economic constitution.² According to Schmitt, a proper market economy required particular political institutions and social customs,³ which in his mind were not democratic, and he used this notion to castigate the progressive Weimar republic.

The Hungarian economist Karl Polanyi made a similar case in his now classic book The Great Transformation: markets were not independent from society, but rather embedded in it, and an unbridled performance of the free market could in fact undermine the very civic and community relations that underpinned it. The concentration of wealth and its toxic influence on politics, the power that employers exercise over employees, the disparate access of the wealthy to the ear of government officials: this all made democracy and markets incapable of coexisting as separate, unregulated spheres of life.

In Schmitt’s view, there are two types of law: imperium, the law of peoples, and dominium, the law of property. Discussion among liberals, progressives, and centrists have so far focused on dominium. To use the questions of healthcare reform as an example, debate focuses on voter favorability and political practicality; more rarely, speakers focus on outcomes, and basically never they focus on the higher order consequences of those outcomes. Not contemplated is what kind of society is being created in terms of the people; who gains or loses power from each option, and what kind of citizenry it produces. Thus, to “put Schmitt on his head,” as Marx did with Hegel, this means that liberalism must answer two questions: the first is whether markets and democracy can survive with an increasingly unliterate and unsophisticated population, and the second is whether they can survive together at all. Without incorporating a proper understanding of these relations, liberalism can only be “a beautiful car without an engine”, to borrow a metaphor from Stephen King.

The falcon cannot hear the falconer

Every economics class begins with a simple parable: Robinson Crusoe lives alone on an island where he can choose between farming for coconuts and fishing for, well, fish. But then comes Friday, a second character, and the two can trade and specialize. From these competitive gains, multiplied by millions or billions depending on the scale of the economy, comes the case for free and open markets—the availability of each to provide for each other to the best of their abilities.

But the role of these exchanges (collectively termed “the market”) is not to allocate or organize; for economist Friderich Hayek, it is to connect.⁴ Every person involved in production or commercialization has information others do not: how their job is done. The market gets these people to share that information with others, letting them properly apportion resources on account of how much is available (supply) and how much others want (demand). This information is shared through prices: the higher the price, the more demand relative to supply, and thus the more incentives to produce. The information provided by price signals is both useful and, most importantly, accurate because both buyers and sellers have money on the line. The system that best incentivizes this kind of information sharing is private ownership⁵ or at least private organization:⁶ people do not care about running out of other people’s proverbial money the same way as their own. For Hungarian economist Janos Kornai, the centerpiece of a market economy was not just the sharing of information, but the sharing of costs:⁷ the notion that companies could lose and make money. Without getting into the question of how production is structured, the fact that sellers have to find a market for their wares⁸ where consumers are sensitive to quantity and cost forces them to focus on productivity, innovation, and stability.

In this sense, markets do not need rational individuals to function; what they need is rationality emerging from group conduct. If individual people simply avoid losses and chase earnings, the entire network of behavior functions as if they were all individual rational profit-seekers; this is because, through purely evolutionary means, suboptimal behavior will be adapted out. This was the original logic of “rationality” as an economic concept: an emergent property of individual trial and error. Nonetheless, this does not mean “the market” is infallible; it is, in fact, highly so. The first flaw comes from markets themselves: the price mechanism does not adequately allocate resources if information is concentrated among either buyers or (more often) sellers, if market transactions incur a cost on non-participants, or if goods and services can benefit more than just the direct payers. The notion of “market failure” and the need for government intervention are themselves vast fields of economics.

