The world economic order is undergoing some visible and, at the same time, unexpected changes. First of all, it is about the intensification of economic nationalism, operationalized, among other things, through the tariff war. In general, given the prevailing mentality in society, most ordinary people, regardless of their education, tend to associate this war with more or less arbitrary decisions of powerful political leaders at a global level. Currently, President Donald Trump is seen as a strong leader who wants, for various reasons, which most attribute to his personality, to start a trade war under the slogan Make America Great Again.

But the landscape is much more complex and indicates rather a world economic order that is on the verge of changing or, perhaps, even falling apart, under the influence of the action of very important and powerful geopolitical and economic actors. It is hard to imagine that these actors, who until some time ago were in a good enough balance not to seriously alter the order in which they operate, have suddenly radically changed their behaviors, against the existing economic order.

Of course, if we accept that these actions are the whims and aberrant ambitions of some important personalities, then we could say that what is happening is difficult to explain. In this vision, we can only hope that these people will not succeed in changing the economic order by introducing rules that we have given up precisely in order to progress. We can hope that after others, with less capricious but also ambitious personalities, take their place, democratically in democratic countries, or by who knows what methods in non-democratic countries, things will return to what we perceive as normal.

However, to understand the changes that are taking place, we need to leave aside the whims, ambitions or pride of the main actors and see the deep causes. Without denying the role of personalities in history, we need to recognize that the real global problem lies in the tensions in the economic order that arise because certain practices have, for too long, evaded inevitable needs, introducing irreconcilable contradictions between elements of the global economic order. We need to understand what in the social and economic order no longer works as it has worked until now and why it no longer works. In this way, we will be able to understand what determines the actions and discourses of some leaders and relevant political forces at a global level to conflict in such a way as to shake the global economic order.

This approach, to show which key elements fundamentally contradict each other to disrupt the global economic order, risks being viewed by the followers of pragmatism, that is, by those who are only interested in temporary solutions, as a doctrinaire effort without effects. However, no matter how theoretical and seemingly far from the concrete forms of manifestation those fundamental elements to which I refer may seem, I am convinced that only by starting from them will a solution to the current problems be found.

My explanation starts from the fact that, in the world economic order, the spontaneous order is overwhelmingly prevailing over the designed part. But this does not mean that the designed order does not have an important role. If designed at odds with the logic of spontaneous order, it can produce many and significant unsatisfactory effects. It is the one that produces those tensions that seem to shatter the economic order. However, the unsatisfactory aspects may not appear from the beginning. Even when they become recognizable, they may seem insignificant, because they can be accommodated by the spontaneous order for a long time, before producing effects so costly for the participants in the overall order that, in the end, at least some of them begin to contest or even act against the existing order.

The problem is that, in society, the widespread conception is not that the social order in general, and even more so the global economic order, is overwhelmingly prevailing over the designed order, but the erroneous one, according to which the social order is for the most part a designed order; probably still insufficiently well designed, and the unsatisfactory aspects can be eliminated or diminished by better design. For this reason, the task of those who struggle to show that the unsatisfactory aspects can be rigorously attributed to the designed order becomes very difficult, not least because they are faced with an opposition that can easily take the form of a despotism of public opinion.

In other words, elements of the complex market order begin to struggle against designed rules that have turned out not to serve spontaneous order, but to disrupt it.
If the adjustments in the designed order that emerge from this struggle align with some economic principles but remain incompatible with others, or are inadequately ordered and dosed over time, then they will either not be sufficient to eliminate or diminish the unsatisfactory aspects, or they will face opposition that cannot be overcome.

As it will become clear in my presentation, what is happening now to the global economic order has its roots in rules that we designed and adopted long ago, which we considered either fair or useful, but which violate objective economic principles. It will also turn out that the very elimination of those rules generates, temporarily, undesirable consequences or may be incomplete or may lead to the adoption of new designed rules blatantly at odds with the spontaneous order. This latter effect occurs if those who have the desire, but also the task of receiving and transposing the signals regarding the need to return to market order into appropriate adjustments in legislation have only a partial understanding of the global economy as a spontaneous order. The rise of tariff protectionism is evidence of this incomplete understanding.

