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Friedrich Hayek’s Free-Market Motivations for Supporting International Federalism

By July 19, 2019No Comments

Friedrich Hayek, one of the 20th century’s most prominent economists, continues to have his theories lauded by many in the field to this day. What is less well known about him is that, like many other in the inter-war period, he was a vocal supporter of the theories of inter-state federalism. Indeed, Hayek became an active member of the group “Federal Union” in the late 1930’s, having been brought into the movement by fellow economist and federalist Lionel Robbins.

Notably, Hayek didn’t just support these theories through political idealism or for the prevention of war, but primarily to facilitate the global proliferation of laissez-faire capitalism. In his view, the creation of inter-state federations would enable the formation of vast trans-national markets, unrestricted by national borders; in this ideal, the free flow of trade would allow for new levels of prosperity. Moreover, he believed that the security created by such a federation would be a crucial aspect of securing this freedom of trade. Such an approach focusing primarily upon economic motivations is unusual in the field of international federalism, and warrants further analysis.

Hayek’s views on the matter are most clearly laid out in his essay “The Economic Conditions of Inter-State Federalism”, in which he argues that interstate federation:

“would do away with the impediments as to the movement of men, goods, and capital between the states and that it would render possible the creation of common rules of law, a uniform monetary system, and common control of communications. The material benefits that would spring from the creation of so large an economic area can hardly be overestimated, and it appears to be taken for granted that economic union and political union would be combined as a matter of course.”

This union, he does however note, must be moderated to avoid complete obliteration of the nations. To again quote, “there must be neither alliance nor complete unification; neither Staatenbund [Confederation] nor Einheitsstaat [Unitary state] but Bundesstaat [Federation].” To this end, he became, for a while at least, a vocal proponent of the union of nations.

Alexander Hamilton’s Foresight

Indeed, it was Hayek’s academic precursor, Alexander Hamilton, who set the precedent for these theories; he saw that, in the period between the American Revolution and the signing of the Constitution, a lack of national economic coordination had brought the nascent nation , and ripe for exploitation by European colonial powers. He too realised that the only way to ensure the economic successes of these deeply intertwined political actors was to give them a common rulebook by which to play, and it was this understanding that in part shaped his formulation of what was to become federalism.

However, Hayek’s overwhelming focus upon libertarian economic policies as a core aspect of federalism led to Hayek coming into dispute with his fellow members of Federal Union, and consequently quitting the group by 1941. He had come to believe that their objectives were no longer conducive to the proliferation of economic liberalism; by 1944, he was using the book The Road to Serfdom” to criticise “the numerous ill-considered and often extremely silly claims” made “during the height of the propaganda for “Federal Union””.

This case, however, does illustrate the diversity of motivations within the schools of inter-state federalism, and therefore provides us with a seldom expressed perspective on the idea. As with any theory, it is interesting to see similar conclusions reached even when approached from completely different starting points.

Economics and Globalization

Whilst Hayek’s views on world federalism have largely been forgotten in his wider catalogue of work, the substantial and ongoing liberalisation of global trade gives us reason to once more pay heed to his arguments. The free flow of goods and services has now become the rallying cry of many large nations, with examples like China’s Belt and Road Initiative and the US International Development Finance Corporation rapidly increasing the rate at which international trade linkages are being developed. Moreover, the EU has emerged as an archetype for inter-state integration, with a focus on economic cooperation that many have argued is beginning to bring Hayek’s visions to fruition.

We can therefore see a curious inversion of Hayek’s hypothesis; the globalization of economic processes has led to a greater need for global governance, rather than a globalization of governance leading to economic globalization; it would seem Hayek’s theories put the cart before the horse. Nevertheless, Hayek shows us that the two must go hand in hand; whilst markets have globalized, we now need to ensure the globalization of the appropriate laws and legal structures. When discussing federalism, Hayek argued that “the abrogation of national sovereignties and the creation of an effective international order of law is a necessary complement and the logical consummation of the liberal programme”; we have not seen these aspects emerge, meaning that, going by Hayek’s theories, we have failed to build the foundations on which our global economic structure should rest. Only by doing so can we create the safe environment that would allow for the secure and prosperous interchange of good ideas that present the surest and brightest future for humanity.

Hayek’s theories had their ends fulfilled, but not their prerequisite means. This, if anything, should help us to understand the inherent instability of our modern global economic system, and why better global governance is needed to make it sustainable, manageable and equitable.

Disclaimer: The views expressed in this blog post do not necessarily reflect the official policy of Citizens for Global Solutions.

Charles Marsh

Author Charles Marsh

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