Can the same logic be applied to democracy? In 1919, public intellectual Walter Lippmann wrote The Basic Problem of Democracy⁹ for The Atlantic, where he posits that the spread of false information was the fundamental threat to democratic life. Continuing with Public Opinion in 1922 and The Phantom Public in 1925, Lippmann gives a decisive “no”: his theory of the sociology of opinion formation,¹⁰ the imperviousness of the masses to information provided by experts means that leaders must insulate themselves from the public in order to safeguard their best interests. However, Lippmann’s contemporary John Dewey¹¹ provides a counterargument in his 1927 book The Public and Its Problems: democracy is a way of life,¹² not just a political system, and as such the public has to be shaped into one capable of democratic life. But, in return, experts and politicians have to listen: voters have information about their lives which, through their joint and individual experiences, they can only share effectively with the “commanding heights” of market and state at scale through the ballot box. The only way for Bill Clinton to “feel your pain” was to feel his own pain at the ballot box in elections he could either win or lose.¹³

It is, thus, obvious that liberalism has to be “monogamously, faithfully, and permanently married to democracy”, in the words of philosopher Judith Shklar¹⁴ but that, more importantly, it is not “a marriage of convenience” like Shklar believed, but a union of true soulmates. Liberalism properly understood as a collective project to uplift the individual cannot be not democratic, and democracy as a collective project of self-governance cannot be achieved without liberalism. In this sense, the answer to the first question is self-evident: liberalism, or democracy for that matter, do not in any way require a particularly sharp or informed population in the same way that the libertarian skeptics of democracy propose—in fact, they would recoil at the same idea being applied to markets.

One liberal’s journey to answer the question of a generation

To go back to the earlier metaphor, for Robinson and Friday to trade as equals, they need to see each other as equals first; they need to understand what trade means, and they need to see their labor as being equal in value. This is what Hayek referred to as the metaeconomic conditions; for the longest part of his life, he devoted himself to designing the principles for a metaeconomy¹⁵ that would preserve individual liberty and open markets. These metaeconomic conditions are, in fact, identical to both Polanyi’s notion of embeddedness and derive from Schmitt’s economic constitution, per historian Quinn Slobodian’s book Globalists. Sadly, Hayek’s solution skewed closer to Schmitt than Polanyi: it came to become antidemocratic and illiberal:¹⁶ a heavily restrained government, closed borders, and strict social conservatism. Nevertheless, metaeconomic conditions exist, and are of the utmost importance to preserve liberalism. What kind of liberalism can accommodate markets and democracy harmoniously?

Well, what kind of economic conditions produce illiberal values? That is a question with a pretty established answer: low growth and high deprivation. Research¹⁷ finds that democracies can remain successful as long as they result in economic growth, quality public services, and stability. Poor economic performance is also linked with¹⁸ low trust in the political process and more political upheaval. Countries with weak institutions¹⁹ are likely to have higher corruption, and high corruption undermines²⁰ trust in institutions. The legitimacy of democracy²¹ (and, therefore, liberalism) comes from the economic benefits the population perceives itself as receiving. Inequality also promotes illiberal and anti-democratic politics,²² at the same time as it shifts economic policymaking²³ in the direction the rich desire.

But economic deprivation doesn’t just cause changes in behavior: it also changes people’s values.²⁴ Low trust in institutions and your fellow citizens,²⁵ nativism,²⁶ and misogynistic attitudes²⁷ are all closely related to being on the losing side of economic transformations. Individuals exposed to lower economic growth during their formative years are more likely to have a “zero sum” mentality,²⁸ which makes them believe that one person’s gain is another person’s loss; this belief is highly correlated with opposition to immigration and, for men, with sexist politics. An analysis of 36 European countries²⁹ finds an extremely close correlation between cosmopolitan beliefs, social trust, and support for democracy.

But what caused all of this? Over the last 50 years, but particularly the last eighteen, the American economy has shifted structurally from a manufacturing economy to a services economy.³⁰ In particular, technological changes (automation³¹ and the IT revolution³²), as well as increased trade exposure³³ and competition from China and other developing countries,³⁴ has shifted the distribution of income from blue-collar labor (which went from being the best paid occupations to the worst³⁵) to white-collar labor and capital owners. This, coupled with changes in tax policy and loss in union protections, resulted in an astronomical increase in inequality. The Great Recession of 2008/2009 worsened this³⁶ trend: the net losers of this structural transformation, white working-class voters in the Rust Belt, also lost substantial amounts of their home equity in ways that trapped them out of opportunities. Between 2007 and 2017, the US economy saw a net gain of 8.4 million white-collar jobs but a net loss of 5.5 million blue-collar ones.³⁷

