Ocampo, Emilio

Working Paper
The populist threat to liberal democracy

Serie Documentos de Trabajo, No. 774

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University of CEMA, Buenos Aires

Suggested Citation: Ocampo, Emilio (2021) : The populist threat to liberal democracy, Serie
Documentos de Trabajo, No. 774, Universidad del Centro de Estudios Macroeconómicos de
Argentina (UCEMA), Buenos Aires

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 UNIVERSIDAD DEL CEMA
Buenos Aires
Argentina

Serie
DOCUMENTOS DE TRABAJO

Área: Economía y Ciencia Política

THE POPULIST THREAT TO LIBERAL DEMOCRACY

Emilio Ocampo

Enero 2021
Nro. 774

www.cema.edu.ar/publicaciones/doc_trabajo.html
UCEMA: Av. Córdoba 374, C1054AAP Buenos Aires, Argentina
ISSN 1668-4575 (impreso), ISSN 1668-4583 (en línea)
Editor: Jorge M. Streb; asistente editorial: Valeria Dowding jae@cema.edu.ar
 The Populist Threat to Liberal Democracy*

Emilio Ocampo**

Abstract

Populism is no longer considered a disease of the developing world. In recent decades it has
spread throughout Europe and North America, while maintaining its grip on its historical
stronghold, Latin America. Populism now represents the biggest threat to the survival of liberal
democracy. However, confusion about what it means prevails, even among academics. Unlike
communism, which attacked democracy frontally and sometimes violently, populism works from
within by appealing to negative emotions that weaken society’s cultural antibodies. In any of its
ideological variants, it proposes simplistic, arbitrary and costless measures to overcome society’s
structural problems that end up damaging the economy and weakening the rule of law. This
essay outlines the main elements of a conceptual framework that can be useful to analyze the
roots of modern populism, understand how it chooses its ideology and predict how it will likely
evolve. It also draws parallels with threats to liberal democracy during the interwar period and
extracts insights from the contemporary interpretation provided by two leading intellectuals:
Joseph A. Schumpeter and Friedrich A. Hayek.

Key words: populism, liberal democracy, authoritarianism.

* Revised version: May 3, 2021. This version includes substantial changes on the original.
** Professor of Economic History and Director of Center of Studies in Economic History at Universidad del CEMA (UCEMA).
Any mistakes are my sole responsibility. The viewpoints expressed in this article do not necessarily represent those of UCEMA.
 The Populist Threat to Liberal Democracy

Emilio Ocampo

Of those men who have overturned the liberties of republics, the

greatest number have begun their career by paying an obsequious
court to the people; commencing demagogues, and ending tyrants.
Alexander Hamilton, The Federalist Papers

The tyranny of the majority is now generally included among the

evils against which society requires to be on its guard.
John Stuart Mill, On Liberty

In a recent interview Mario Vargas Llosa warned that the worst and most dangerous enemy of
liberal democracy is no longer communism but populism: “No one in their right mind wants to
model their country on North Korea, Cuba or Venezuela. Marxism is already on the fringes of
political life but that’s not the case with populism, which shatters democracies from within. Far
less direct than an ideology, it is a tendency weak democracies are unfortunately vulnerable to.”1
It now seems evident that even in the most politically advanced countries unchecked populism
can not only corrode but also destroy the foundations of liberal democracy.2

What is populism? Almost two decades ago, political scientist Margaret Canovan noted that very
few of her colleagues in academia paid attention to populism because they considered it a
“pathological symptom of some social disease” characteristic of less developed countries, or a

1
Vargas Llosa (2018). See also Vargas Llosa and Vargas Llosa (2018).
2
Recent events have also shown that individual freedom faces other threats as well. In the face of the Covid-19 pandemic,
democratically elected governments throughout the world have restricted economic and civil liberties (see Freedom House, 2020)
Time will tell whether these restrictions are transitory or become permanent.

Version: May 3, 2021 2

political phenomenon that eluded a precise definition.3 This is no longer the case. After being
dormant for almost a century, populism has resurfaced in Europe and North America. Populist
parties have tripled their vote in the past two decades, placing their leaders in government in
eleven European countries and increasing thirteen fold the population living under populist
regimes.4 Populism is an insidious virus that corrodes democracy from within. It has even
infected supposedly immune Anglo-Saxon countries such as the US and the UK. This modern
strain of populism is different from the one that has prevailed in many Latin American countries
for most of the postwar era. Instead of fostering class conflict, it appeals to racism, xenophobia,
and anti-globalization. In this regard, it has a closer resemblance to early 20th century European
populism.

Despite increased attention by academics, consensus over a definition of populism remains

elusive.5 Confusion prevails, even among politicians. During a press conference at a NAFTA
summit in mid-2016, Mexico’s President Enrique Peña Nieto criticized politicians who “using
populism and demagoguery… choose the easiest way to solve the challenges of today’s world.”
His comment was aimed at the yet to be nominated Republican presidential candidate whose
poisonous rhetoric targeted Mexico and its citizens. To Peña Nieto’s surprise, President Obama
rebuked him. “I’m not prepared to concede the notion that some of the rhetoric that’s been
popping up is populist,” he said. According to Obama, a populist politician was one who cared
about “social justice issues or making sure that poor kids are getting a decent shot at life or have
healthcare.” Trump was a “xenophobic chauvinist” not a “true populist.” Obama claimed the
label for himself and Bernie Sanders.6

Peña Nieto was closer to the truth. Populism is not simply about caring for the downtrodden,
embracing popular causes and/or promoting redistributive policies. What distinguishes it from
other political strategies or movements is its contempt for the status quo, the simplistic, arbitrary,
and costless way in which it pretends to solve society’s structural problems and the negative
emotions it promotes with an antagonistic and Manichean discourse that divides society between

3
Canovan (2004). For a more in-depth exposition of the analysis that follows see Ocampo (2018).
4
Lewis et al (2018).
5
Mudde and Rovira Kaltwasser (2017).
6
Time (2016).

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“the people” (those who vote for it) and “others” (who are their enemies.) If persistent, populism
undermines the rule of law and degrades democracy’s institutional fabric and civic culture.

Populism is not, and cannot be equated with, a specific ideology. Instead, as Ernesto Laclau
always emphasized, it is “a way of doing politics.” There is left-wing populism (e.g., Chavismo),
right-wing populism (e.g., Nazi-fascism) and chameleonic populism (e.g., early Peronism).7 The
first promotes class conflict, the second, xenophobia and/or racism while the third
opportunistically combines elements of both. All strains of populism promote chauvinism,
fanaticism and resentment. All are potential lethal to democracy and freedom. There is no such
thing as “good populism.”8 People living under right wing populist regimes may think left-wing
populism would be less damaging despite substantial evidence to the contrary.9 Populism is
culturally, institutionally and temporally idiosyncratic. In the US, the Electoral College favored
the emergence of right-wing populism. Unless there is a major change in demographics, left
wing populism is unlikely to succeed at the national level but may do so at the state or municipal
level (e.g., California and New York City.)

