On Mark Carney and the Fate of Liberal Economies
by Robert Skidelsky
6 February 2026
Carney’s Intervention
In his sophisticated 20 January address to the Davos World Economic Forum, Canada’s prime minister and former Bank of England governor Mark Carney offered an insight into the disintegration of the global economy which went well beyond the usual strictures on Trump for mental instability or megalomania.
While Canada, like other middle-sized powers, had prospered under the protection of the ‘rules-based’ international economic order, their understanding of such an order was ‘partially false’. Far from being spontaneously self-enforcing, the rules-based system depended on the United States. The fiction of a non-hegemonic world was useful because it disguised the extent of the free world’s, especially Europe’s, dependence on American exertion. American leadership provided the public goods — open sea lanes, a stable financial system, collective security, and a mechanism for resolving disputes — needed to maintain an open world economy. It was the unacknowledged price Europe paid for its security and prosperity.
But the bargain, Carney said, no longer worked. ‘We are in the midst of a rupture, not a transition.’ When the United States defected from the world order it had built since 1945, effectively joining the revisionist powers of China and Russia, it was clear we were headed back to the ‘spheres of influence’ world of the 19th century. What then should small and medium-sized countries like Canada (or Britain) do to retain their independence from the predatory beasts in the international jungle? ‘If you are not at the table, you are on the menu.’
Carney’s ascent to reality was really a remarkable statement from a political leader, at any rate of the kind we have grown used to in Europe. Because the great and good assembled at Davos believed in the sanctity of the ‘rules-based international order’, they failed to grasp the gravity of America’s defection from it. They went on intoning the words on which they had been brought up after the prop had been removed. This, I think, was the fiction which Mark Carney set out to unmask.
The precarious nature of liberal globalisation had been pointed out many years earlier by the British economist Lionel Robbins. The ‘cardinal error’ of the liberal economic project was its failure to understand that a global liberal economy needed a political foundation. ‘Resting, so far as policy within states was concerned, upon the assumption of a firm foundation of law and order backed up by an apparatus of coercion, it blandly assumed that between states harmony would be secured by the mere perception of long-run self-interest’ (Robbins, Money, Trade, and International Relations, 1971, p. 218). A regression to protectionism was inherent in this liberal blind spot. What Robbins failed to explain was how the liberal economy had persisted globally for long periods of time without the explicit foundation of world government.
C. P. Kindleberger offered an answer with his theory of hegemonic stability. An international economy without a world state requires a leading or hegemonic power to stabilise it. The hegemon had to provide three essential counter-cyclical services: maintain an open market for imports, maintain a flow of investment, and ‘discount in crisis’ (Kindleberger 1972, p. 28). Kindleberger was a Keynesian: what he required of his hegemon was that it practise discretionary Keynesian policies on a world scale to enable other countries to ‘stick to the rules’.
Kindleberger’s explanation of the ‘rupture’ of the interwar years was straightforward: ‘The world economic system,’ he wrote, ‘was unstable unless some country stabilised it…. In 1929, the British couldn’t, and the United States wouldn’t. When every country turned to protect its national private interest, the world public interest went down the drain’ (Kindleberger 1973, p. 292). Reacting to the greatest depression of modern times, the world economy split up into economic blocs; the revisionist powers, Germany, Japan, and Italy, went to war for territory.
There was an important twist to Kindleberger’s proposition, which made the breakdown of hegemonic power more than fortuitous. The British and ultimately American hegemonies broke down because the hegemons lacked the ability to tax the recipients for the services they were providing. This enabled the weak to exploit the strong — a classic example of this is the way the USA has paid well over 50% of NATO defence spending since NATO was founded in 1949. ‘Free riding’ by beneficiaries drains the hegemon of its economic power to continue to supply the public goods needed to maintain the system. The hegemon’s trade surpluses turn into deficits as it provides the rest of the world with security, capital, and liquidity. The liberal system then disintegrates. So, in the 1970s, Kindleberger predicted what Carney in 2026 claimed has come to pass: the end of American hegemony with no obvious replacement.
Looking Back
How well does the Kindleberger thesis stand up? Take the gold standard, a classic example of a ‘rules-based’ order. In the 19th century, all ‘first-class’ countries committed themselves to making their currencies convertible into gold on demand at a fixed and unchanging price. Without this convertibility guarantee, it is highly improbable that the world economy of the 19th century could have taken the liberal shape it did.
What impelled or induced governments to respect the gold standard rules? Certainly, there would be reputational damage for breaking the commitment, and there was a certain amount of central bank cooperation in Europe. But it is also true that Britain backstopped the system. As the preponderant financial and, for most of the 19th century, industrial power in the world, Britain played a key underwriting role by maintaining free imports, a flow of investment capital, and acting as lender of last resort. If we add a feature which Kindleberger ignored — British naval supremacy — the international gold standard emerges more clearly as a British-managed standard. A fair generalisation would be that the City of London and the Bank of England jointly managed the monetary side of the 19th-century order, with the Treasury’s ‘balanced budget rule’ providing essential credibility, and the British Navy keeping the trade routes open. However, Britain’s services to the system undermined its own economic strength. Maintaining free imports and capital exports through thick and thin was bound to erode its industrial base. When the crash of 1929 came, ‘Britain couldn’t, and America wouldn’t, underwrite the rules of the system. So the system collapsed.
After 1945, the United States stepped into Britain’s shoes. It rejected Keynes’s proposal for an international central bank which would issue an elastic currency (bancor) counter-cyclically, but as the world’s leading creditor it did accept its own responsibility to underwrite a ‘rules-based’ international order.