At the global level, the economic order is spontaneous order because, at the level of each country, the social order is first and foremost spontaneous order too, which, as I have shown in the “Letter to Augustine”, is always overwhelmingly prevailing over the projected order. It retains this character at the level of a country if there is no intention and power for the spontaneous order to be suppressed. But even if, at the level of one or a few countries, the spontaneous order were suppressed by democratic or authoritarian means, at the global level the economic order would continue to remain predominantly spontaneous order. This would happen because technological inventions and innovation would take place almost exclusively in economies where spontaneous order dominates, expanding the latter and increasing its complexity globally. These economies would become more prosperous and more united. Consequently, no matter how much the authorities in different countries would strive to design the social order, on the whole, the order remains essentially and predominantly spontaneous order.

Although, in general, in various countries (except dictatorships), spontaneous order is preponderant, this does not mean that the rules that lead to spontaneous order are of the same nature. In Western countries, spontaneous order arises mainly because each of us follows, for the most part, the rules of good conduct, discovered over thousands of years. Of course, we also follow designed rules, but these are a relatively thin layer compared to discovered rules, but even they produce spontaneous order through unintended consequences (Hayek, “Law, Legislation and Liberty”, 1993). All these discovered rules constitute a tradition that, in the West, is essentially liberal. Our well-being and solidarity in the West are produced by this spontaneous order based on a tradition of rules that reflects the fact that we discover freedom.

However, there are also societies/economies that owe their existence to traditions whose essence is not liberal. In other words, the global economic order is overwhelmingly a spontaneous order, but it constantly reflects the result of behaviors that are guided by rules of different natures. On the one hand, there is the conflict between the designed and the discovered rules, which we see everywhere, and on the other hand, the conflict between the liberal tradition of the West and other traditions. However, objective economic principles operate in the economy, and economic laws have their say and sanction or correct behaviors that tend not to obey the necessities expressed by the objective principles. Thus, at the global level, economic behaviors tend to be guided, in general, by common rules.

This does not mean that different ideologies, notions about reason, moral beliefs, or insufficient knowledge do not lead to the violation of economic principles. It is precisely from the violation of these principles that all the tensions that arise in the world economic order start. Perhaps the most violated of all principles is the one of which the world is least aware, namely the universal principle of ignorance, which reflects the ever-increasing division of knowledge of particular facts. Violation of this principle occurs, both at the level of individual countries and at the level of the global economic order, when decision-makers believe they know what the economic and social order should look like, even though no one can know the particular facts on which the order is based. This principle requires that our actions to realize our personal plans be free within the limits of a discipline imposed by the rules of good conduct that we have discovered. In this way, our personal interests align with those of the public, by following and discovering rules that expand our freedom, allow our cooperation, and make our actions more efficient.

An example of how individual freedom of action, guided by discovered rules of good conduct, can lead, at a global level, to the expansion of freedom, to the increase of economic integration and cooperation, and to the efficiency of actions, is the gold standard. This system was not designed, but discovered. Its essence was that it offered Western countries an international monetary system, although the countries had no purpose in seeking this and did not try to design it. It was so effective that countries outside the West, such as Japan, adopted its rules in order to have access to Western capital.

The emergence and spread of the views according to which economists, sociologists and political scientists can use methods similar to those of physics to design policies that would improve the economic order in accordance with well-defined goals set for it was an important reason for abandoning the gold standard. In the monetary field, the positivist idea of ​​abandoning the automatic monetary policy rule of the gold standard and adopting an activist rule to stabilize prices (with a different objective than that of the gold standard) emerged as early as the 1920s. Economists such as Irving Fisher, Gustav Cassel, Ralph George Hawtrey, and John Maynard Keynes supported this idea. It is very likely that these constructivist conceptions and the epistemic authority of their supporters encouraged the authorities of some countries to use the economic crisis of 1929-1933 and its painful consequences to abandon the gold standard with the confidence that they were doing something necessary and useful. After the suspension of the discovered rule of the gold standard, which we arrived at after several hundred years of experience, in less than 100 years two other rules were used successively, but which were not discovered rules, but designed rules: the Bretton Woods agreement and the current international monetary system.