Although sometimes used as synonyms, populism and demagogy have slightly different
meanings. In current usage, a demagogue is a political leader “who makes use of popular
prejudices and false claims and promises in order to gain power.” The term therefore denotes an
electoral strategy rather than a set of policies. Following Aristotle and Polybius, Rousseau
proposed the term “ochlocracy” (mob rule) to describe the regime that emerges when demagogy
is successful.10 The Founding Fathers took demagogy as a serious threat when drafting the US
constitution. They viewed civic virtue and a system of “checks and balances” as the only
antidote.

Despite its ancient lineage, populism is essentially a modern phenomenon.11 The first self-titled
populist party –the People’s Party– was founded in the US in 1891. However, despite having a

7
Early Fascism significantly differed from Nazism. For starters, anti-semitism was not part of its doctrine. Mussolini had two
Finance Ministers and many advisors of Jewish origin. Only after 1938, under pressure from Hitler, he started persecuting jews.
8
See Rodrik (2021).
9
The other mistake is to believe that left wing populism as it exists in Venezuela is not populism or socialism.
10
Rousseau (1762), p. 58. See also Riker (1982), pp.13-14.
11
Napoleon III can be considered the first populist politician of modern times.

Version: May 3, 2021 4

strong following in the Southern and Western states, it vanished after two decades.12 In the 1920s
and 1930s, right-wing populism emerged in Europe’s fledgling parliamentary democracies.
Mussolini led the way with his “March on Rome.”13 Hitler tried to emulate him but failed. While
in prison, he studied Gustave Le Bon’s lessons on mass psychology and when he regained his
freedom he became “a demagogue of the first water and an orator and agitator of real ability.”14

In the 1930s, populism also surfaced in several Latin American countries, always adapted to
local culture and political circumstances. Mexico’s Lázaro Cárdenas inaugurated the region’s
long lasting addiction.15 After WWII, populism disappeared in the Old World while it thrived in
South America. Argentina’s Juan Perón is considered the quintessential Latin American populist
leader. He was also one of the most successful politicians of the 20th century. Although he
originally reached power through a military coup, he won the presidency in free elections with an
overwhelming majority three times. There is probably no other country in the world in which a
political leader active in the mid 20th century had such a profound and lasting impact.16 Perón
ruled Argentina from June 1943 until September 1955 and between May 1973 and his death in
July 1974. His party has governed the country 80% of the time since the reestablishment of
democracy in 1983.17 Peronism not only dominates Argentine politics but has also influenced
other countries in Latin American. Chávez once described himself as “a true Peronist.”18

Whatever its ideology, populism is a political scam. As Arrow, Riker, and others have
demonstrated logically no electoral system can coherently express the “will of the people.”
Therefore, no politician can claim to represent it either, no matter what percentage of votes he or
she wins in a free election.19

12
The first to use the term populist were the Russian narodniks in the late 19th century However, Russia did not have a
democratic system at the time.
13
Mussolini became Italy’s prime minister not as a result of an election but of a decision of King Victor Emmanuel II within the
rules of the parliamentary system. He governed in accordance to those rules until January 1925.
14
Wertheimer (1931), p.66. For the impact of Le Bon’s ideas on Hitler see Múller Frøland (2017), p.128.
15
Hitler was the first successful populist politician of the 20th century. However, late stage Nazism was not right-wing populism
but totalitarianism. See Paxton (2004), Finchelstein (2017) and Eatwell (2017).
16
For an analysis of Peronism as a populist movement see Ocampo (2020c).
17
Some provinces in Argentina have been governed uninterruptedly by Peronism since 1983, when democracy was reinstated.
18
La Nación, 2008.
19
Arrow (1950) and Riker (1982).

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Populism as a “Solution”, the Populist Leader as Savior

Academics have debated for decades what is the proper definition of populism without reaching
the consensus. Attempting to settle this debate is a futile task. However, it is necessary to
establish at least certain definitional boundaries if we are to understand the threat posed by
populism. First, as Aristotle and Polybius pointed out, populism is a degeneration of democracy
that has its own life cycle. Without electoral legitimacy in its origin it cannot exist and it ceases
to exist when it becomes authoritarian. Second, a popular politician is not necessarily a populist
one. In a democracy the vote of the majority is necessary to govern and it can be obtained
without resorting to populism. Hence, populism is not a necessary condition for the existence of
a right or left wing democratic government. Third, populism always imposes some type of
redistribution of collective resources but not all redistribution is necessarily implies populism.
Fourth, populism is not an ideology but a way of doing politics that can be articulated from the
left or the right. Finally, all forms of populism appeal to extreme nationalism, which also can be
packaged with a right or left wing ideology.

To understand the origins of populism it is useful to focus on three elements.20 First, a simplistic,
arbitrary and supposedly costless “solution” (the “populist solution”) to structural problems that
have generated a widening divergence between the aspirations of a majority of the electorate and
reality (the “frustration gap”).21 Second, a narcissistic, charismatic and opportunistic politician
that advocates and justifies the implementation of the “populist solution” with a Manichean
narrative that challenges the status quo and appeals to chauvinism and certain predominant
beliefs, prejudices and anxieties that are culturally and temporally idiosyncratic (the “populist
narrative”.) Third, a majority that finds the “populist solution” convincing and emotionally
appealing and votes for it.22

The frustration gap is the sociological humus in which populism rises and develops. It is a
necessary but not sufficient condition for its emergence. It can have an objective cause, such as a

20
Ocampo (2018) and (2019).
21
Defining populism as a “solution” allows for the inclusion of populist manifestations such as Brexit into the analysis. No
populist candidate won an election in England but a populist solution received a majority of the vote.
22
In this context, a majority is defined as the minimum number of votes required in a specific electoral setting to secure the
power of the executive.

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financial crisis, war, great migration, technological progress or radical change in the international
economic order (e.g., protectionism in the 1930s or deindustrialization due to globalization in
recent decades). It can also result from a subjective comparison of the present with unfulfilled
expectations or with an idealized vision of the past. The success of the populist politician
depends on his or her ability to promote such comparison.23 But this is not enough. He or she
also has to convince voters that the frustration gap is not a result of a natural catastrophe but of a
conspiracy carried out by the enemy of the people. Only the perception of unfairness can feed
resentment among voters. Resentment is the emotional fuel of populism.

A widening frustration gap with such characteristics inevitably generates a reaction among
voters. Such reaction can take the form of a demand for measures to neutralize a perceived
cultural, ethnical or religious threat to the established order (or an idealized order that was
supposedly lost not too long ago) or for a redistribution of the economic resources it “unfairly”
generated. Right wing populists emphasize the former reaction, whereas left wing populists the
latter. The wider the frustration gap and the more unfair its origin is perceived, the more likely an
opportunistic politician will be able to take advantage of it. This situation is common in countries
that impoverished themselves after periods of prosperity (e.g., Argentina and Venezuela), those
in which median incomes have stagnated for decades (e.g., the US), or those in which a majority
feels that society’s culture, religious values and/or ethnic composition are threatened by
“outsiders” (e.g., the US, Western and Eastern Europe).

