Populism, nationalism, and xenophobia all contributed to the victory of the “Leave” campaign in the United Kingdom’s recent referendum on membership in the European Union. But these forces float on the surface of a larger sea change: a fundamental shift worldwide in the relationship between the state and the market.

Since the birth of modern capitalism, these two frameworks of human activity have generally been at odds. While the market tends to expand geographically as its participants pursue economic benefits, the state seeks to keep everybody and everything orderly within the territory it controls. A merchant may recognize market opportunities in a foreign country, but he will run into the state — most immediately, that country’s immigration authorities — if he pursues them.

How to reconcile the tension between the market and the state is the central concern of political economy today, just as it was for Adam Smith in the 18th century, Friedrich List and Karl Marx in the 19th century, and John Maynard Keynes and Friedrich von Hayek in their long debate on the topic through the middle decades of the 20th century.

Let’s consider two hypothetical extremes in the state-market relationship. The first is a seamless global market in which individuals can maximize their material benefits without any state intervention. The problem with this scenario is that you may live in a country that is vulnerable to all the negative consequences of no-holds-barred globalization, such as currency devaluation, labor exploitation, the flouting of intellectual property laws, and so forth.

The other extreme is a world comprising entirely isolated autarchic states, where individuals are protected from external economic forces and the state has full autonomy over domestic affairs. In this scenario, you will have to forgo all the well-known economic benefits of the global division of labor.

Between these two extremes lies most of the world as it is, characterized by regional integration projects like the EU or the North American Free Trade Agreement.

We can identify important swings during the history of capitalism over the last two centuries, either toward the market or the state. For example, the repeal of the Corn Laws in the U.K. in 1846 favored a free market in international trade and accelerated globalization until the outbreak of World War I.

After WWI, the pendulum swung back toward the state. Financial capital in the West was weakened politically, and a mobilized working class took the opportunity to demand jobs and social welfare programs that ran counter to the logic and rules of a globalized market. In the run-up to World War II, beggar-thy-neighbor policies and rampant protectionism ensued — with Britain leaving the gold standard in 1931 in response to a run on the pound. The Economist declared Sept. 21 of that year, “the definite end of an epoch in the world’s financial and economic development.” After the passage of Brexit, the same journal warned, “Britain is sailing into a storm with no one at the wheel.”

The 1944 Bretton Woods conference marked another swing back toward the market, but this time allowed for some degree of national autonomy. Until the late 1960s, a harmonious balance of international openness and national autonomy allowed for widespread prosperity.

Turbulence returned in the 1970s, however, as the slow growth and high prices of “stagflation” and a global energy crisis pushed the pendulum back toward fully liberalized markets — a shift from the Keynesian to the Hayekian world, helped along by Margaret Thatcher in the U.K. and Ronald Reagan in the United States.

This brings us to the present. The economic crisis of 2008, and the global economy’s failure to recover from it fully, put an end to the project begun by Thatcher and Reagan. As in the post-WWI period, workers came to see themselves as left behind by globalization, with political leaders favoring financiers and big business at their expense. In the case of Brexit, the “Leave” camp voted for more national autonomy, even though it will have a clear material cost.

An American version of Brexit may not be far behind if the next U.S. president scraps the Trans-Pacific Partnership trade deal with 11 Pacific Rim countries, signed in February of this year. At a time when global trade negotiations are almost dead, the TPP should seem like a reasonable approach to boosting multilateral trade. And yet both presumptive U.S. presidential candidates say they oppose it, promising what would be tantamount to an “Amexit” from the global trading system.

We are at an interregnum. Social and political discontent will continue to bubble up around the world until we return the state-market relationship to a healthy equilibrium. The problem is that no one knows how best to do this.

Some propose re-harmonizing international markets with national autonomy, as occurred under Bretton Woods. But the post-war international economic order was built for the pre-globalization age, and we cannot put the genie back in the bottle, even if it were possible to do so. Brexit marks the beginning of the end of the latest era of globalization. What comes next is anyone’s guess, but we can be certain that it won’t be the final destination.

By Yoon Young-kwan

Yoon Young-kwan, former minister of foreign affairs of the Republic of Korea, is professor emeritus of international relations at Seoul National University. -- Ed.

(Project Syndicate)