Political scientists contend that a defining characteristic of the state is its monopoly on the use of force (or violence). Meanwhile, economists are quick to emphasize that monopolies are slow and reluctant to innovate, and they charge higher prices for lower quality goods and services than they would under more competitive conditions. Thus, it is no surprise that we get very little innovation in governance.
However, with cheap commercial flights to almost anywhere on the planet and with the internet allowing for individuals to work and manage their assets remotely, there are geo-arbitrage opportunities in terms of governance. A North American or European can maintain dollar or euro sources of income, while residing in a country with relatively low cost yet high standard of living, lower taxes, and access to beaches. This same person may hold assets in yet another country and bank in another still.
The late Harry Schultz coined the term “flag theory,” which is the idea that a person can maximize personal freedoms by:
- building a portfolio of citizenships and residence visas (or at least one, outside one’s nation of birth)
- holding assets in jurisdictions that offer a combination of the most secure property rights and privacy
- holding tax residency in a low (or no) tax country
- incorporating companies in jurisdictions that have low or no corporate tax
- finding the “playgrounds” where you actually want to spend much of your time.
In sum, flag theory refers to arranging your affairs to optimize for a combination of the best governance (with favorable tax rates playing an important part of that) and lifestyle.
We might add to Schultz’s flag theory by emphasizing the importance of owning assets that are highly portable and outside the traditional banking system (Bitcoin, for example), hosting any websites on servers within countries that are committed to free speech, and communicating – whenever possible – over encrypted and decentralized means. (The Signal app, for example, is encrypted-by-default, yet centralized. The XMPP protocol enables communications that can easily be encrypted and is decentralized, meaning the protocol does not rely on any single app or entity to coordinate users). All of these factors combined work together to describe what authors William Rees-Mogg and James Dale Davidson called “the sovereign individual” in their 1997 book by that title.
Inspiration from Academic Literature
Charles M. Tiebout argued in his 1956 paper “A Pure Theory of Local Expenditures” that mobile “consumer-voters” are able to “[pick] that community which best satisfies his preference pattern for public goods.” Tiebout argued that competition exists on local levels of governance that does not on the national level. These local communities, Tiebout wrote, are forced to compete against one another to attract new residents. In his own words, “The greater the number of communities and the greater the variance between them, the closer the consumer will come to fully realizing his preference position.”
In 1970, Albert O. Hirschman’s book Exit, Voice, and Loyalty explored how “member-customers” seek to resolve problems caused by the decline of firms, organizations, and states. Hirschman wrote that member-customers have the option to either vocalize disagreement (“voice”) in an effort “to change… an objectionable state of affairs” or to abandon one organization for another (“exit”). He argued that while political scientists tend to emphasize the power of voice and economists the power of exit, both undervalue the other’s favorite. However, Hirschman stressed repeatedly that the voice option without a plausible threat to exit (and without the existence of a competing alternative to exit to) is “handicapped.” But beyond exit merely improving the state of affairs for the member-customer, he also believed that “exit has an essential role to play in restoring quality performance of government” itself.
James M. Buchanan’s 1954 paper “Individual Choice in Voting and the Market” outlines key differences between ballot box voting and voting in the market. (In Hirschman’s terminology, ballot box voting would be one way of manifesting “voice”, and voting in the market often involves “exit”). Among the key differences identified by Buchanan is the greater uncertainty with ballot box voting. In the market, a voter can choose between a variety of existing alternatives; in ballot-box voting, he chooses between potential alternatives and “he is never secure in his belief that his vote will count positively.”
Bryan Caplan’s book The Myth of the Rational Voter identifies systematic biases that prevent voters from thinking rationally about political matters. Caplan argues that the problem of political ignorance is a demand problem, not a supply problem. That is, political information is rarely in short supply. In the Information Age, the daily human experience is one of information overload. Legal scholar Ilya Somin builds upon the systematic biases identified by Caplan in his own book Democracy and Political Ignorance and makes the case that “foot voting” (meaning physically relocating one’s residence as well as taking one’s business elsewhere) gives citizens “strong incentives to learn about the results and evaluate them objectively.” Both Caplan and Somin have written other books exploring the economic and philosophical implications of the right to move across political borders.