Regarding the nature of the “populist solution”, simplicity is key. The populist leader must
explain the origin of the “frustration gap” in a simple way that can be easily understood by voters
with the lowest level of education. Its effectiveness must seem assured by its simplicity, which
rests on the twin pillars of Manichaeism and paranoia. The essence of the populist narrative is
the struggle between good (“the people”) and evil (“the enemy of the people”), the latter always
conspiring to harm or exploit the former.24 When effectively delivered, this narrative inevitably

23
It is an historical fact that most successful populist leaders have been men. Eva Perón is a notable exception. Although she rose
to power thanks to her husband, her ability to stir the masses was as his equal and she ended up wielding as much power as he did
(see Zanatta, 2011). Cristina Kirchner also rose to power in similar way and later claimed Eva’s mantle.
24
Populist politicians conceive politics as described by Carl Schmitt: the only distinction which is valid in politics is antagonistic
(Schmitt, 1927, 26). Schmitt’s ideas were revived by modern ideologues of left-wing populism such as Laclau (2005).

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breeds resentment, which is populism’s psychological nutrient and one of the most powerful
tools to manipulate the masses.

Second, the populist solution arbitrarily tramples on established institutions (formal and
informal). Since the populist leader supposedly represents the “will of the people”, he or she is
not subject to the rule of law or any customs or institutional constraint. Government arbitrariness
is the antithesis of the rule of law, one of the pillars of liberal democracy.25 Once effectively
installed, it opens the door to authoritarianism.

Third, the populist solution proposes to close the frustration gap at no cost to those who vote for
it. That cost must be borne by those who the populist leader identifies as “the enemies of the
people.” The enemies can be domestic and foreign. The former are minorities with limited
electoral weight that are denied their rights and persecuted; the latter are punished with
deportation of immigrants, embargos, punitive tariffs, nationalization and/or expropriations.26
The populist narrative –which is grounded and appeals to predominant cultural values and
beliefs– provides a “justification” for this arbitrariness. As Tocqueville warned in order, “to
commit violent and unjust acts, it is not enough for a government to have the will, or even the
power; the habits, ideas, and passions of the time must lend themselves to the committal of
them.”27

Finally, the populist “solution” is a fake solution. It not only fails to resolve the underlying
structural problems that gave birth to it but in fact actually tend to worsen them. When this
happens, distorting and denying the facts and proposing spurious causal relationships becomes
essential for the regime’s survival. The leader explains that the self-inflicted crisis is not the
result of misguided policies but of exogenous factors or a conspiracy orchestrated by the internal
and external “enemies of the people.”28 Any independent media outlet that challenges this
narrative, is automatically incorporated into it as another foe. The regime tries to impose its own

25
Throughout this article I will use the term ‘liberal’ in its British definition, i.e., consistent with the tradition of 19th century
Western thought. In the US the term has almost the exact opposite meaning (see Hayek 1944, p.ix).
26
War and invasion are populism’s ultima ratio, particularly for extreme right-wing variants.
27
Tocqueville (1896), p. 131.
28
For example in Argentina, populist governments typically blame inflation on supermarket chains or the rise of international
commodity prices.

Version: May 3, 2021 8

version of reality through propaganda channeled through state-owned media or by “friendly”
journalists (typically amply rewarded with public advertising.)

It is also important to note that the electoral majority that brings a populist candidate to power is
not a homogenous group of low-income voters but a coalition that cuts across all income levels.29
In fact, in most modern democracies with a certain degree of economic and institutional
development, the vote of a substantial portion of the middle class is key to the electoral success
of a populist candidate. A growing number of dissatisfied middle-income voters is a better
predictor of the rise of populism than a large percentage of the population living in poverty.30 As
Eric Hoffer pointed out in The True Believer, “it is usually those whose poverty is relatively
recent, the ‘new poor’, who throb with the ferment of frustration. The memory of better things is
as fire in their veins. They are the disinherited and dispossessed who respond to every rising
mass movement.”31

In summary, to reach and maintain power, populism requires a charismatic and opportunistic
politician that can “articulate” the populist narrative and link the disparate demands of a majority
of the electorate that feels unsatisfied and frustrated with the established order (what Laclau
defined as “the logic of equivalence”).32 In Latin America, so called “social justice” was the
rallying cry of traditional populist leaders such as Juan Perón.33 The “narrative” plays a critical
role in the emergence of successful populism: it explains in very simple terms the origin of the
frustration gap and those measures required to close it. Underlying it there is always an
antagonistic relationship between “the people” and the existing power structure that supposedly
prevents its demands from being justly satisfied. According to Laclau, the “crystallization” of
this antagonism is the essential and most important part of the populist leader’s “discourse.”34

29
Even Perón, who is usually associated with the “shirtless” peasants, won his first election in February 1946 with the support of
a broad coalition that even included the most reactionary members of the conservative elite.
30
This statement has to be qualified. First, there is a negative relationship between poverty and institutional quality. Second,
under certain circumstances steadily rising poverty levels might be an indication not of explosive population growth (e.g., India)
but a shrinking middle class, which is a good predictor for the rise of populism.
31
Hoffer (1951), p. 26.
32
In addition to developing a theory of populism, Laclau also contributed to its implementation. Until his death in 2014 he was
the intellectual mentor (and advisor) of several left-wing populist leaders that emerged in Latin America and Southern Europe.
33
Under Peron’s regime “social justice” meant higher salaries and social benefits for industrial workers and higher profits for
crony capitalists. The former divorced were from productivity and the latter from efficiency, both financed by exactions on the
agricultural sector and higher prices to consumers. The stagflation generated by this system hurt the poor disproportionally.
34
Laclau (2005), p.110.

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His or her electoral success depends on his or her ability to foster (or reinforce) a feeling of
dissatisfaction with the status quo among a significantly large number of voters, which in turn
requires convincing them that they do not have the same standard of living, respect or
recognition that they deserve and other easily identifiable smaller groups enjoy (which, ipso
facto, become the “enemy of the people”). In other words, the leader has to reinforce the feeling
that a majority has been unfairly deprived of something that it is entitled to.

The proposed definition allows a distinction between populist politicians, populist policies and
populist regimes. A populist politician is a politician that proposes a “populist solution” to win
an election. However, many politicians who start their career as populists end up as dictators.
Populist policies are those government policies needed to close the frustration gap in a manner
consistent with the “populist narrative.” Electoral success and the implementation of the
“populist solution” are necessary conditions for the existence of a populist regime.35 But as we
shall see below, populist regimes tend to degenerate into autocracies. Finally, an authoritarian
regime does not become populist by applying populist economic policies.

The Role of Malignant Narcissism

Malignant narcissism is key to understand populism. As mentioned above, extreme nationalism

is a common denominator of left wing and right-wing populism. As a sentiment, nationalism
feeds of malignant collective narcissism, which has as its most obvious and frequent symptom a
belief in “the superiority of one’s group and the inferiority of all others.” If anything or anyone
threatens this belief, the predictable reaction is aggression and resentment.36 To build up this
feelings of superiority it is often necessary to re-interpret national history. In Latin America,
where both politics and history are imbued by magical realism, it is not uncommon for populist
leaders to propose a metempsychosis with national heroes, as Chávez did with Bolívar in
Venezuela and Perón did with San Martin in Argentina.