These two rules were intended to create an international monetary system that would allow fiscal and monetary policies to contribute directly to the elimination of unsatisfactory aspects of society that were wrongly attributed to the spontaneous order of the market. As I will show below, these two designed rules either were the direct source of tensions in the global economic order or facilitated what the gold standard system did not allow, namely the adoption of purposeful rules that led to the current tensions in the international economic order, including the current tariff war.

To facilitate understanding of how the current monetary system or the Bretton Woods system has led, since its adoption until today, to major tensions in the international economic order, including those we are facing today, it is necessary to mention first that any country needs to find a coherent solution to what is called the “macroeconomic policy trilemma” or the “impossible trinity” (Mundell, 1963; Obstfeld and Taylor 1997). Any country, if it wants to have coherent macroeconomic policies, must accept that it cannot have a fixed exchange rate, an active monetary policy vis-à-vis domestic objectives such as inflation or employment, and mobile capital at the same time. A country can choose to have a fixed exchange rate, mobile capital and leave monetary policy with a passive role towards domestic objectives. Alternatively, if the country wants to have an active monetary policy, then it needs either to control capital movements and maintain a fixed exchange rate, or to accept free capital flows and a flexible exchange rate (the current system).

Although it seems like a technical problem, the solution to the macroeconomic policy trilemma depends crucially on the prevailing spirit in society. This dependence is fundamental to understanding my argument about the tensions in the global economic order. Wilhelm Röpke (1959) showed that the basis of the gold standard was the classical liberal “spirit” (Röpke’s emphasis; see “International Order and Economic Integration”, D. Reidel Publishing Company, Dordrecht-Holland). When the classical liberal spirit prevailed, which was consistent with the principle of ignorance reflecting the division of knowledge, the goals pursued were to separate the economic process from state intervention. There was a movement by governments to refrain from designing economic order, as if it were understood that such designing is mostly useless and harmful in terms of unintended consequences.

Interestingly, people discovered the solution compatible with the spontaneous order of the West before they discovered the very problem of impossible trinity. The gold standard emerged spontaneously not elsewhere, but in the West, whose liberal tradition allowed it. Economically, Western society benefited from the guidance of this tradition and, since the 18th century, has always been more developed than other civilizations. Technically, the exchange rates of the currencies of different countries were fixed in relation to a quantity of gold and between them, capital moved freely, and monetary policies were passive in relation to employment and inflation, but active in order to maintain fixed exchange rates. A country’s monetary policy depended on the outcome of all private transactions. If a current account deficit resulted, then monetary policy had to reduce the money supply and, as a result, increase interest rates, in order to stimulate gold inflows, and if a current account surplus appeared, it had to increase the money supply, with the consequence of reducing interest rates, in order to stimulate gold outflows. This standard (rule) worked well from 1873 to 1913, before the start of World War I, and less so until 1933, because, in the 1920s, some central banks began to be concerned with inflation, including under the influence of the economic positivism that I mentioned with reference to Keynes, Fisher, Cassel and Hawtrey.

What I am particularly interested in emphasizing for the purpose of my argument is that, through the gold standard rule, the value of money was protected from the influence of government policies and was left to depend on society, that is, on the market and on objective principles reflecting necessities that we can only dodge in the short term. Equally important, the gold standard removed most of the economic sources of conflict between sovereign states (for these aspects, see Röpke, 1959). Overall, this contributed to the reduction of the sources of conflict between sovereign states, sources that remained for the most part of a nature other than economic.

When the classical liberal spirit was replaced by a collectivist spirit, which made interventionism its main instrument to achieve goals on behalf of society, economic activity was no longer firmly separated from political activity. In this way, the spontaneous solution to the macroeconomic policy trilemma given by a society in which the classical (authentic) liberal spirit reigned, based on true individualism, no longer had any basis. Two visions of society contributed mainly to the erosion of this basis. One was the organicist one, which from ancient times provided a permanent support for those who wanted to justify putting the interests of society above those of the individual. The other was the ideology of „new liberalism”, which spread from the end of the 19th century to introduce the idea of ​​an interdependence between the individual and society, creating the premises that, as early as the 1920s, in the West there was discussion of improving society by designing redistribution rules (policies), redistribution that had to be financed from taxes.