So how do we consolidate this literature in a way that makes sense for a global market for governance? While Tiebout confined his thinking to the market for public goods provided by competing local levels of government, we can apply it more widely to globally-mobile consumer-voters shopping for the best jurisdictions to be governed in terms of where they physically live, where they incorporate their companies, and where they choose to bank and hold their assets.
From Hirschman, we understand that voice has value, but a willingness to exit from a jurisdiction (with ourselves and our capital) can bring about swift and meaningful change to our lives in a way that remaining within the country of our birth and vocalizing opposition to decline in governance cannot.
From Buchanan, we understand that our actions within markets often provide more favorable trade-offs when compared to ballot box voting. But we could bring Buchanan’s analysis a step further by noting that for those willing to move to new jurisdictions, the limited and relatively static state of affairs in governance within a country need not apply so much. There is, in fact, a global marketplace for governance. States may monopolize governance within their own territories, but shopping among those monopolies opens up exciting possibilities.
Lastly, Somin’s concept of “foot voting” drives home the point that if we move to a new jurisdiction (especially to a new country), our governance often changes drastically and overnight in a way that can be very favorable to us.
Economists of the Austrian School: Pioneers and Practitioners of Flag Theory
Flag theory is often presented as a late twentieth-century lifestyle strategy: diversify passports, residencies, banks, and assets to reduce exposure to any single state’s policy drift. Yet several of its core intuitions map neatly onto the Austrian tradition, both in its later popularizers and in the real-world choices that economists of the Austrian school of thought made under political stress.
Harry Schultz, who coined the term “flag theory,” framed his thinking in an explicitly Austrian register, crediting Friedrich Hayek as his main economic inspiration and frequently citing Ludwig von Mises and Mises’s American student Hans Sennholz. The same pattern appears among other popularizers of international diversification such as Jerome Tuccille and WG Hill. In other words, the “flags” idea did not arise in a vacuum. It grew naturally from a worldview that treats institutions as constraints to compare, compete, and, when necessary, exit.
This connection becomes especially vivid when we look back to the Austrian school’s founding generation, where theoretical attention to institutions met an unusually concrete awareness of geopolitical rupture. Carl Menger traveled extensively with Crown Prince Rudolf of Habsburg, an experience that invited comparison across jurisdictions and regimes. As the notes record, Menger anticipated a catastrophic European war years before 1914 and positioned accordingly: he shifted wealth into gold and into securities in neutral Sweden. Mises reports that, around 1910, Menger warned European policy would bring “a terrible war” followed by “horrifying revolutions,” and that, in anticipation, one could recommend little besides hoarded gold and, perhaps, Scandinavian securities. Menger acted on this view by placing savings in Swedish papers, effectively combining a hard-asset hedge with exposure to a comparatively safer jurisdiction.
Menger’s student Felix Somary carried this practical sensibility into high finance and became, in these notes, an unusually clear early example of what we would now call a flag-theory practitioner. Somary helped shape Swiss private banking, and he appears here as someone who married early geopolitical diagnosis with operational decisiveness. Immediately after the assassination of Archduke Franz Ferdinand, he was asked on the phone from Budapest: “Does this mean world war?” Somary’s reply, as he later recalled, was an unambiguous yes, and the message was relayed immediately to business partners in Paris and London. He then described the next step in plain administrative terms: for clients whose wealth he managed, he converted balances and securities into gold and placed that gold in Switzerland and Norway. A few days later, war began. Read as a sequence of actions, this is the “flags” logic in embryo: change the asset (into gold), change the custody location (out of the soon-to-be belligerent sphere), and distribute across relatively safer, neutral settings before constraints tighten.