The populist leader is a narcissist who embodies in an exaggerated manner certain psychological
and cultural traits that are typical of a country’s median voter. Generally these traits do not have

35
Mao and Castro were not populist leaders but dictators. What they all have in common is extreme malignant narcissism.
36
Fromm (1964), p.85-86. See also Golec de Zavala and Keenan (2020).

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a positive connotation but they facilitate the process of identification of the followers with the
leader. Sigmund Freud described this process in Group Psychology and the Analysis of the Ego
(1921) and Erich Fromm developed it further in The Heart of Man (1960).37 As Fromm
explained, “the narcissism of the leader who is convinced of his greatness, and who has no
doubts, is precisely what attracts the narcissism of those who submit to him.”38 This was as true
for Hitler, Perón, and Chávez, as it is for Trump, Erdogan, and Orban.39Any mass movement that
describes itself with a surname is likely to reflect some form of malignant narcissism.

Leaders that exhibit this personality disorder need to create a reality of their own that satisfies
their self-image:

If they [malignant narcissists] have the talent to appeal to large masses and are
shrewd enough to know how to organize them, they can make reality conform to
their dream. Frequently the demagogue on this side of the borderline to a
psychosis saves his sanity by making ideas that seemed “crazy” before appear to
be “sane” now. In his political fight he is driven not only by the passion of power,
but also by the need to save his sanity.40

Hitler was an extreme case of this pathology. According to Fromm, his narcissistic psychosis and
necrophilia took Germany down the path to self-destruction. The Nazi leader was “not capable of
seeing reality objectively… his only reality was his wishes and thoughts” and would have
probably suffered “a manifest psychosis had he not succeeded in making millions believe in his
own self-image, take his grandiose fantasies regarding the millennium of the ‘Third Reich’
seriously, and even transforming reality in such a way that it seemed proved to his followers that
he was right.”41 This large-scale transformation of reality is unlikely to happen if strong and
independent media constantly challenges a populist leader.

37
Freud (1921) pp.37-42 and Fromm (1964).
38
Fromm (1964), p.106.
39
A well-known US political consultant described Trump as “an avatar” for the “worst instincts” and “deepest desires” of the
American people (Wilson, 2018, p.2).
40
Fromm (1973), p.391.
41
Fromm (1964), pp. 108-109, 76.

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The Ideology of Populism

Laclau always emphasized that populism was not an ideology but “a way of constructing
politics.”42 In reality, what determines the ideology of a particular populist strain is how the
populist leader identifies the “enemy of the people.”43 This identification is culturally and
temporally idiosyncratic. Right-wing populists tend to define the “enemy” based on ethnic,
religious or cultural characteristics. Left-wing populists instead usually defined it by an
economic dimension. However, in the aftermath of the collapse of the Soviet Union, post-
Marxist intellectuals have attempted to move beyond the class struggle narrative. Laclau and
Mouffe, who must be credited for giving an intellectual patina to modern left-wing populism,
propose to use it as an instrument to achieve what they call “radical democracy”, which is
essentially illiberal. This requires incorporating new dimensions of conflict in populist discourse
such as “the rise of the new feminism, the protest movements of ethnic, national and sexual
minorities, the anti-institutional ecology struggles waged by marginalized layers of the
population, the anti-nuclear movement, the atypical forms of social struggle in countries on the
capitalist periphery.”44 A foreign enemy (or enemies) that threatens national greatness is
common to both strains of populism.45

Ideology is also strongly correlated with the outlook of a populist movement. Right wing
populist leaders promise to defend a threatened cultural and/or ethnic status quo (or an idealized
past version of it), while those of the left wing variety a utopian future that can only be achieved
by confiscating resources from the privileged few who benefit from the current state of affairs.

The experience in the 2016 primary and presidential elections in the US illustrates this point.
Both parties had populist candidates –Donald Trump and Bernie Sanders– who agreed on the
underlying problem (the “American dream is over”) but proposed alternative explanations of the
origin of the “frustration gap” and identified different groups or nations as “enemies of the
people.” Consequently they also proposed different solutions. According to Trump, the culprits

42
Laclau (2005), p.6, and Mouffe (2018), p.10.
43
Carl Schmitt, the legal ideologue of the Nazi party, was the first to propose this dichotomy as a political strategy (see Schmitt,
1932, pp.29-30).
44
Laclau and Mouffe (1985), p.9.
45
This also explains why economic autarchy and protectionism are common denominators for right-wing and left-wing populist
regimes.

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of America’s decline were unfair competition from Mexico, China, and Muslims.46 Sanders, on
the other hand, blamed income inequality and Wall Street bankers. Whereas Trump proposed
tariffs, travel bans and deportation of illegal immigrants (“make foreigners pay”), Sanders
advocated higher taxes on the top 1% (“make the rich pay”) and massive redistribution.

Those who vote for a populist leader due to ideological affinity are likely to be disappointed. A
narcissistic leader only cares about him or her. Ideas are always subordinated to the political
needs of the moment and the psychological demands of his or her own ego. Perón offers the best
example of an ideologically chameleonic populist leader. He started as a staunch anti-communist
allied with the Army and the conservative Catholic Church, then he became the champion of
nationalism and the urban underclass; later, when the economy crashed, he showed a friendly
attitude towards the United States and foreign investment while he confronted the hierarchy of
the Catholic Church; after being ousted in 1955 he courted the insurrectionist left inspired by
Fidel Castro, whom he publicly praised, and, finally when he returned to power in 1974 he
veered again to the right.47 This ideological zigzagging inevitably led to violent clashes within
the Peronist movement that eventually triggered the closest thing to a civil war Argentina
experienced in the 20th century.48

The identification of the “enemy of the people” not only defines the ideology of a populist
regime but also its economic policy. Left-wing populists try to improve the material welfare of
low-income groups through redistributive policies and deficit spending, while right wing
populists favor policies that transfer resources from targeted minorities and/or foreigners to
middle and high-income groups (i.e., they are more plutocratic). In the short run, the former tend
to boost consumption, while the latter, to foster savings and investment. Both, in different
degrees, resort to protectionism, interventionism and nationalizations. Both foster crony
capitalism and corruption. However, left-wing populism has proven to be more destructive in
economic terms.

46
The evidence shows that automation was a more important factor (see Acemoglu and Restrepo, 2017).
47
Perón entered politics in 1943 by leading a military coup which had as one of its main objectives to prevent a communist
revolution from taking place in Argentina.
48
Hugo Chávez’ socialism became more extreme as his regime became more authoritarian but crony capitalism thrived under his
rule and that of his successor. Chavismo has meant socialism and misery for the masses and capitalism and riches for the
nomenklatura.

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The Life Cycle of Populism

According to Polybius’s theory of constitutional change (anacyclosis), what we now call

populism is a degeneration of democracy. But this degeneration goes through its own phases:
demagogy (the strategy used by a populist politician to win the election), ochlocracy (a
government that implements the “populist solution”) and autocracy (a government that restricts
economic and civil liberties by abusing power.) In the first phase, populism is a contender for
power and, in the last two, an incumbent. The dynamics of each of these stages are different and
their length can vary due to economic, cultural and institutional factors that are country specific.
Some populist regimes never reach the final stage due to the existence of strong cultural and
institutional antibodies.