Both views that have helped to replace the liberal spirit have sprung from the error that underlies all major errors in the social sciences, namely the error of considering that all natural processes in society that are not rooted in instinct are determined by reason or intention. Once such a conception is adopted, it can give rise to a multitude of erroneous doctrines about what the social order should look like in order to be able to achieve a goal or a „hierarchy of ends” (the expressions belongs to Hayek). Distributive justice or climatic justice are such goals. But in reality, as I mentioned above, spontaneous order is overwhelmingly prevailing over designed order, which means that natural processes that are not determined by reason or intention are overwhelmingly preponderant. They are based on knowledge dispersed in society, where everyone is free to conceive a plan (reason and intention) based on personal knowledge, but which he can only carry out if he follows the general rules of good conduct. These rules in their coherent totality have been acquired throughout our selective evolution and form the wisdom of spontaneous order (Hayek, “Law, Legislation and Liberty”). Once this conception operates, it can give rise to only one doctrine, namely that of classical liberalism. Only this doctrine allows us to have a correct method of research in economics and to discover what adjustments compatible with the market order we can make to our institutions so that we have a chance to reduce the unsatisfactory aspects of the social order.

Now, if we take into account the reality that there are nation-states operating in the world and introduce the problem of the trilemma, we see that classical liberalism allowed the wisdom of spontaneous order to lead us to the gold standard. In contrast, those doctrines elaborated by those who believe that, without the help of wisdom acquired spontaneously through selective evolution, reason or intention can produce functional and effective social and economic order, have led to the replacement of the gold standard and have stimulated the design of a solution to the trilemma that, if not directly supporting, at least allows actions aimed at achieving the illusory objectives regarding the economy and society.

It is no exaggeration to say that the problems of the global economic order in which nation-states operate, including the current problems, have their roots in the solution given to the macroeconomic policy trilemma in the absence of the authentic liberal spirit. More precisely, the deep source of these problems began to emerge when the liberal spirit began to be replaced. The conviction of some economists, successfully transferred to the political sphere, that society can be built by designing rules, required that the solution given to the trilemma be one that would allow the economy to achieve a goal (an economy that cannot have a goal because it is overwhelmingly spontaneous order) and that would make interventionism the main instrument for managing the economy.

In this solution, unlike the gold standard, fiscal policy can exercise dominance over monetary policy, especially if there is no clause prohibiting it, making the system vulnerable to inflation. The lack of understanding of the fact that society functions as a selective spontaneous order had its say, and in 1944, the solution known as the “Bretton-Woods system/agreement” was adopted. I will not go into details, but I will mention what is relevant to the subject of this essay: the degree of economic integration decreased, and the space for economic conflicts between participating states widened. There were many tensions between the US and de Gaulle’s France, with the latter claiming that the system was particularly beneficial to the US because only the dollar was backed by gold. Finally, when the US balance of payments deteriorated and the dollar began to depreciate, including due to many transfers for the reconstruction of war-torn countries, Britain and France demanded that gold itself be used between central banks, and the agreement was denounced by President Nixon in 1971.

The current solution to the trilemma, so that monetary policy could be active, consists of the use of flexible exchange rates and capital mobility. It emerged in the early 1980s. The new solution was adopted because, in theory, it would allow monetary policy to reflect the domestic financial conditions of each country, and the interference of countries’ monetary policies with the financial conditions of other participating countries to be almost suspended by the free float of the exchange rate. It is increasingly questionable whether, in the conditions of extraordinary market integration, this hypothesis is still or has ever been realistic.