A further, often overlooked bridge between Austrian economics and flag theory lies with another student of Menger’s who moved from scholarship into statecraft: Richard Schüller. He is considered another of Menger’s favorite students, and pursued a career in diplomacy. His work sharpened Austrian awareness of geopolitics and the strategic value of neutral jurisdictions. He remained in public service and became part of the peace negotiations at Brest-Litovsk and Bucharest (1918) and at Saint-Germain (1919). He then rose to head the Trade and Economic Policy section of the Austrian Foreign Ministry and later served as Austria’s envoy to the League of Nations in Geneva, placing him directly in the institutional machinery that tried to stabilize a shattered Europe. In trade policy, he argued in detail about the costs and benefits of tariffs versus freer trade, and he also worked within League of Nations structures. Schüller’s trajectory highlights that neutrality is not only a private convenience, it is a geopolitical position that can preserve room for maneuver when blocs harden and borders become instruments of coercion.
That line runs straight to Geneva and the institutional ecosystem that, between the wars, became a practical laboratory for internationalism and a refuge for exiled scholars. When Mises left Austria, he did so for neutral Switzerland, taking up a professorship at the Graduate Institute of International Studies in Geneva in 1934 and remaining there until 1940. The Institute itself was created in 1927 in the wake of World War I and the League of Nations’ move to Geneva, aiming to improve diplomatic competence and international understanding. It later distinguished itself in the 1930s and World War II by welcoming exiled researchers while maintaining intellectual independence. This “Geneva base” becomes a key link between Austrian economics and flag theory because it embodies the same principle at the level of institutions: a neutral jurisdiction can function as an intellectual and financial safe harbor, a place where cross-border cooperation and analysis can continue when surrounding regimes polarize.
The Institute was shaped by William E. Rappard, a Swiss academic and diplomat who illustrates, almost biographically, the transnational posture that flag theory later systematized. Rappard was born in New York City (April 22, 1883) to Swiss parents; his father worked in the United States as a representative of Swiss industries. Rappard then moved to Switzerland, graduated from Harvard in 1908, and studied at the University of Vienna in 1908–1909. That personal arc, New York, Harvard, Vienna, Geneva, matters here because it reflects the early twentieth-century version of a “portfolio life”: embedded in multiple jurisdictions, literate in multiple intellectual worlds, and positioned to build institutions that outlast any single political swing.
Within that Geneva milieu, Mises and Hayek were not merely “present.” They anchored a research and teaching emphasis that naturally foregrounded the mobility of goods, capital, and people as a civilizational question, not just a technical one. Mises held a chair in international economic relations. Hayek taught at the Geneva Graduate Institute as well, including a summer course in 1937. And the Institute’s later self-description of its mid-century focus explicitly highlights trade and international monetary economics among its core emphases. Put differently (and this is an interpretation rather than a quotation): once you treat economies as interconnected systems, you are inevitably drawn to the question of how quickly flows can be redirected when governments become predatory. That is the analytical backbone of flag theory, expressed decades earlier as scholarship and institutional design.
Even in peacetime, Austrian economists sometimes engaged in what could be called “micro-flagging,” selecting legal environments for specific life decisions. One small but revealing instance of governance-shopping is Hayek teaching at the University of Arkansas in Fayetteville for a summer to take advantage of Arkansas’s comparatively relaxed divorce laws.
In modern terms, it is the same logic, applied narrowly: find the jurisdiction whose rules fit the problem at hand, then move (even temporarily) to make use of them. Finally, the Austrian story also contains the darker mirror image of voluntary exit: forced exit. Mises, as a Jew in interwar Europe, ultimately had to “vote with his feet” to escape the Nazi threat, reminding us that mobility is sometimes not optimization but survival.
The post Jurisdiction Shopping: The Forgotten Logic Behind Flag Theory was first published by the American Institute for Economic Research (AIER), and is republished here with permission. Please support their efforts.