The first stage always requires legitimization by the popular vote; even Hitler had to go through
it.49 In the Weimar Republic, Nazism operated “formally on a perfectly legal democratic basis”
and an effective “campaign of demagogy finally led to the establishment of a tyranny.”50 In the
second stage, the regime may appear to be “closing” the frustration gap with some degree of
success. But this is a mirage disguised by favorable exogenous factors or an unsustainable
redistribution of resources at the expense of those minorities identified as the “enemies of the
people.” However, this strategy is short lived. The targets of populist rage evade exactions via
capital flight and/or emigration or its resources are depleted. Over time, the arbitrary measures of
the populist regime degrade institutional quality and the absence of structural reforms ensures
that the “frustration gap” widens. The electoral coalition that brought the demagogue to power
splinters and reduces the chances of obtaining majority vote in a free election. This opens the
door to populism’s third stage: autocracy. With free elections, a broad and growing discontent
threatens the survival of the populist regime. The populist leader usually reacts to this threat by
doubling down, using state controlled media to promote a conspiratorial narrative (the crisis is
due to the perverse deeds of the “enemies of the people”) and systematically abusing executive
power (by violating property rights, restricting press freedom and tampering with the electoral

49
Before being appointed Chancellor, Hitler was described as a demagogue “of the first water.” This doesn’t mean equating
Nazism with populism, it means Nazism used populism to rise to power. One could argue that Hitler was a tyrant disguised as a
demagogue. He used the system of democracy to destroy it. This was obvious to Classic and Enlightment thinkers.
50
Schacht (1948), p.269.

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system). Under a populist system, “the temptation and the ability to weaken the electoral
sanction are especially strong.”51 If a democracy does not have strong institutional and cultural
antibodies, it is eventually destroyed, and, in its last stage, if ever reached, populism mutates into
a dictatorship. History shows that once in power populist leaders can quickly jump to the last
stage. It only took Hitler two months.

Economic performance is a key factor in explaining populism’s life cycle (the other being
electoral considerations). Whether right or left wing, as Nobel Prize winner Jean Tirole has
pointed out, populist policymakers show contempt “for elementary economic mechanisms.”52 In
essence, populism is “anti-economics”, as it rejects the idea that society, and therefore
government, faces any constraints. Populist policies are predicated on the assumption that if
society faces any constraints, it must be because internal and/or external forces inimical to the
interests of “the people” have imposed them. The populist program follows logically from this
premise. Revenge is always one of its key psychological ingredients.

In a paper that has become a classic, Dornbusch and Edwards defined the typical Latin American
populist economic policy paradigm as a set of measures that seek to redistribute income and
expand aggregate demand as if the country faced no financial constraints.53 This paradigm is
characteristic of the left-wing variety. These populist leaders reject the idea that deficit financing
through monetary expansion can lead to high inflation and believe fostering consumption
through expansive fiscal and monetary policies is non-inflationary and leads to real output
growth. In reality, as Dornbusch and Edwards also pointed out, the implementation of these
policies eventually leads to stagflation.

From an economic standpoint, the Latin American variants of populism –Perón’s 1946-55
experience being archetypical– have followed three phases: first, a short-term consumption boom
fueled by wage increases and expansionary fiscal and monetary policies; second, increasing
bottlenecks that lead to creeping inflation and foreign-exchange shortages; and third, a full-
blown crisis followed by a period of adjustment (sometimes under a non-populist government).

51
Riker (1982), p.249.
52
Tirole (2018), pp.28-29.
53
Dornbusch and Edwards (1991). See Ocampo (2020b) for a description of the populist economic policy paradigm.

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Usually, at the end of the cycle, average real wages are lower.54 There is a strong association
between the economic and political phases of populism. From an economic standpoint, the first
phase coincides with its second political stage, and the second and third, with its degeneration
into autocracy or the revival of democracy.

Given that it tends to emphasize investment rather than consumption, the life cycle of right wing
populism is different. The effects on the economy tend to be less destructive, at least in the
medium term. However, to the extent they rely too much on protectionism and crony capitalism
right wing populists also generate output and productivity losses. Right wing populist regimes
tend to be more respectful of property rights as long as managers and shareholders do not openly
criticize them. Also, since they are more likely to go to war, they can actually be much more
destructive.

Lessons from the Interwar Period: Schumpeter and Hayek

Except for the US and a few other countries, liberal democracy is essentially a 20th century
phenomenon. For the rest of the Western Hemisphere, World War I was a turning point. It
unleashed forces that contributed to the emergence of the democratic system and also the most
serious threats to it: Stalinism and Nazism. During the Interwar period both movements not only
evolved and consolidated their hold on power but also contributed to World War II. Intellectuals
on both sides of the Atlantic attempted to explain the rise of this threat and what it meant for the
future of the democracy. In the vast literature that followed, two views stand out both for their
pessimism and lasting influence: Joseph A. Schumpeter’s Capitalism, Socialism and Democracy
and Friedrich A. Hayek’s The Road to Serfdom. Although Schumpeter and Hayek had grown up
in Vienna, been trained as economists in the Austrian tradition, adhered to a liberal ideology and
wrote their books almost simultaneously, they reached opposite conclusions regarding the
relationship between capitalism, socialism and democracy.55 Schumpeter had an American
audience in mind for his book whereas Hayek a British one. It was, and is still common, to treat
their conclusions as predictions. In reality, both extrapolated prevailing trends to their logical
conclusion. Whereas Schumpeter’s book has been hailed as a major contribution to

54
Ocampo (2020b).
55
For a comparison of their political and economic ideas see Streissler (1983) and Klausinger (1995).

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contemporary social theory, Hayek’s as a political pamphlet and dismissed by many academics
as the bible of resurgent 19th century liberalism. Schumpeter died in 1950 and was not able to see
how his thesis stood the test of time; Hayek, who was 16 years younger, died in 1992 and was
able to revise his conclusions. Although neither one explicitly addressed the populist threat,
reframing their analysis in the current context yields valuable insights about it.56

According to Hayek, communism and Nazism competed for “the support of the same type of
mind” and had Western liberalism as their common enemy. Since both prioritized the interests of
the community over those of the individual and both ended up destroying freedom he labeled
them “collectivism.”57 In Hayek’s view, it was a mistake to believe –as was common in England
in the 1930s– that Nazism was a “a capitalist reaction, against socialism;” instead it was just “a
peculiar form of socialism, a sort of middle-class socialism, not a proletarian socialism.”58 The
main argument of The Road to Serfdom was that by concentrating immense power in the hands
of people who were the most likely to abuse it, a centrally planned economy in which the state
owned the means of production would gradually degenerate into totalitarianism (such as then
existed in both Germany and the Soviet Union).

In Hayek’s definition, populism is a variety of collectivism, as it prioritizes the community over

the individual. This definition is still useful but for most developed democracies equating
communism, fascism and populism can lead to confusion. In autocracies, malignantly narcissistic
leaders impose collectivism through violent revolution, whereas in developing democracies they
do it with demagogy, i.e., they resort to populism.59 Mussolini and Hitler became dictators
playing by (and then eliminating) the rules of vulnerable parliamentary democracy.