The new monetary standard agreed at the Bretton Woods Conference of 1944 was a gold-exchange standard, anchored to the US dollar. The United States committed itself to maintain the dollar’s external convertibility into gold at $35 an ounce, all the other members of the system pegging their currencies to the dollar and holding most of their reserves in dollars. By maintaining an open market for imports, a flow of capital investment, and ‘discounting in crisis’, the USA provided the Kindlebergian goods needed for an integrated global economy; while US military supremacy replaced British naval supremacy in ensuring the security of trade routes. But this bargain worked only as long as domestic US policy kept the dollar itself sufficiently scarce to make the convertibility guarantee credible. In the 1960s, war and democracy, the twin scourges of price stability, combined to release the brake on dollar creation. Printing dollars to pay simultaneously for the NATO alliance, the Vietnam war, and Lyndon Johnson’s Great Society programme caused a world upsurge in prices, a drain of gold out of America, and suspension of dollar convertibility into gold in 1971. The United States sabotaged the system it was underwriting. National interest came before global stability.
Both Kindleberger and the economist Robert Triffin predicted that the dollar’s hegemonic role was bound to be self-liquidating, though for different reasons. In 1960, Triffin proposed the famous Triffin paradox: the United States could not at the same time provide enough dollars to satisfy the global demand for liquidity and maintain confidence in gold-dollar convertibility (R Triffin,Gold and the Dollar Crisis: The Future of Convertibility, 1960). Kindleberger’s much broader claim was that the self-liquidating mechanism was free-riding by the beneficiaries of the public goods supplied by the hegemon. Essentially, the hegemon has to run trade deficits to keep markets open and absorb foreign surpluses. This causes its industrial decline, and erodes its power to provide public goods.
Contrary to Triffin, the end of dollar convertibility in 1971 did not bring about a real rupture in the dollar-led system. This was because what Giscard d’Estaing in 1965 called the ‘exorbitant privilege’ of the dollar depended less on its link to gold than on its reserve status, a first-starter advantage which over time became almost impregnable. The dollar’s reserve function was key to its hegemony. As American investor Jeffrey Wernick puts it: ‘A reserve currency is not just national money. It is global infrastructure. It functions like a public utility for settlement, collateral, and reserves.’ (X, The Wernick Files, Jan 24, 2026)
Because of its embedded role as a reserve currency, the failing dollar of the 1960s became the mighty petrodollar of the 1980s, as the multiplied earnings of the OPEC cartel swelled US Treasury coffers; the East Asian financial crisis of the late 1990s brought a flood of new reserves to the United States.
The paradox of the situation was that whereas the growing US current account deficit should have caused an outflow of dollars and the lowering of the dollar exchange rate, the reserve position of the dollar led to an inflow of dollars and the strengthening of the US dollar exchange rate. These inflows allowed the United States to become the world’s ‘consumer of last resort’, but at the cost of growing import surpluses, which hollowed out its industry. So Trump followed in the footsteps of Nixon and, as Carney put it, ‘broke the bargain’ on which the system lived.
Looking Forward
The Trump administration has not achieved coherence. Trump’s tariff policy is designed to eliminate the import surpluses on which the dollar’s reserve position depends, while his Treasury secretary Scott Bessent preaches the doctrine of the strong dollar. But the time has passed when a strong dollar is consistent with a strong economy. The United States can have one or the other, not both. What is going on is a messy retreat of the dollar, a spontaneous, if slow, diversification of reserves into a mixture of other currencies, metals, and cryptocurrencies in the face of the weaponisation of fading, but still formidable, US power. In 2000, the dollar accounted for 71% of world reserves; by 2025 it was down to 57%. (FT, Feb 1, 2026)
Carney accepts that when the rules no longer protect you, you must protect yourself. But he rejects a world of ‘fortresses’. It would be ‘poorer, more fragile, less sustainable’ than an open economy. Instead, he offers a ‘third path’ between protectionism and subordination: the sharing of sovereignty among groups of countries to provide collective goods for different groups. Small and middle-sized countries should form overlapping coalitions for varied purposes: to share standards, to build complementarity, to make collective investments, to develop collective autonomies. In short, a positive-sum game is available for collective action even if it is not on a world scale. ‘From the fracture we can build something bigger, better, stronger, more just…. This is the task of the middle powers.’
These were the stirring words which rounded off Carney’s discourse, with Canada as an example of a middle-sized country, rudely awakened from its dream of a benevolent protector, and now taking the lead in forging ‘comprehensive strategic partnerships’ all over the world.
Carney’s address is an invitation to thought and thought to action. Two vital questions remain: What public goods are needed for a well-functioning market economy? And can they be provided by collective agreement? Robbins, following Hayek, thought that what the state needed to provide was a framework of general rules which protected property, maintained competition, and enforced the law. His public goods were outside the market, but made a liberal market economy work. One might claim that a functioning global system for fiscal and monetary stability developed spontaneously after the 1970s and 1980s. But its unacknowledged dependence on the United States showed up in the banking collapse of 2008, which started in America: an example, Kindleberger would have said of the hegemon not fulfilling its responsibilities. Kindleberger, as a Keynesian, gave his hegemon the crucial role of stabilising the economy by active counter-cyclical policy. This steadying role is now vacant.
A cooperating group of small and middle-sized countries might prefer a ‘rules based’ order’ even rule-enforcing institutions, than to give discretionary power to a market actor set above them, but if history is any guide cooperation alone will not insure against economic disorder..And what should Britain’s role be in any configuration of the small and medium?
Ultimately, the question is philosophical. It is about the necessary conditions of a free economy and society. Hayek believed that a competitive market produced its own order — the spontaneous order - with a minimal state needed to maintain the rules of the road. Keynes believed the spontaneous order would collapse without a central stabilising force. On this matter, we await Carney’s further thoughts. (2200)