Why Einaudi Was Wrong About Nationalism

Culture - April 12, 2024

European Diary: Nicosia, March 2024

In the spring of 1983, Friedrich A. von Hayek visited a group of students at Oxford University. They wanted to establish a Hayek Society to discuss conservative and classical liberal ideas. I was one of these students, at the time writing a doctoral dissertation on Hayek’s theories. Hayek expressed his pleasure that young people were interested in his ideas. But he set one condition for us to use his name: ‘You must promise not to become Hayekians. I have observed that the Keynesians are much worse than Keynes, and the Marxists much worse than Marx.’ I have not always been able to fulfil our promise to Hayek, because I am largely in agreement with him on philosophy and politics. He has in my opinion provided the most profound intellectual defence in the twentieth century of the free society. But as I told the audience of my lecture at the ECR Party Cultural Weekend on 29–30 March 2024 in Nicosia, Cyprus, I would not share the rejection by Hayek and many other prominent liberal thinkers of the nation state. Unlike Hayek, I would tend to support it, although it is by no means the only possibility of a political arrangement.

Einaudi’s important ideas about taxation

My lecture was about themes from a forthcoming book of mine where I compare Nordic liberalism, articulated by the prolific Danish poet and pastor Nikolaj F. S. Grundtvig, and a Southern variant, presented by the eminent Italian economist Luigi Einaudi, President of Italy between 1948 and 1955 and widely regarded as one of the fathers not only of the Italian economic miracle after the Second World War, but also of the European Union. I praised Einaudi’s important contributions to public finance. One of them was about the just tax. In the search for a just tax the Swedish economist Knut Wicksell had proposed the unanimity criterion: This would be the only way to apply the principle of non-coercion prevalent in the free market to politics. In the free and competitive market people only exchange goods and services by mutual consent, usual based on their views on what is to their own benefit. In politics however there is always a danger that a group with political clout would use it to serve their special interests.

Einaudi however believed that the unanimity criterion was not practical, for several reasons. He proposed instead the acceptability criterion. If a tax was widely accepted, then it could be considered a just tax, to be paid with almost the same composure as a freely chosen good or service in the market. After all, a just tax was payment for the indispensable services of government which could indeed, Einaudi believed, be seen as the fourth factor of production, with labour, land, and capital. Taxes, wages, rent, and interest should all be regarded as prices for the essential services of these four factors of production, respectively. It followed that it would seem as strange to allocate taxes according to the ability to pay as to charge a price for bread sold in a bakery not according to its ability to satisfy the consumers, but according to the different means of the customers, so that the rich man would pay more for his loaf of bread than the poor one. Einaudi’s point is, I think, a cogent argument against progressive taxation. Government provides services which should be priced (financed by taxes) in such a way that its customers (citizens) would derive maximal satisfaction from their provision.

Einaudi made another important point about taxation: The taxation of income from capital is a case of double taxation because the capital had been accumulated by saving on income. (This argument was already made by John Stuart Mill in the nineteenth century, as Einaudi observed.) Consider two individuals, Luigi and Fabio, enjoying the same annual income. Luigo is thrifty and enterprising, and he puts half his annual income aside for investments, perhaps in his own little family company. Fabio on the other hand each year spends all his income on goods and services. Both have paid the same amount of money in income tax. But while Luigi then has to pay in addition a tax on his income from the capital derived from his saving, Fabio has no more tax to pay. In other words, taxes on wealth and capital gains punish the thrifty and reward the profligate. Hitherto, thriftiness has been considered a virtue and profligacy a vice. Moreover, such taxes reduce the amount of money available to entrepreneurs and venture capitalists, the engines of progress under capitalism. Usually, the inheritance tax is a case of triple taxation: first the initial income is taxed, then the income of the thrifty from their savings is taxed, and finally the wealth accumulated by them over the years is taxed; thus, they are not allowed to pass it all on to their children or to dispose of it in other ways (for example as private charity).

Non-Aggressive Nationalism

Einaudi was right about many issues. But he was, like Hayek, wrong in rejecting nationalism, I told my audience in Nicosia. He had of course in mind the bellicose nationalism which he had witnessed in the First World War, cynically used by demagogues to stir up the hatred of one nation towards other nations, usually involving a call to conquer other territories and subdue its inhabitants. But a distinction has to be made between this odious kind of nationalism and the non-aggressive nationalism presented by Grundtvig, based on the will of a community to form a state because it shares a culture and a history, and often a language. The contrast between the two kinds of nationalism was clear in the Schleswig conflict between Denmark and the German Confederation. It was a peculiar conflict. The Danish king was Duke of Schleswig which originally had been almost totally Danish-speaking, but in the 1860s it was divided almost evenly between Danish speakers in Northern Schleswig and German speakers in Southern Schleswig. Danish nationalists wanted to annex the whole of Schleswig, forcing the Germans in Southern Schleswig to become citizens of Denmark. German nationalists also wanted to annex the whole of Schleswig, forcing the Danes in Northern Schleswig to become citizens of a German state. Thus, both groups were aggressive nationalists. Grundtvig however proposed that Schleswig should be divided between the two communities where the Northern half would become part of Denmark and the Southern half part of Germany.

In a famous poem, Grundtvig expressed the idea of nationality by consent:

Of a ‘people’ all are members

Who regard themselves as such,

Those whose mother-tongue sounds sweetest,

And their fatherland love much.