Hayek downplayed this essential distinction between Nazism and communism. In fact, he argued
that during the 1920s the “fusion of radical and conservative socialism” had driven “everything

56
It is beyond the scope of this essay to provide an in-depth analysis of Schumpeter’s and Hayek’s work. What follows is a
summary deemed relevant by the author for the analysis of populism.
57
Hayek (1944), p.33.
58
Hayek (1982), p.277.
59
There is no such thing as a freely elected communist dictator. Salvador Allende, who was a Marxist, won Chile’s presidential
election in 1970 as head of a broad based center leftwing coalition. In more recent times, Daniel Ortega of Nicaragua is the only
possible exception that confirms the rule. He won a presidential election in 1984 as leader of the Sandinista movement after the
overthrow of right-wing dictator Anastasio Somoza and then again in 2007. However, Sandinismo is a variant of left-wing
nationalism very common in Latin America that mixes Marxist ideas with anti-Yankee sentiment. Under Ortega,

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that was liberal” out of Germany and set the stage for the emergence of an authoritarian regime.
In his view, Hitler’s rise was the inevitable consequence of these trends.60 More importantly,
Hayek also believed that a Nazi-type mass movement would not succeed in England due to
cultural and institutional factors and that creeping socialism with extensive nationalizations
under a parliamentary system was a more likely scenario. For several decades events proved him
right: in the 1930s Mosley’s British Union of Fascists (BUF) was an electoral failure, and in the
postwar era, the Labor party succeeded in socializing the British economy without resorting to
demagoguery.61

One of Hayek’s key insights was that any form of collectivism inevitably degenerates into a
kakistocracy (the government of the worst). To explain why Hayek delved superficially into
group psychology, reaching conclusions that in many respects are consistent with Freud’s ideas
mentioned above.62 According to Hayek, the desire of an individual to identify with a group is
“the result of a feeling of inferiority” which can be compensated if membership “confers some
superiority over outsiders.”63 Second, mass movements not only tend to disproportionally attract
individuals with low moral standards but also once it incorporates them, it reduces any prior
restraints on their behavior. Another typical characteristic of mass movement is unanimity of
values and beliefs, which requires appealing to the lowest common denominator. Finally,
sycophancy and loyalty to the leader are more likely among “those whose vague and imperfectly
formed ideas are easily swayed and whose passions and emotions are readily aroused.” The
“deliberate effort of the skillful demagogue” was required to “weld together a closely coherent
and homogeneous body of supporters.” Hayek also anticipated a key conclusion of contemporary
analyses of populism:

It seems to be almost a law of human nature that it is easier for people to agree on
a negative programme, on the hatred of an enemy, on the envy of those better off,
than on any positive task. The contrast between the ‘we’ and the ‘they’, the
common fight against those outside the group, seems to be an essential ingredient

60
Ibid., p.125.
61
For an analysis of Mosley’s career see Ocampo (2020a).
62
Unlike Mises, Hayek was always very critical of Freud (Ibid., pp. 68, 73). However, it seems he was not totally familiar with
the latter’s work, particularly regarding group psychology. In fact there are many points of agreement between them.
63
Hayek (1944), p. 138.

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 in any creed which will solidly knit together a group for common action. It is
consequently always employed by those who seek, not merely support of a policy,
but the unreserved allegiance of huge masses. From their point of view it has the
great advantage of leaving them greater freedom of action than almost any
positive programme. The enemy, whether he be internal like the ‘Jew’ or the
‘Kulak’, or external, seems to be an indispensable requisite in the armoury of a
totalitarian leader.64

The intellectual roots of this “friend versus enemy”, “good versus bad” Manichean dichotomy
can be traced back to Carl Schmitt, one of the ideologues of Nazism.65 Not surprisingly, left
wing intellectuals have Schmitt from obscurity and not only incorporated his concept of
antagonism into their sociological theories but also recommended it as an electoral strategy.66
Today it is an essential weapon in the discursive arsenal of any successful populist leader.

Hayek identified another negative selection factor that operated in any collectivist regime: “the
unscrupulous and uninhibited are likely to be more successful” in rising to the top of the
nomenklatura than well-intentioned idealists.67 This inevitably leads to abuses of power,
corruption and economic inefficiency. Hayek also pointed out that the institutions of collectivism
could not be divorced from its “morals.” Under a collectivist regime the main guiding principle
of government policy is to do what is “good for the people” even if it means trampling on the
rights of the individual, i.e., the end justifies the means.68

In a populist regime, the leader always claims to be the faithful and exclusive interpreter of the
people’s will. In reality, what he or she decides ends up being good for certain interest groups
that are close to the regime’s leader and its nomenklatura. This explains why cronyism,
patrimonialism and clientelism flourish under populism.69

64
Ibid., p.139.
65
Schmitt (1932), pp.29-30.
66
Laclau and Mouffe (1985) and Mouffé (1993).
67
Hayek (1944), p.136.
68
Ibid., p.146.
69
A patrimonialist system is “a regime where the rights of sovereignty and those of ownership blend to the point of being
indistinguishable, and political power is exercised in the same manner as economic power” (Pipes, 1974, pp.22-23).

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Finally, and particularly relevant today, Hayek warned about how under a collectivist regime
truth becomes “something which has to be believed in the interest of the unity of the organised
effort, and which may have to be altered as the exigencies of this organised effort require it.”70
He also anticipated that democracy could slide into despotism when a strong demand for “quick
and determined government action” and “dissatisfaction with the slow and cumbersome course
of democratic procedure” lead to the emergence of a strongman that inspires confidence that “he
can carry out whatever he wants.”71

Schumpeter proposed a radically opposing view. Although he agreed with many of The Road to
Serfdom’s arguments, he thought its main thesis was flawed and crucially dependent on Hayek’s
adherence to the utilitarian rationalist “political sociology” of John Stuart Mill (ironically, in his
view, also shared by British socialist intellectuals.) Schumpeter argued that democracy had given
“dominant power” to the masses, but the masses had never really embraced the principles upon
which capitalism and democracy had emerged and developed. “Excepting intellectuals and
politicians, nobody has changed his ideas. It is the people whose ideas count politically that have
changed.”72

According to Schumpeter, capitalism would self-destroy due to its internal dynamics and would
be inevitably replaced by socialism, which was not only compatible with democracy and
freedom of choice, but also economically viable.73 However, as noted by one reviewer his book
proved that “one may predict socialism, believe in its inevitability, and yet hate it thorough.”74
All three propositions contradicted the main thesis of The Road to Serfdom. However, Hayek and
Schumpeter defined democracy differently. For the latter, democracy was simply an institutional
mechanism to ensure competition for political leadership, whereas for the former it also included
a set of institutions that protected individual freedom.75

70
Ibid., p.163.
71
Ibid., p.136.
72
Schumpeter (1946), p. 270.
73
Schumpeter (1942), pp.296-302, 422.
74
Machlup (1943), p.301.
75
Schumpeter (1942), pp.259-262, 269. For Hayek liberal democracy was simply a means to an end: protecting individual rights.
See also Riker