The slow, uneven, and incomplete recovery from the worst recession in a century is the central fact of modern politics.³⁸ The class politics of educated and uneducated people shifted: university graduates have become the backbone of the left because of their economic success, while the blue-collar losers of deindustrialization have become a right wing demographic. Given the roughly similar sizes of each group in most countries, this has contributed to intense political polarization,³⁹ including around cultural issues,⁴⁰ which in turn weakened support for democracy⁴¹ by right-wing partisans.⁴² Racial⁴³ and gender⁴⁴ political patterns are also explained by the distribution of income, as are age patterns.⁴⁵ The perfect example for this dynamic is Brazil,⁴⁶ where economic liberalization led to higher unemployment, which resulted in higher affiliation with pentecostal churches, and which, paired with tax policy,⁴⁷ increased vote shares for far-right candidates⁴⁸ leading to Jair Bolsonaro’s election and later, his failed attempt to steal the 2022 presidential election.⁴⁹

New Deal with it

Karl Polanyi’s The Great Transformation is usually understood as a book focusing on economic history: the transition of a society ruled by ancient traditions tying landowners and laborers to one ruled by the invisible hand of the impersonal market. This is a misconception: Polanyi’s central question is fascism: particularly, how the “disembedding” of large portions of society from their way of life since time immemorial had pushed them into the arms of people like Adolf Hitler and Benito Mussolini.

In Depression-Era Germany, areas more closely harmed⁵⁰ by the austerity programs of Heinrich Brüning showed higher rates of support for the Nazi Party; in the same sense, voters benefitted by the infrastructure buildouts of the Nazis⁵¹ had higher rates of support for Hitler. The Nazis were also, as a party, seen as a vehicle for personal advancement:⁵² they provided institutions for socialization with other high-status “Aryans”. Polanyi saw fascism as solving the embedding problem of industrial capitalism by embedding all of society in a totalitarian state oriented around production; it replaced the social ties lost during the Depression and Italy and Germany’s recent industrialization with ties built around The Party.

This provides, however perversely, a path forward for the left: to speak, in the words of Argentine economist Juan Carlos Pugliese, from the pocketbook instead of the heart. Over the last five years the labor market has lost substantial impetus, the cost of living has become the central issue of politics,⁵³ and inequality has skyrocketed.⁵⁴ While there was no Great War displacing society in its entirely, there was, however, a similar shift from social media: the rise of unprecedented levels of loneliness,⁵⁵ following the fifty-year trend explored by Robert Putnam’s Bowling Alone, a book published in the mid-nineties following up on a trend that started in the seventies.

What is there to be done? Well, if times aren’t as unprecedented as we might think, then solutions have precedents too. How did the United States prevent falling into the arms of fascism in the 1930s? With the New Deal, which included substantial government steering of economic structure, a drastic expansion of the welfare state, substantial tax hikes on the Gilded Age robber barons, and large-scale investment in both physical and social infrastructure. The adequate conduct of monetary policy, by abandoning the gold standard and empowering the Federal Reserve, was also a crucial step. All of this required extensive institution building and information gathering, as well as outreach to ensure public buy-in.

A solution?

The final question, thus, is what to do in a more concrete sense. What actionable policy steps can be taken to restore support for liberal values and liberal institutions? And what policy agenda can rebalance the political economy of the United States (and any other country that wants to try) to redistribute democratic power?

Let’s ask the voters: the central concern of American politics over the last five years has been the cost of living. Basic necessities have become more and more unaffordable for people even making good wages—in particular, the fundamental need for housing has become harder to fulfill. Housing prices are now higher than in 2007, right before the housing bubble burst, and the burden of housing costs to income exceeds the recommended 33% ratio in basically all major housing markets. The solution is, fortunately, very simple: building more housing.⁵⁶ Like all other commodities, increasing supply reduces prices;⁵⁷ additionally, given segmentation by area and size (that is, by income), allowing new housing (even luxury) results in reduced prices either way.⁵⁸ The scarcity of housing also shifts people’s project for their life: it makes them less likely to start a family⁵⁹ and less likely to save or invest;⁶⁰ the reduced buy-in into the economy, thus, also reduces buy-in into liberalism and democracy as the guarantors of long-term prosperity. In particular, the fact that housing has such an impact on major economic factors ensures that governments must act decisively⁶¹ to end the housing crisis: this involves both regulatory action⁶² (since government rules around the housing market are the key factor in price), as well as industrial policy⁶³ and public housing,⁶⁴ which is an important constituent part of the housing market in multiple European cities.⁶⁵

