Liberty and Democracy as Economic Systems

Until the twentieth century, economics and politics were studied together under the heading of political economy. Two major nineteenth-century treatises on the subject, by David Ricardo (1817) and John Stuart Mill (1848), had the title Principles of Political Economy. Toward the end of that century, the subdisciplines separated; the turning point might be marked by the publication of Alfred Marshall’s Principles of Economics in 1890. With economics and political science going their separate ways, the implication, often explicitly stated, was that the economic systems of nations could be analyzed independently of their political systems. Economists, increasingly preoccupied with the characteristics of economic equilibrium, developed theories devoid of political institutions, as if any set of political institutions could be compatible with any set of economic institutions. For purposes of recommending policy, economic theorists often assumed the existence of dictatorship as a simplifying device, and with rare exceptions the assumed dictator was a benevolent one who always chose welfare-maximizing policies.1 In this article, I argue that economic models always imply an underlying set of political institutions and that economic institutions and political institutions cannot be properly analyzed if they are treated as separate and independent. I develop a