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In Capitalism Socialism and Democracy Schumpeter mentioned several factors that not only
supported his main thesis but also help explain the origins of populism. First, he noted that most
voters were ignorant and behaved irrationally and that personal ambition and interests
conditioned the behavior of politicians. Consequently it was “only the short-run promise that
tells politically and only short-run rationality that asserts itself.”76 Regarding the rhetorical and
discursive arsenal of the demagogue he pointed out that politicians preferred a “democratic
phraseology” that flattered the masses and offered “an excellent opportunity not only for evading
responsibility but also for crushing opponents in the name of the people.”77 He also observed that
fostering “the association of inequality of any kind with ‘injustice’” was an important “element
in the psychic pattern of the unsuccessful and in the arsenal of the politician who uses him.”78
Finally, he argued that in certain countries in which there was a successful ethnic minority,
racism would assure “popular success to any politician who cared to appeal to it.”79

With respect to the possibility of regime change within a democratic setting, Schumpeter
emphasized that for an “active hostility” against the status quo to exist, it was necessary that
“there be groups to whose interest it is to work up and organize resentment, to nurse it, to voice it
and to lead it.”80 In his view, disgruntled intellectuals, and to a lesser extent special interest
groups, played the key role in this process. Schumpeter never mentioned demagoguery as a
factor, even though he had seen the effect of demagogues in Austria and Germany.81 This
omission may be explained by two factors. First, in Capitalism, Socialism and Democracy
Schumpeter concerned himself mostly with the future of the United States. Second, he
specifically stated that Gustave Le Bon’s analysis of crowd psychology did “not fit at all well the
normal behavior of an English or Anglo-American crowd.” However, Schumpeter made an
important point relevant to the analysis of populism:

The phenomena of crowd psychology are by no means confined to mobs rioting

in the narrow streets of a Latin town. Every parliament, every committee, every
council of war composed of a dozen generals in their sixties, displays, in however
76
Ibid., p.261.
77
Ibid., p. 268.
78
Ibid., p. 254.
79
Ibid., p. 277.
80
Ibid., p. 145.
81
See McCraw (2007), p.175.

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 mild a form, some of those features that stand out so glaringly in the case of the
rabble, in particular a reduced sense of responsibility, a lower level of energy of
thought and greater sensitiveness to non-logical influences. Moreover, those
phenomena are not confined to a crowd in the sense of a physical agglomeration
of many people. Newspaper readers, radio audiences, members of a party even if
not physically gathered together are terribly easy to work up into a psychological
crowd and into a state of frenzy in which attempt at rational argument only spurs
the animal spirits.82

Finally, Schumpeter seems to have anticipated the rise of Peronism (and indirectly even
supported it.) In a postscript of Capitalism, Socialism and Democracy he essentially proposed
the Catholic Church’s social doctrine as “an alternative to socialism that would avoid the
“omnipotent state.”83 Schumpeter, who was catholic, failed to realize that the “Third Way” was
not a viable alternative but a catalyst for the trends he described so convincingly in his book.

Until the first oil shock it seemed both Hayek and Schumpeter had been wrong (or at a minimum
too pessimistic.) In the postwar era, the “hot socialism” Hayek described in The Road to Serfdom
was no longer an “acceptable” policy, capitalism did not collapse but instead thrived, and, a
growing welfare state did not lead to totalitarianism. Until 1989 communism represented the
most serious menace to liberal democracy. However, it was an external military threat.

Although Hayek survived Schumpeter by forty years and even wrote an essay on him, he never
reviewed Capitalism Socialism and Democracy (which was published a year earlier than his
own) or frontally attacked its thesis.84 Although in The Road to Serfdom, he had denied that
socialism was inevitable in a 1977 interview he admitted that Schumpeter had been right on this
point. “Our present political structure inevitably drives us into socialism, even if people do not
want it in the majority,” he said. In Hayek’s view, capitalism had raised expectations that it could
not fulfill: “Unless we take from government the powers to meet the demand of particular

82
Ibid., p.257
83
Schumpeter (1942), p.422. It is unclear whether Schumpeter ever considered Peronism as a practical implementation of
Catholic social doctrine. It is more likely he had his compatriot Engelbert Dolfuss in mind. On Schumpeter and Catholic social
doctrine see Stolterer (1950) and Waters (1961).
84
Hayek always felt in debt with Schumpeter. When he visited the US in the early 1920s, Schumpeter, already a well known
economist on both sides of the Atlantic, provided him with several letters of recommendation (see Ebenstein, 2001, p.32).

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groups, which are raised by their success, I think it will destroy itself. This applies to both
capitalism and democracy.”85

Hayek believed that a growing welfare state would over time lead to the same result as central
planning, albeit through an indirect, and possibly slower, route.86 Behind this new threat to
freedom was a growing demand for “social justice”, a “misleading” and “empty” term that
served as the pretext for “almost every claim for government action on behalf of special interest
groups.”87 Applying the principle of “social justice” to its logical extreme would produce “a kind
of society which in all essential respects would be the opposite of a free society.”88 Argentina
provides some empirical validation for Hayek’s view: as mentioned earlier, “social justice” has
been the cornerstone of the policies with which Perón and his successors took Argentina down
the road of unprecedented economic and institutional decline.

In the sixties and seventies, Hayek also started hinting at the populist threat. In The Constitution
of Liberty he argued, as Tocqueville and Mill had done in the 19th century, that a “degeneration
of democracy” would occur when demagogues successfully managed to impose the principle that
what is “right is what the majority makes it to be.”89 Any regime that justified any “coercive
measure” if it seemed to serve “a good purpose” was problematic, since “anything or anybody
which will help the politician be elected is by definition a good purpose.”90 This one of guiding
principles of any populist regime. But in the mid 1970s anything remotely resembling current
populist movements was unthinkable in the advanced Western democracies.91

Of the many reviews and analyses of Schumpeter’s and Hayek’s work, there is one worth
singling out because it directly and presciently connects with populism. In the early 1970s, Paul
Samuelson, who had been Schumpeter’s student at Harvard, proposed an alternative view of the
future of capitalism, socialism and democracy. First, he argued that Hayek’s thesis was wrong

85
Hayek (1978), pp. 87-88.
86
Ibid., pp. 59-60. It is important to note that in Hayek’s definition socialism described an economy in which the state owned and
controlled the means of production and government planners made all relevant economic decisions.
87
Hayek (1976), p.65.
88
Hayek (1960), p.164.
89
Ibid., p.171.
90
Hayek (1978), pp. 88, 165.
91
In fact, the following decade ushered the Reagan and Thatcher reforms, making Hayek’s dire warnings seem overstated, which
is ironic given that he partly inspired them. Byrne (2018), pp.32-42 and Thatcher (1995), pp.50-51, 253, 604.

