At the end of March, I had the privilege to assist to the conferences of the Mont Pelerin Society and Fundación Internacional para la Libertad in Lima, Peru. I felt one issue in particular rose above all others in the discussions: the threat posed to the liberal State by the rise of theocracies (in the Middle East), the leftwing populism (in Latin America) and the authoritarian State with fascist tendencies (for example in Russia).

 
In my opinion, these phenomena are different only in appearance, while in reality they have the same cause: a deep dissatisfaction with the liberal State and a pursuit of alternative solutions. Alas, the study of economics and the human action are uncommon within the general population, and this pursuit often translates in choosing easy but counterproductive solutions, leading societies from one problem to an even bigger one. Furthermore, these solutions are specific to the tradition and cultural hegemony of each region. It is for this reason, I believe, that phenomena such as ISIS have risen in the Middle East, whilst we see the rise of Chavez´s clownish but murderous populism in Latin America and Putin´s fascist authoritarianism in Russia. When one is in the middle of a shipwreck, he ties himself, if he lacks wisdom, to the first material he sees. And if it is sinking iron, the results are foreseeable and definitive.

 
But why is the liberal State perceived in crisis in so many parts of the world? Ultimately, it is rooted in the free market, which uncountable studies demonstrate that not only increases the total wealth of society, but also distributes it more equitably. Citing Mises, “under capitalism the more able and more gifted men can profit from their superiority only by serving to the best of their abilities the wishes and wants of the majority of less gifted men”. Ford, Rockefeller or Gates have distributed more wealth when they were making money than when they were giving it away. It is true that the innovation carried by capitalism creates a minority of losers; however this effect is limited and temporary: the Industrial Revolution created the luddites, but these did not impede its development.

 
The answer to this paradox, in my opinion, is that the premise is false. The State is seldom liberal, and the capitalism is usually based on cronyism, instead of free-markets. Born in theory as republics, the majority of States have transformed into democracies, where minorities are unprotected: the old story of two wolves and a sheep voting for what is for dinner. In a democracy, perverse incentives of all type are to be found in abundance, the politicians need votes and they want money. Inevitably, we see the immoral and discouraging wealth redistribution (more commonly given to middle class rather than the poor) and the selling of the State´s monopolist power to private interests, that transforms market capitalism to crony capitalism, an economic system as distant to true capitalism as socialism. Competition dies in a sea of taxes, regulations, legal monopolies and subsidies, hampering wealth creation, while plutocrats and organized voters, such as unions, capture the existing wealth, increasing income inequalities among the members of society. Instead of gales of creative destruction, we get the mephitic dead calm of corporativism and socialism.

 
When asked what form of government the Constitutional Convention had chosen, Franklin memorably answered: “A Republic, if you can keep it”. 13 years later, Congress enacted the Sedition Act, which heavily limited freedom of speech. And it was downhill from there, from the civil war to uncountable other useless wars paid by the taxes and the conscripted blood of citizen-slaves, from the statization of schools in the Reconstruction all the way to the New Deal, the Great Society and now Obamacare, from the creation of the FED to the detachment between the dollar and gold and the QEx, without forgetting the various prohibitions and the current shameful war on drugs. I believe that any person, without prejudices, that compares the American Constitution with the current state of the United States, should come to accord with the fact that the system of checks and balances simply never worked. And if it did not work in the cradle of individual liberty, what hope is there for it to work in Latin America, with its cachiques and caudillos, or in Russia, with its nationalism and absolutist tradition, or in the Islamic states, with a religion that even today in many instances teaches the submission of society to its representatives?

 
When a horse loses a race 200 times in a row, it does not do much to keep on drugging it, it is time to cut the losses and look for new pastures. What to do then? I don´t want to propose market anarchism here, it would be unhelpful to be immediately disqualified as a dangerous utopist, as Mario Vargas Llosa stated in Lima. However, I´d feel a coward if I did not at least point out that since the start of the 60s, a considerable body of studies have developed Rothbard´s seminal works, dealing not only with ethical considerations, but also with historical analysis and, above all, concrete proposals. I frankly believe that it is time to give it a chance, in a physical space not actually inhabited and of course with private capital.
However, I propose here another solution, based in the only algorithm that, in nature or society, never failed: competition. My thesis is that the current States are not only illiberal (asphyxiating democracies, instead or republics, or autocratic States), but they are also a cartel. Only really wealthy individuals have the privilege of choosing where to live, while the big majority is tied to their birthplace, in a modern sort of bondage of serfdom.