By contrast, unlike the spontaneous solution of the gold standard, the current solution allows for the blurring of the boundary between economy and state, although the blurring does not have to be actually practiced. Thus, it is important for my argument to emphasize that the solution is open to both possibilities: both liberalism and interventionism. What will concretely support the solution depends on the prevailing spirit in society. After its adoption, in the 1980s and then until 2008, especially in the 1990s, the solution served a more liberal spirit compared to what followed. After 2008 and up to the present, much more than was present even at the adoption of the Bretton Woods agreement, with which it would have been better suited, the dominant spirit is that of social justice (more equality through redistribution), doubled by “climate justice”. Moreover, the entire tradition of learned rules of the West began to be attacked not only from the perspective of social (distributive) justice, but also from the perspective of cultural progressivism, which, in essence, tries to send the tradition into ridicule, rendering optional the compliance with the learned rules that make it up.

These developments generated effects that had the potential to bring the economy, economic issues and economic policies back to the center of disputes between states. On the one hand, it mobilized right-wing voters, who brought to power opponents of the concept of social justice and of interventionism through regulations that hinder the freedom of markets, but also opponents of cultural progressivism. In the US, this influence, among others, resulted in the new Trump administration. At the same time, they brought to the fore the ideas of philosophers such as Nick Land or bloggers such as Curtis Yarvin, who, rejecting the inept idea of ​​economic equality, come up with other totally wrong ideas, such as those that democracy is a brake on progress, that democracy and freedom are incompatible, that a nation can be run like a corporation, that some races are naturally inclined towards servitude, etc. This proves an understanding not only incomplete, as I have indicated above, but also wrong, of the fact that our well-being can only continue if the economic order at the level of a country or at the global level remains overwhelmingly spontaneous order.

On the other hand, from the perspective of the global economic order, a source of tension comes from the fact that not all countries practice fully flexible exchange rates under conditions in which capitals are mobile and monetary policies are active with respect to domestic objectives. In China, the yuan exchange rate does not float completely freely, like the US dollar, and the rule of pragmatically devaluing it has effects, including on the US balance of payments. Added to this are industrial subsidy policies, which favor Chinese exports over competitors. In the euro area, the solution to the trilemma is similar to that of the gold standard for the countries that compose it, since the countries have a single currency and do not have active monetary policies, having a single nominal interest rate. However, the Union behaves towards the rest of the countries as an entity that respects the solution based on flexible exchange rates and capital mobility.

The euro area inflation targeting strategy should not have negative effects on other countries. However, in the absence of a fiscal union, negative effects may occur. In practice, euro area national states may have budget deficits that are often and for a long time above the levels required by the fiscal rules designed to prevent or correct such situations. Thus, the single monetary policy of the currency area may de facto conflict with the various fiscal policies of the area and the factors influencing them, with unintended negative consequences.

In the euro area, various factors, including cultural ones, determine that some countries are more inclined towards sustainable policies, while others prefer policies that favor solidarity. This translates into attitudes towards competitiveness and inflation within the union, which makes real interest rates different, tending to produce a segregation of the union into countries with current account deficits and countries with current account surpluses. This feature can contribute to the widening of global imbalances. As I have mentioned on other occasions, for the former governor of the Bank of England, Mervyn King, these imbalances could have such a destabilizing force at a global level that he was worried not that the Eurozone would fall apart, but that politicians would do everything in their power to maintain it (see Mervyn King, “The End of Alchemy: Money, Banking and the Future of the global Economy”, Little, Brown). Together, countries with surplus savings, such as Germany, in the Eurozone, Japan, China and other countries in Southeast Asia and, last but not least, some oil-exporting countries, make the USA a kind of borrower of last resort (the only one who still borrows).

Finally, Russia, which is a great military power, has, according to Freedom House, an “authoritarian political regime”, and its economy is based on the extraction of hydrocarbons. This makes it vulnerable to liberalism. That is why Russia will not promote liberalism at home and will not look favorably on liberalism from abroad. The return of liberalism in Western countries is a great economic threat to an authoritarian political regime that manages an economy dependent on oil and gas exports. To understand this, it is necessary to understand that progressive policies of „greening” at speeds above the natural rhythms identified by the market have created a big problem for Russia, although these policies are not liberal. But an even bigger problem would arise for the Russian economy from a transition in Western countries to truly liberal policies in the classical sense of the word. Thus, both the liberal revision of energy policies in Europe, but especially the liberalization of the hydrocarbon market in the USA, will create a big problem for the Russian economy.