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not only in terms of its prediction but also in the interpretation of the historical evidence.
“Hitler’s Fascism and Lenin’s Communism were not, as Hayekians believe, the inevitable
consequences of Bismarckian-type social security, Lloyd George-type tax reforms or FDR New
Deals,” he claimed.92 Second, he contended Schumpeter had also been partially wrong.
According to Samuelson, what threatened the mixed-economies of the West was not a slide into
Soviet or Maoist version of socialism, nor Tito’s Yugoslavian experiment, nor its 1970s Swedish
variety, nor Oskar Lange’s 1930s pseudo market socialism, but the type of populism prevalent in
South America, particularly the one Juan Perón imposed on Argentina between 1946 and 1955.93
Ten years later, in 1980, Samuelson reiterated his prediction: “If you want to read the shape of
things to come, perhaps you should turn your gaze from Scandinavia and toward Argentina.”94
At that time, he was convinced that the slide into populism was inevitable:

The same gasoline that classical economists thought ran the laissez faire system,
namely self-interest, will in the context of democracy lead to use of the state to
achieve the interest of particular groups. It is a theorem of von Neumann’s theory
of games that this should be the case. Long before Marx, John Adams and
Thomas Macaulay warned that giving votes to all would mean that the poorest 51
percent of the population would use their power to reduce the affluence of the
richest 49 percent. Stagflation, upon which I could write a very long book, is one
important manifestation of what is implied in this fundamental diagnosis.95

Samuelson’s pessimism was based on the assumption that stagflation was an inherent feature of
the mixed economy and deeply rooted “in the humane nature of the welfare state.” As a result,
the mixed economy system that prevailed in the Western World had turned into a zero-sum
game. Therefore there was no guarantee that the forces of democracy would “converge” to
optimal government interventions in the economy and forsake “all other temptations that involve
deadweight loss and distortion.”96 In essence, Samuelson reformulated Schumpeter’s thesis by
replacing capitalism with “stagnating mixed-economy” and socialism with “Latin American style
92
Samuelson (1971), p.34. He also rebutted Hayek’s thesis in his best selling economics textbook, see Samuelson (1973), p.868.
93
Samuelson (1971), p.277. Given that Samuelson and Friedman were rarely in agreement on these matters, it is interesting to
note that at this time the latter also worried that Western democracies could follow the same path as Argentina (Friedman, 1975).
94
Samuelson (1981), p.44.
95
Ibid., p. 43.
96
Samuelson (1980), p. 895.

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populism.” However, he seems to have been more concerned about the latter’s impact on
economic performance than on individual freedom.

Samuelson turned out to be wrong about secular stagflation and many other things (including a
prediction that the economy of the USSR would eventually surpass that of the US.) Until very
recently, it seemed as if his reformulation of Schumpeter’s prophecy would meet the same fate as
the original.97 The resurgence of populism in Europe and North America in the 21st century,
suggests that it may not, but in a way that is different from the one Samuelson had imagined.

Left wing populism was responsible for the economic, cultural and institutional decline of
Argentina and Venezuela, two countries that during several decades of the 20th century were not
only the wealthiest in Latin America but also among the wealthiest in the world. The Venezuelan
case shows how fast a country can go down the road to serfdom and misery under autocratic
populism: the Maduro regime systematically violates human rights and 95% of the population
lives under the poverty line.98 Despite having the world’s largest oil reserves, the country fell
from 54 in global GDP per capita rankings in 1999, when Chávez rose to power, to 130 by 2019,
which is remarkable given that almost 5 million Venezuelans have emigrated (almost 20% of the
population.)99

However, it would be a mistake to believe that only left-wing populism poses a threat to
freedom. Modern right-wing populist regimes may not undermine the economy as much, but
they also degrade the institutional and cultural fabric of liberal democracy. The biggest danger in
fact arises from the confusion right-wing populist leaders have generated in the electorate of
many advanced countries. A substantial portion of conservative voters who traditionally
supported economic freedom now seem willing not only to restrict the civil liberties of those
who disagree with them but also to accept protectionism and interventionism. Only a distorted

97
Schumpeter emphasized that his thesis about the future of capitalism was not a prophecy but the logical outcome of certain
prevailing trends.
98
For evidence of human rights violations in Venezuela see Human Rights Watch (2020) and United Nations Commission on
Human Rights (2021).
99
The rankings are calculated using the IMF’s PPP estimate of GDP per capita.

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and naïve interpretation of Hayek’s book could lead anyone to believe that the only effective
antidote to serfdom is right-wing populism.100

Conclusion

Contrary to some influential voices in academia, there is no such thing as “good” populism.101
Left-wing populist regimes start by limiting economic liberties, while right wing populist
regimes by restricting civil liberties. By their own internal dynamics both tend to undermine the
system of checks and balances that prevents the concentration of power.102 The road to autocracy
and misery under populism is not straight; there are no iron laws and multiple equilibria are
possible. It is a mistake to believe that the best way to stop socialism is by electing a supposedly
right wing populist strongman. German conservatives tried that in the 1930s and it didn’t work
out. The only sure outcome of such strategy is the destruction of liberal democracy.

There is an antidote to the populist virus: preserving strong institutions and promoting a vibrant
and committed civic culture that supports them. Written laws alone are not enough unless there is
a widespread commitment to uphold them. According to James Buchanan an institutional
framework that protects individual freedom can only survive if a majority of the electorate shares
three fundamental values and beliefs: autonomy, Kantian inter-dependence and collective good
sense. The first requires that most people trust that their success (or failure) depends mostly on
their own efforts. The greater the conviction that external forces interfere or limit an individual’s
chances of progress, the lower general confidence will be and the greater the likelihood of anti-
social behavior. The second requires that a majority values fairness, justice, respect and tolerance
for others and explicitly deplores and actively fights against fraud, deceit, theft, dishonesty and
corruption. The last of Buchanan’s conditions implies that most people recognize the limits of
collective action. This belief is obviously related to a society’s predominant worldview. It
implies that a majority of voters has its feet on the ground and will not duped by demagogues
who promise utopian projects of social or economic transformation. According to Buchanan, if a
majority of the electorate does not understand that in the medium and long term the collective

100
This is the mistake made by German conservative leaders in 1932-33. They thought they could make Hitler their puppet and
instead he ended up their master.
101
See Rodrik 2017, 2018 and 2021.
102
Somebody could take Hayek’s view to its logical extreme and suggest that right wing populism is the only effective antidote
to serfdom.

Version: May 3, 2021 26

will (embodied in the State) cannot override economic laws, freedom or growth will likely be
sacrificed.103

We must add another condition to Buchanan’s list: a sufficiently large number of citizens must
be prepared to actively defend the institutions that guarantee their freedom. As John Stuart Mill
put it almost two centuries ago:

A people may prefer a free government; but if, from indolence, or carelessness, or
cowardice, or want of public spirit, they are unequal to the exertions necessary for
preserving it; if they will not fight for it when it is directly attacked; if they can be
deluded by the artifices used to cheat them out of it; if, by momentary
discouragement, or temporary panic, or a fit of enthusiasm for an individual, they
can be induced to lay their liberties at the feet even of a great man or trust him
with powers which enable him to subvert their institutions –in all these cases the
are more or less unfit for liberty; and though it may be for their good to have had
it even for a short time, they are unlikely long to enjoy it.104

As recent events demonstrate, Mill’s warning is applicable not only to the world’s youngest
democracies but also its oldest.

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