Why Democracy Needs Rules and Laws

We are living through a period of acute economic and political strain, one in which economies are unstable, technology is disrupting work and political institutions as well as post-World War II alliances are under pressure.

Unsurprisingly, Americans and others increasingly doubt that the systems governing their lives are working in their interest. Democracies are being tested by external shocks, but more importantly by doubts about whether vital institutions can be trusted.

The erosion of trust

The defining problem of our time is the erosion of trust in democratic political and economic institutions, the growing belief that they cannot restrain power before it hardens into domination.

History tells us that democracies cannot depend on people restraining themselves; they must rely on rules and laws strong enough to withstand political and economic ambitions that are very powerful.

Remember good government?

The American Founders understood this with unusual clarity. In The Federalist Papers, James Madison argued that good government cannot assume that people are guided by “better motives.”

Madison insisted that the need for checks and balances applied not only to formal politics, but to “the whole system of human affairs, private as well as public.”

The broad remit of checks and balances

This fundamental insight is often remembered too narrowly as a theory of constitutional checks and balances. In fact, it is a much broader claim about human nature and behavior.

Power does not confine itself to legislatures or courts. It accumulates in the economy, professions, finance, and social hierarchies. When institutions are not strong enough to contain and channel power it becomes dangerous to freedom.

Freud’s challenge for today’s democracies

Nearly a century ago, Sigmund Freud gave the American Founders’ intuition a psychological foundation. Civilization, living together in society, requires repression, he said. Human beings are competitive, aggressive and status-seeking.

These traits do not vanish with education or prosperity. When societies pretend otherwise, human aggressiveness emerges as domination and eruptions of violence.

The task of a free and democratic society is not to eliminate ambition and power, it cannot, but to channel these forces into forms that are socially and politically tolerable.

The end of the virtuous power-sharing cycle

For much of the period after World War II, a growing number of democracies, often with the American model in mind, managed this balance.

In the United States, intense rivalry in politics, business, academia, media, sports and even religion was widely accepted because it substituted rule-bound competition for raw coercion.

Antitrust enforcement restrained economic concentration. As a very hands-on and very positive result, more Americans had access to education and media reflected a broad range of opinions.

Taxation limited the power of money, and the post-war economy grew faster than it has been growing recently thus easing tensions. Political institutions were independent enough to arbitrate among competing interests.

The corrosive nature of American domestic devolution

In recent decades, however, this relatively smooth balance has been shaken. Politics, instead of enforcing agreed rules, is more often captured by entrenched players. Political and economic winners become harder to challenge, and elections have become less meaningful.

When opportunities to gain influence and wealth narrow, citizens suspect the game is rigged. And when institutions appear unable or unwilling to check power, Americans and others lose confidence in their fairness.

The erosion of freedom

It was this danger that John Maynard Keynes had in mind when he defended capitalism on the grounds that it was better for people to battle competitors for money than to fight their fellow men in efforts to exclude them from power and influence: Economic competition is a useful outlet for human aggressiveness.

Keynes also understood, as Alexander Hamilton had long before him, that competitive striving was productive, but when economic success comes to claim broader authority, it erodes freedom itself.

In modern politics, one distinction is critical and cannot be allowed to blur: Economic inequality can be tolerated in a democracy within limits, but political domination cannot.

The challenge is not to suppress ambition and wealth-seeking, but to ensure that they remain contestable, reversible and bounded.

Why governments at all levels do not set rules for competition

This institutional challenge was taken up very clearly by the American economist Henry Simons, widely regarded as the founder of the Chicago School of conservative economics. Writing in the 1930s during the Great Depression, most notably in A Positive Program for Laissez-Faire, Simons argued that competition is a public good that governments should preserve.

When governments at all levels do not set rules for competition, markets concentrate and become self-serving private governments, a regression toward the oppressive economic arrangements all too familiar in history.

The danger, Simons warned, was not capitalism itself as leftists claimed, but capitalism without firm rules to keep power contestable.

The cost of foregoing good traditions

By and large, the American political economy after World War II operated in a competitive framework. Over time, however, antitrust enforcement weakened, tax policy that first worked to enlarge the middle class stopped doing so, educational programs like the GI bill lost ground, and financial institutions became increasingly powerful.

Together, these changes led to slower growth but perversely also allowed economic success to convert into political dominance.

When the rules are written by and for the winners

The lesson is not ideological. When citizens believe the rules are fair, they will tolerate unequal outcomes. When they believe the rules are written by and for the winners, trust erodes.

Both the political system and the economy become less open and free. Americans certainly sense this.

It is why a free United States must begin with federal, state and local governments that preserve political and economic competition and openness.

Lessons for the United States – and beyond

The reality we have to contend with is that inequality will persist. Likewise, conflict and the will to power are unavoidable. The question is whether those forces are governed by laws and practices that keep power in check, as the American Founders hoped they would, or whether power will be allowed to harden into permanent authority.

In a period of distrust and anger, the insights of the Founders remain the surest way to keep America and other democracies free.