The situation seems unique, but, because nothing is new under the sun, there are also old experiences that help to understand the current context. History shows us that the distributive justice on which feudal society had focused and which it wanted to achieve through fair prices, not through redistribution, as is the case today, generated another extreme: mercantilism. By virtue of this philosophy, the state, starting from the Renaissance period and up to the era of the Scottish Enlightenment, opposed distributive justice with a policy of extensive regulation, usually inflationary, in order to align private and public interests. Essentially, mercantilism was based on the conception according to which private and public interests are divergent, and their convergence can be ensured through regulations, interventionism and protectionism. Mercantilism was a policy against the free market; market freedom was restored only when it was understood that private and public interests converge because the pursuit of self-interest leads to the discovery of good rules for society, to prosperity, to cooperation and to solidarity that results from the expansion of business.

The liberal perspective of the Trump administration regarding domestic policies is incompatible with mercantilism. The intentions to reduce excessive regulation are an indication in this sense. As I have shown, flexibility of the currency exchange rate, the free movement of capital, and an active monetary policy are compatible with both the morals of social justice and the liberal one, so that, from a domestic perspective, the current solution given in the US to the macroeconomic policy trilemma is fully compatible with the expansion of market freedom. But this solution does not seem as good in foreign relations, especially in relations with those partners using competitive devaluations. From this perspective, it seems that domestic liberalism can be combined with the mercantilist practice of increasing customs tariffs.

Unfortunately, the results will not be the best. The tariff war will lead to a slowdown in the expansion of trade relations, to a recession, as it did during the crisis of the 1930s, but probably also to inflation. At the deepest level, what has led to this tense situation in global economic relations is the repeated attempt to design and implement policies to promote distributive justice in the West. This idea led to the replacement of the gold standard, a solution discovered to provide an international monetary system with nation-states, but which, at the same time, did not allow the formulation of policies aimed at distributive justice. The solution represented by the gold standard was oriented to support in the participating countries primarily the objectives of policy sustainability, not the illusory ones of distributive justice.

The Bretton Woods and the current systems cannot prevent repeated attempts to achieve the intangible objective of distributive justice. The repeated attempt, especially after the 2008 crisis, to promote distributive justice along with cultural progressivism could be the root cause of a tariff war breaking out at the very heart of the West. The only thing is that the West alone would incur losses from such a war. It seems that the lesson to be learned by the West is that it cannot turn against its traditions of rules of good conduct discovered over thousands of years without paying a heavy price.

Perhaps one of the best examples supporting this truth is that, by abandoning the solution we discovered to the macroeconomic policy trilemma, namely the gold standard rule, we abandoned the only mechanism we knew to prevent ourselves from endlessly trying to achieve the illusory goal of distributive justice. Once the spirit of distributive justice or, occasionally, other unattainable goals began to dominate, inflation increasingly became a policy of governments. Once we adopted the other two solutions, we found ourselves engaged in a permanent effort to design institutional frameworks that would allow us to use monetary policy in a way that would preserve the value of money as best as possible.

Since then, we have been making this effort continuously. It has a chance of success, because a particularity of the extremely complex structure of the market is adaptability (Hayek, „Law, Legislation and Liberty”). The elements of the structure are constantly fighting, spending immense resources, to eliminate those designed rules that do not serve order. We have often failed, and when we have succeeded, the results have generally been less good than in the gold standard period. But, in the logic of spontaneous order, sooner or later, the constant need to find a mechanism to compensate/counterbalance what seems to be a feature of any generation, namely the inability to avoid social superstitions, from which, in the end, many episodes of high inflation derive, will probably make us discover it. It will be, in essence, a rule that, like all good rules, will result from our actions, although, most likely, it will not be a project of ours. Perhaps, just as we learned that the elimination of private property in the production of means of production led to the disappearance of innovation in former socialist countries, we will also learn that the attempt to replace the distribution that the market does with the redistribution that governments do is, ultimately, the basis of inflation in capitalist countries.