 
That the States are a cartel, it is not obvious: I know not of a cartel that works with more than 7 or 8 members, how is it possible that there exists a cartel of around 200 separate entities? The answer lies in the peculiar nature of the State: it is the only monopoly whose incentives do not include the acquiring of more clients. At the base of this curious phenomenon is the democratic element of the State, which makes it impossible for the politician to promote immigration. The resistance of voters is only in part due to the nationalist and xenophobic propaganda from the State itself, in reality it is mainly related with the constraints of some critical resources: in the XIX century it was shortage of land, after that it was and is the welfare state. In fact, look at the results when the State lacks this constraints and it can break the cartel: for example, the United States in the XIX century or Hong Kong after the Second World War.
How can we break this cartel? It can be done “qualitatively”, that is, by getting rid of the welfare state in a few States, which would attract more endowed and entrepreneurial men and women and give rise to what the statists call “race to the bottom”, but it is in reality a race to liberty. Or, more likely, it can be done “quantitatively”, by radically increasing the number of States. It appears that a cartel of 200 can still be kept, but I strongly doubt one of 10,000. And I believe there are at least three reasons that should give us hope.

 
In the first place, technology is going to help us. It is true that, as a friend of mine is fond of saying, Palantir best clients might well be the States. However, the Web and the smartphones for instance allowed a dissemination of ideas dramatically superior to that possible only 25 years ago. I can´t imagine how Students for Liberty could have developed in so many countries so rapidly without the Internet. Another example is bitcoin, potentially an existential threat to the nation State if it manages to impose itself and get rid of the State monopoly on currency. Who knows what other magnificent innovations will be developed in the near future?

 
In second place, I’d mention the tendency to secession. In the last 30 years more than 30 new countries have been created, as far as I know it is a historical record since Westphalia. It is important to note that secessions for economic reasons, not only ethnic ones, are starting to be seen. For example, I believe that the secessionist tendencies in Catalonia, Low Countries and more clearly in Italy are fundamentally economic in nature. And the secessions for economic reasons are the most admirable, as shown by the greatest of them all, the American Revolution. The importance of secessions that are economic in nature is of course that they imply a potential number of States larger by an order of magnitude at the least.

 
In third place, there is the explosion of free-trade zones. Today there are free zones that have a larger GDP than that of some small States. They are starting to have significant political power within some States. It is very possible to think that in upcoming years private owners or tenants associations of these free zones will start to buy out political privileges in exchange of one-time, large sums of money injected to the finances of States prostrated by corruption and the welfare state. In fact, something similar happened already in human history: many of the great medieval republics, Venezia, Genova, Hamburg and Amsterdam for example, were born when merchants of these cities started to buy out the local parasites, were it a prince or a bishop, for privileges originally economic in nature and then political, in exchange of money for financing a dissolute life or one or the other war against a neighbor.

 
What´s the final vision then? A world filled with thousands and thousands of city-states, of all possible forms, focused on individuals with different functions of utility. There would be States of all stripes, liberal, libertarian, socialdemocratic, fascist, communist, even theocracies, racist states or anarcho capitalist zones, who knows. The key issue is for there to be free circulation of people, goods and capital; something that will be guaranteed by competition. National defense would be solved with Defense Leagues, the most common instrument in historic periods dominated by city-states.

 
A final consideration on what would become, I speculate, the most successful form of city-state: I´d call it a corporate monarchy, which would be a stock company, probably listed in international stock markets, proprietary of the territory of the city-state.

 
There are specific skills to manage what sociologists, economists and engineers call “the roots of the community”, that is, energy, water, security srvices and other utilities (I can´t abstain myself from mentioning and thanking a man I have the honour to call my friend, Spencer MacCallum, whose ideas are at the roots of this article). It is likely that specialized companies may provide these services at more competitive costs, and can therefore offer better prices and attract the most desirable citizen-customers. And this would be the final victory of the free market: a world where differences would not be solved through political means, whether physical violence or that of the vote, but by market mechanisms only: the option of exit from different territories and the commercial law within each territory.

 

 

This article first appeared in Spanish in the May 2015 issue of the Entrepreneurial committee newsletter of the Federacion Internacional para la Libertad, Lima. The intended audience was classical-liberal, I hope it did not come across as too lame in Liberty.me.