The same idea was later set out by French historian Ernest Renan in a lecture on the concept of a nation: The history, language and location of a group might all be important in shaping its identity, but ultimately none of those attributes determine what is a nation, Renan said. The Americans and the British speak the same language, but they are two different nations. The Swiss are a nation, even if they speak four languages. German-speaking Europeans belong to at least three states, Germany, Austria, and Switzerland (alongside small minorities in Belgium and Italy). As Renan put it, a language invites people to unite, but it does not force them to do so.  What is crucial is the will of the group to live together under the same law, in the same state. It is its spontaneous and voluntary self-identification: ‘It presupposes a past; it is summarized, however, in the present by a tangible fact, namely consent, the clearly expressed desire to continue a common life. A nation’s existence is, if you will pardon the metaphor, a daily plebiscite, just as an individual’s existence is a perpetual affirmation of life.’ Renan added: ‘If doubts arise about national borders, consult the population of the area in dispute. They have the right to an opinion on the issue.’

Denmark and the German Confederation fought two wars about Schleswig. In the 1864 Second Schleswig War, Denmark was defeated and lost both Schleswig and two other German-speaking territories. A minority of 200,000 Danish speakers in Northern Schleswig found themselves in Prussia, against their will. After Germany’s defeat in the First World War Grundtvig’s old proposal was finally implemented. In 1920, Schleswig was divided into three zones which could choose between Denmark and Germany. The northernmost zone overwhelmingly voted for Denmark, and after the central zone had overwhelmingly voted for Germany, it was thought to be unnecessary to hold a referendum in the southernmost zone which would obviously have voted for Germany. Accordingly, the border between Denmark and Germany was moved southwards, and on 10 July 1920 Danish King Christian X rode majestically on a white horse over the 1864 border (as depicted in the painting above, by Hans N. Hansen). Today Denmark is, like the four other Nordic countries, an example of a well-functioning nation state where the citizens feel at home. Civil society—the intermediate social space between the individual and the state—is vibrant there as in the other Nordic countries. The Danes live neither in a fortress nor a prison. They are proud of their identity and heritage, without rancour or bitterness towards other nations.

Restoration of the Subsidiarity Principle

Einaudi thought that a confederation like the League of Nations (and before that the Holy Roman Empire) was too weak to keep the peace and ensure an effective framework for production and commerce within a common European market. Therefore he proposed a European federation, with a military force, a common currency and a legislative body although he affirmed that the tasks of such a federation should be reduced to an indispensable minimum. In my talk, I pointed out that these three proposals did not turn out to be very realistic. First, it was NATO, the North Atlantic Treaty Organisation, that ensured Europe’s defence, with the crucial help of the United States and Canada. Therefore, a special European military force is superfluous. Instead, NATO should be strengthened, to keep the Americans in and the Russians out.

Secondly, when a common currency was being planned in the 1990s, leading German economists twice issued public warnings that Europe was not prepared for it, because the economies of the member states had not converged sufficiently and because there was not in the rest of Europe the same determination as in Germany to maintain a stable currency. Unfortunately, they have been proven right. Although strict rules about the euro were initially enacted, they have been repeatedly broken. Einaudi had been a strong supporter of a common currency. ‘The advantage of the system would lie not only in the calculation and convenience of cross border payments and transactions. Although very considerable, that advantage would be small compared to another, much greater one: the abolition of the sovereignty of individual states in monetary matters,’ he had written in 1944. ‘If the European federation makes it impossible for individual federated states to pay for public works by printing more banknotes, and forces them to raise the necessary funds solely with taxes and voluntary loans, it will have accomplished, by that alone, a great feat.’ This has not been the case. The euro is no D-Mark. The problem of soft money has been transferred from the national to the European level.

Thirdly, legislative power in Europe is in fact not held by the European Parliament, but by the non-transparent, non-elected European Commission. The judges of the Court of Justice of the European Union, CJEU, almost always rule in its favour, and they have decided that its stipulations take precedence over national law. Self-selection and a quest for increased power may explain many of its judgements. The European Commission and the CJEU largely ignore the Subsidiarity Principle: that political issues should be resolved at the most immediate or local level possible. The Subsidiarity Principle was clearly stated in the 1931 Papal Encyclical Quadragesimo anno, §79: ‘Just as it is gravely wrong to take from individuals what they can accomplish by their own initiative and industry and give it to the community, so also it is an injustice and at the same time a grave evil and disturbance of right order to assign to a greater and higher association what lesser and subordinate organizations can do.’ In my talk in Nicosia, I suggested that perhaps the tasks of the CJEU could be divided between two courts. The present CJEU should rule on purely legal issues, whereas a special Subsidiarity Court should decide cases of competence between the member states and the Union, with the Subsidiarity Principle as lodestar.

A European Federation of Nation States

When the European Economic Community was formed in 1957, its aim was to defend the four freedoms, the free movement of goods, capital, services, and people across European borders, thus to bring Europeans closer to one another and reduce the likelihood of conflicts and wars. For the next thirty years it fulfilled this aim admirably. ‘The common market was a highly successful attempt to remove the barriers to trade and capital movements that the national governments had erected. It increased efficiency as well as freedom. Moreover, by strengthening competition, it reduced the need for government intervention in the economy,’ the distinguished German economist Roland Vaubel wrote in a perceptive paper for the English Institute of Economic Affairs. But in the 1990s the focus shifted from economic to political integration, or centralisation. The aim was no longer a common market, but rather a United States of Europe. In my talk in Nicosia I expressed doubts about the desirability of this development. A European federation of nation states was preferable to a new superpower. Perhaps some inspiration for such a federation might be sought in the close but spontaneous cooperation of the five Nordic countries, within the Nordic Council and elsewhere, with minimal surrender of national sovereignty.