The driving factor for astronomical growth in housing prices is the adoption of policies that prioritize the interests of wealthy homeowners at the expense of the vast majority of people. Housing, thus, is a key driver of wealth inequality:⁶⁶ the concentration of economic activity in big cities paired with the unequal ownership of land resulted in an explosion of the gap between the haves and have nots.⁶⁷ This has important political consequences: the interplay between land and finance means that inequality can entrench itself further and further, and at the same time create gigantic economic vulnerabilities⁶⁸ that produce prolonged downturns. The solution to inequality, thus, isn’t only expanded taxation⁶⁹ of the very rich: the United States needs to rethink its political economy to reduce the (currently, endless) opportunities for rent seeking⁷⁰ and corruption.⁷¹ At the same time, reducing inequality means addressing poverty, which overwhelmingly affects children:⁷² thus, supporting parents and families with expanded transfers⁷³ is a workable program.

The main question is not whether this would work as policy, but as politics: the program of resolving substantial material issues to make a democratic society viable again was the core of Bidenomics;⁷⁴ however, its obvious political failures are a learning opportunity. First, the program has to be properly tailored to financial conditions to ensure it is not inflationary; second, it has to focus on achieving actual, tangible results in politically viable periods. The lack of state capacity in the United States is astonishing compared to other developed countries:⁷⁵ you can call the program to restore it “Abundance” or an entrepreneurial mission state⁷⁶ carrying out industrial policy⁷⁷ and sectoral incentives,⁷⁸ but in truth, a systematic effort to ensure the government is capable of completing basic projects and implementing its own policies is crucial—particularly when it comes to building broadly shared prosperity.⁷⁹ The state needs to have the ability to steer and regulate artificial intelligence and its key infrastructure.⁸⁰ Carl Schmitt spoke of a “Leviathan” capable of marshaling enormous navies to wage organized, carefully planned wars, and a lawless “Behemoth” that only had the capacity to wage chaotic violence; without a program to ensure a Leviathan exists, the only state capacity left in the United States will be ICE and Palantir.

The political viability of an effective program is likely, and would directly address popular disaffection with the economy: the 2021 child tax credit cuts⁸¹ were the inciting incident for the “vibecession,” as the decline in consumer sentiment that haunted the Biden administration began immediately after benefits were withdrawn; at the same time voters seem to reward an aggressive and expansive program of public investment and welfare⁸² during times of crisis. At the same time, a looming economic shock from the rapid expansion of artificial intelligence means the time to come up with a program is now: the consequences of inaction would be dire. The root source of Trumpism as a political movement was the decline of the industrial hinterland, and these voters, faced with international trade shocks,⁸³ shifted to the right in the 1990s not because of “progressive issue positions on gender and race,” but because they saw no tangible distinction between two free-trade austerity parties⁸⁴ in the context of grossly insufficient government support.⁸⁵

In his seminal 1995 essay on fascism Ur-Fascism,⁸⁶ Italian thinker Umberto Eco finalizes with a quote from a speech given by Franklin Roosevelt in 1938: “…if American democracy ceases to move forward as a living force, seeking day and night by peaceful means to better the lot of our citizens, fascism will grow in strength in our land.” What was understood in the 1930s has to be understood again: that the solution to a seemingly terminal decline in democratic politics and liberal culture is not rhetorical tricks or clever political strategies, but rather, a serious attempt at addressing the substantive economic issues that, time and time again, have prompted voters to turn en masse to radical alternatives. To use a quote that is, by now, a cliche, those who forget their history are doomed to repeat it.

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